HELOC vs Cash-Out Refi: Don't Refinance Away a 3.5% Rate for a $40K Remodel

The mistake: resetting a cheap rate to tap a small amount of equity

We ran a common post-2022 scenario through the calculator: a $250,000 mortgage locked in at 3.5%, needing $40,000 for a kitchen remodel. A cash-out refinance at today's 6.8% market rate doesn't just charge the higher rate on the new $40,000 — it resets the entire $290,000 balance to that rate. A HELOC, by contrast, leaves the cheap 3.5% first mortgage completely untouched and only charges the (higher) HELOC rate on the $40,000 actually borrowed. Over a realistic 7-year holding period, the HELOC comes out decisively cheaper in this scenario — the exact opposite of what "HELOCs have higher rates" alone would suggest.

How the math works

HELOC path: your existing mortgage keeps amortizing at its own rate, and a new, separate loan for the cash amount amortizes at the HELOC rate — both interest costs, summed over your comparison horizon. Cash-out refi path: one new, larger loan (existing balance + cash needed) amortizes entirely at the new market rate — its interest cost over the same horizon. Both add their respective closing costs.

What this tool doesn't model: HELOCs are usually variable-rate (this tool assumes fixed for a clean comparison — a real HELOC's rate could rise or fall with market conditions), the draw-period-vs-repayment-period structure many HELOCs actually have (interest-only draws followed by amortizing repayment), tax deductibility differences (mortgage interest deductibility rules depend on how the funds are used), and PMI implications if a cash-out refi pushes your loan-to-value back above 80%.

Math runs locally. Inputs never leave your browser.Source on github.

Where a cash-out refi wins instead

• Your existing rate is close to or above today's market rate.If you bought or last refinanced when rates were similar to or higher than today, there's no cheap rate to protect — a cash-out refi's typically lower rate than a HELOC can win outright.
• You need a large amount relative to your existing balance.The larger the cash-out amount relative to your current mortgage, the less the "protect the cheap rate on the untouched balance" advantage matters, since more of the blended debt is at the new rate either way.
• You want one predictable fixed payment instead of two loans.A cash-out refi consolidates into a single, simpler mortgage — some borrowers value that simplicity enough to accept a higher blended cost.
• A HELOC's variable rate could rise materially.If you're borrowing for a long repayment horizon and rates are expected to keep climbing, a fixed-rate cash-out refi removes that variable-rate risk entirely — this tool's fixed-rate HELOC model doesn't capture that upside risk protection.

What to actually do with this number

1. Check your existing mortgage rate against today's market refi rate — the bigger that gap, the stronger the case for a HELOC.
2. Get real quotes for both a HELOC and a cash-out refi, including actual closing costs, not estimates.
3. If choosing a HELOC, ask specifically about the draw-period and repayment-period structure and whether the rate is fixed or variable.
4. Use your realistic expected holding period, not the full loan term, as the comparison horizon — most people don't keep a mortgage for 30 years.
5. If the numbers are close, weigh the simplicity of one loan (refi) against the flexibility of a revolving credit line (HELOC) you can draw from again later.