Cash-Out Refinance vs HELOC vs Home Equity Loan: Which Is Better in 2026?

Borrowing against your home comes down to one question first: is your current mortgage rate worth keeping?

By Ken Byrne, NMLS #187129 · ALCOVA Mortgage LLC, NMLS #40508 · Updated October 2026

Homeowners in Virginia, Maryland and DC have three main ways to borrow against their equity: a cash-out refinance, a home equity line of credit (HELOC) and a home equity loan. This guide compares them on rate, payment, closing costs, taxes and risk, using official rules and dated rate figures, with the recordation tax each one triggers in the DMV. To see cash-out refinance numbers for your own home, ask for a JB Financing mortgage review.

Cash-out refinance vs HELOC vs home equity loan at a glance

Consumer Financial Protection Bureau, What you should know about home equity lines of credit (booklet, updated August 2022) and Ask CFPB pages (reviewed August 28, 2026).

The federal consumer agency’s own comparison of the three options. Source: Consumer Financial Protection Bureau, What you should know about home equity lines of credit.

How a cash-out refinance works

You take a new first mortgage for more than you owe, pay off the old loan and receive the difference at closing. The amount is capped as a share of the home’s appraised value.

Fannie Mae Eligibility Matrix (August 5, 2026); Freddie Mac maximum LTV requirements; HUD Mortgagee Letter 2019-11; 38 CFR 36.4306.

Example: on a home appraised at $700,000 with a $400,000 balance, 80 percent is $560,000, so a conventional cash-out refinance could release up to $160,000 before closing costs. Two timing rules apply on Fannie Mae and Freddie Mac loans: at least one borrower must have been on title for six months, and a first mortgage being paid off must be at least 12 months old. Freddie Mac lists a minimum credit score of 620 in most cases. Current options are on our refinance page.

Cash-out pricing costs more than a standard refinance

Fannie Mae charges lenders a loan-level price adjustment on the loans it buys, set as a percentage of the loan amount, and its adjustments for cash-out refinances are higher than for other refinances. As a general industry practice, lenders pass that cost on through the interest rate or as points. The adjustment rises as the credit score falls and the loan-to-value rises.

Fannie Mae Loan-Level Price Adjustment Matrix dated September 30, 2026, cash-out refinance table. These are Fannie Mae’s published adjustments, not a rate quote; other adjustments can apply.

The practical lesson: borrowing to 70 percent instead of 80 percent, or raising your score first, lowers the cost. Eligible veterans have their own path, with a funding fee of 2.15 percent for first use and 3.3 percent after, unless exempt; see our VA loans page.

How a HELOC works

A HELOC is an open-end line of credit secured by your home. During the borrowing period, called the draw period, you can generally spend up to your limit, repay and borrow again. The CFPB gives 10 years as an example of a draw period. When it ends you can no longer borrow and you enter the repayment period, when, the CFPB warns, monthly payments are often significantly higher. Some plans require the whole balance at once as a balloon payment.

Most HELOCs have a variable rate: an index, commonly the U.S. prime rate, plus a margin the lender sets. The bank prime loan rate was 7.00 percent on October 1, 2026, after the Federal Reserve raised its federal funds target range by a quarter point on September 16, 2026. When prime moves, a HELOC payment moves with it.

CFPB HELOC booklet and Ask CFPB pages; Regulation Z, 12 CFR 1026.40(f) and 1026.15; Federal Reserve H.15 release (October 2, 2026) and FOMC statement (September 16, 2026).

How a home equity loan differs

A home equity loan is also a second mortgage, but you receive one lump sum and usually pay a fixed rate in equal payments that pay the loan off. It suits a single known expense. If you need more later, you apply for a new loan.

The deciding factor: your current mortgage rate

Freddie Mac Primary Mortgage Market Survey; Federal Reserve H.15; Bankrate national survey ($30,000 line, 700 FICO, 80% combined loan-to-value). Survey averages, not offers from any lender.

Many owners hold a rate far below these. A Realtor.com analysis of Federal Housing Finance Agency data found that 51.5 percent of outstanding mortgages carried a rate below 4 percent in the third quarter of 2025, and 78.8 percent were below 6 percent. A cash-out refinance gives that rate up on the entire balance.

Example 1: you have a low rate and need $100,000

You owe $400,000 at 3.5 percent with 25 years left, and your principal and interest payment is $2,002.

Calculated with the standard amortization formula using the averages above, rounded to the nearest dollar. The 7.28 percent average is not a cash-out rate; cash-out pricing is typically higher. Illustration only; your rates, fees and terms will differ.

The second-loan options cost about $430 to $810 a month less than the cash-out refinance here, even though their rates are similar or higher, because only $100,000 is borrowed at the new rate. The trade-off is a variable rate on the HELOC: at 9.29 percent, its interest-only payment would be $774 instead of $608.

Example 2: your rate is already high

Now assume you owe $400,000 at 7.5 percent with 28 years left, a payment of $2,851. A $500,000 cash-out refinance at 7.28 percent costs $3,421, an increase of $570, with one fixed payment and a slightly lower rate on the whole balance. Keeping the loan and adding the interest-only HELOC costs $3,459. On these averages the two are close, before closing costs. A real cash-out quote is usually priced above the survey average (see the adjustment table above), the HELOC figure is interest only, and the refinance restarts a 30-year term, so compare actual quotes. The wider question is covered in should you refinance in 2026.

Which option fits which situation

General guidance based on the product rules cited above. Not a recommendation for any individual borrower.

For renovations there are also loans built for the purpose; see our guide to home renovation loans.

Recordation tax in Virginia, Maryland and DC

Every option records a new deed of trust, and each jurisdiction taxes that differently. This is a DMV cost that national comparisons often leave out. A home equity loan is also a new deed of trust, taxed on its full amount in Virginia (25 cents per $100) and in Maryland; DC’s exemption applies on the same terms.

Va. Code 58.1-803 and 58.1-814; Md. Code, Tax-Property 12-105(f) and 12-108(g); D.C. Code 42-1102(21) and OTR Tax Notice 2023-04. In Virginia, a county or city may add a local tax equal to one-third of the state tax. Recording fees are separate.

Lender, appraisal and title charges come on top. For how those are itemized, see our guide to closing costs in Virginia.

Is the interest tax deductible?

This is general tax information, not advice. Under IRS rules, interest on a loan secured by your home is deductible only to the extent the money is used to buy, build or substantially improve that home, and only if you itemize. That applies to all three options: cash taken out in a refinance and spent on a car or on credit cards does not produce deductible interest. The overall limit is interest on the first $750,000 of such debt ($375,000 if married filing separately), which the 2025 tax law made permanent. Older debt from before December 16, 2017 keeps a $1 million limit ($500,000 if married filing separately). Confirm your own situation with a tax professional.

IRS Publication 936 (2025); Public Law 119-21, section 70108, as summarized by the Senate Finance Committee.

Risks and rights to know before you sign

12 CFR 1026.23, 1026.15 and 1026.40(f); CFPB; Fannie Mae Selling Guide B3-6-05.

How lenders measure the last point is explained in our guide to the debt-to-income ratio.

How much equity do homeowners have?

ICE press release, August 10, 2026; Cotality press release, September 10, 2026. National figures.

For a local look at using that equity, including selling instead of borrowing, see our post on tapping home equity in Fairfax.

How to compare offers

The CFPB’s advice is to get three estimates. For a HELOC, ask each lender for the index and margin, the rate cap, the draw and repayment terms, every fee in the table above and whether there is a balloon payment. For a cash-out refinance, compare Loan Estimates and look at the rate, points and total closing costs together. ALCOVA Mortgage lists cash-out and rate-and-term refinances among its loan options, and Ken Byrne’s team can show you the cash-out numbers to set beside a bank or credit union HELOC quote.

Frequently asked questions

Is a HELOC or a cash-out refinance better?

It depends mostly on your current mortgage rate. If it is well below today’s rates, a HELOC keeps it and can cost less each month, as in the example above. If it is near or above today’s rates, a cash-out refinance gives you one fixed payment.

What is the difference between a HELOC and a home equity loan?

A HELOC is a revolving line you can draw on repeatedly, usually at a variable rate. A home equity loan pays out one lump sum, usually at a fixed rate with equal payments.

How much can I borrow with a cash-out refinance?

On a conventional loan for a one-unit primary home, up to 80 percent of the appraised value, less what you owe. FHA is also 80 percent. VA’s rule allows up to 100 percent for eligible veterans, though lenders may set lower limits.

Is a HELOC a good idea?

It can be for costs spread over time when you want to keep a low first-mortgage rate. The risks are a variable rate, higher payments after the draw period and a home that secures the debt.

Are HELOC rates fixed or variable?

Usually variable, tied to an index such as the prime rate plus a margin. The bank prime loan rate was 7.00 percent on October 1, 2026.

Do I pay closing costs on a HELOC?

Sometimes. The CFPB says some lenders waive some or all upfront costs and others charge fees. In Virginia and Maryland a recordation tax applies to the deed of trust.

Is cash-out refinance interest tax deductible?

In general, yes on the part that refinances your original purchase debt and on any cash used to buy, build or substantially improve the home, within the IRS debt limit ($750,000 for most newer loans), and only if you itemize. Cash used for other purposes does not produce deductible interest. This is general information; confirm with a tax professional.

How soon after buying can I do a cash-out refinance?

Under Fannie Mae and Freddie Mac rules, at least one borrower must have been on title for six months, and the first mortgage being paid off must be at least 12 months old. Exceptions exist, including inherited property and delayed financing after a cash purchase.

Can a lender freeze my HELOC?

Yes. Federal rules allow a lender to stop new draws or reduce the limit if the home’s value falls significantly below its appraised value or the lender reasonably believes a material change in your finances will leave you unable to repay, among other listed situations.