Key takeaway
A HELOC, home equity loan and cash-out refinance structure debt differently and put your home at risk if unpaid.
What is the difference between a HELOC, a home equity loan, and a cash-out refinance?
All three let you borrow against your equity, the CFPB’s term for what your home is worth minus what you owe on it. A home equity loan gives you a lump sum with a fixed rate as a second loan. A HELOC is a line of credit you draw from as needed, usually at a variable rate, also as a second loan. A cash-out refinance replaces your whole mortgage with a bigger one and pays you the difference. Every one of them is secured by your house, so missing payments can lead to foreclosure.
What equity is, and how much of it you can borrow
Equity is the current value of your home minus any mortgage balance. If your Maryland home is worth $450,000 and you owe $300,000, you have $150,000 of equity. Lenders do not let you borrow all of it; they set a maximum combined loan-to-value ratio, the CFPB explains, comparing everything owed against the home’s value, and the higher that ratio the higher your cost and the harder it is to qualify.
The value is what an appraisal or the lender’s valuation says, not what a listing site guesses. Ask what maximum ratio applies to the product you are considering and how the lender will set the value.
Home equity loan: a lump sum with a fixed payment
A home equity loan, the CFPB explains, lets you borrow a lump sum using your equity as collateral, usually at a fixed rate that does not change, repaid in equal payments as a second mortgage alongside the one you have. It fits a known, one-time cost.
The CFPB warns that these loans can carry upfront fees and that if you cannot pay, the lender can foreclose; it also advises talking with a nonprofit credit counselor before using one to consolidate debt, and being careful about borrowing against your home to invest.
HELOC: a line of credit with a draw period and a repayment period
A home equity line of credit works like a credit card secured by your house: you draw what you need during a draw period, often paying interest only, and then enter a repayment period when principal comes due and the payment can jump. The CFPB’s HELOC guide explains that rates are usually variable, tied to an index plus a margin, so the payment changes when rates change.
Read the terms for the annual and lifetime rate caps, whether the lender can freeze or reduce the line, any minimum draw, annual fees, and what happens at the end of the draw period. A HELOC fits costs that arrive over time, such as a renovation in stages.
- What is the index, the margin, and the rate caps?
- How long is the draw period, and what will the payment be when repayment starts?
- Can the lender freeze or cut the line, and under what conditions?
Cash-out refinance: one new, larger first mortgage
A cash-out refinance replaces your current mortgage with a larger one and gives you the difference in cash. You get one payment and one rate, but the new rate applies to the entire balance, including the part you had already been paying at your old rate, and you pay closing costs on the full loan. The CFPB’s refinance handout asks the questions that decide it: what it costs, what the payment does, and how long until the numbers work.
When your existing rate is lower than today’s, a cash-out refinance can raise the cost of money you already had; a second loan leaves the first mortgage untouched. When your existing rate is higher, the refinance may improve both at once. The refinance guide on this site walks through the break-even math.
Side by side
The right choice depends on how much you need, when you need it, what your current mortgage rate is, and how much payment uncertainty you can carry. Use the table to frame the conversation, then ask for written terms on each option you are considering.
| Feature | Home equity loan | HELOC | Cash-out refinance |
|---|---|---|---|
| How you receive money | Lump sum | Draw as needed during the draw period | Lump sum at closing |
| Rate | Usually fixed | Usually variable | Fixed or adjustable on the new loan |
| Your current mortgage | Stays as it is | Stays as it is | Replaced by the new loan |
| Payment | Fixed second payment | Changes with rate and balance; can jump after the draw period | One new payment on the full balance |
| Closing costs | Usually lower; some fees | Usually lower; may include annual fees | Full refinance closing costs |
Before you borrow against your home
Every option here turns your home into collateral for whatever you are paying for. That is why the CFPB suggests a credit counselor before consolidating debt this way and caution before investing borrowed equity. Ask what happens to the payment if rates rise, if your income drops, or if the home’s value falls.
Ask your loan officer which of these products the lender offers and for a written estimate of each; in Maryland, Paola takes that call at New Priority Lending Corp. Nothing on this page says one option is right for you or that a particular product is available on your home.
- What is the total cost of each option over the years I expect to keep it?
- What is the worst-case payment on the variable option?
- Does Maryland recordation tax apply to the new loan, and who pays it?
- Is there a prepayment penalty or an early-closure fee?
Primary sources
This guide is based on the following official consumer resources. Your loan documents, your lender’s requirements, and the law that applies decide your individual situation.
- Consumer Financial Protection Bureau — What is a home equity loan?
- Consumer Financial Protection Bureau — What you should know about home equity lines of credit
- Consumer Financial Protection Bureau — What is a loan-to-value ratio?
- Consumer Financial Protection Bureau — Should I refinance? consumer handout
About the author
Paola Sharleen Valdez · Mortgage Loan Officer · NMLS ID #2796757
Paola Sharleen Valdez is a Mortgage Loan Officer with New Priority Lending Corp. She writes these guides so you know what to expect, what to ask, and what you will need before you decide to start a loan with her.