If you own a home in California, you may be sitting on significant equity. There are two main ways to turn it into cash: a home equity line of credit (HELOC), which sits behind your current mortgage, or a cash out refinance, which replaces it. The right choice usually comes down to one number: the rate on the mortgage you already have.
Quick answer
A HELOC usually makes more sense when your current mortgage rate is well below today’s rates and you need a moderate amount, or need money over time. A cash out refinance usually makes more sense when your current rate is similar to or higher than today’s rates, you need a large lump sum, or you want one fixed payment. Compare the blended cost of both, plus closing costs, before you decide.
How does a HELOC work?
A HELOC is a revolving line of credit secured by your home, recorded behind your existing first mortgage. Your first mortgage, and its rate, stay exactly as they are.
- Draw period. You borrow what you need, when you need it, up to your credit limit. Draw periods commonly last up to 10 years, and many HELOCs allow interest only payments during this time.
- Repayment period. After the draw period ends, you repay principal and interest, so the payment can rise significantly.
- Variable rate. Most HELOC rates are tied to the prime rate and change when it moves. Some lenders let you lock part of the balance at a fixed rate.
- Borrowing limit. Lenders cap your combined loan to value (CLTV), meaning your first mortgage plus the HELOC as a share of the home’s value. Many cap it somewhere between 80% and 90%.
Lenders can freeze or reduce your line in some situations, such as a significant drop in your home’s value, so do not count on unused credit as an emergency fund. See Ryan’s HELOC page for program details.
How does a cash out refinance work?
A cash out refinance replaces your current mortgage with a new, larger loan. The new loan pays off the old one, and you receive the difference in cash, minus closing costs.
- One loan, one payment. You end up with a single first mortgage, usually at a fixed rate.
- Your whole balance reprices. The new rate applies to everything you owe, not just the cash you take out. That is the key trade off.
- Loan to value limits. Conventional and FHA cash out refinances on a primary residence generally allow up to 80% of the home’s value. VA cash out refinances can go higher for eligible veterans, depending on the lender.
- Timing rules. For a conventional cash out refinance, the mortgage being paid off generally must be at least 12 months old, and at least one borrower must have been on title for at least six months.
Learn more on Ryan’s cash out refinance page.
HELOC vs cash out refinance at a glance
| HELOC | Cash out refinance | |
|---|---|---|
| Your current mortgage | Stays in place, rate unchanged | Paid off and replaced |
| How you get the money | Draw as needed over time | One lump sum at closing |
| Rate type | Usually variable | Usually fixed |
| Monthly payments | Two: your mortgage plus the HELOC | One |
| Upfront costs | Often lower | Similar to any refinance |
| Typical maximum | Commonly 80% to 90% combined loan to value | Generally 80% loan to value for conventional and FHA |
| Best when | Your current rate is low and needs are moderate or spread out | Your current rate is not much lower than today’s rates, or you want one fixed payment |
How do you compare them? Use the blended rate test
A HELOC rate is usually higher than a first mortgage rate, but it only applies to the money you borrow. A cash out refinance rate applies to your entire balance. To compare fairly, calculate the blended rate of keeping your mortgage and adding a HELOC:
Hypothetical example, not a quote: You owe $400,000 at 3.25% and need $100,000.
- Keep and add a HELOC at 8.00%: ($400,000 × 3.25% + $100,000 × 8.00%) ÷ $500,000 = 4.20% blended
- Cash out refinance at 6.50%: the full $500,000 at 6.50%
In this illustration the HELOC route costs less in interest, even though its own rate is higher. If your current rate were 6.25% instead of 3.25%, the answer could flip. Rates, fees and your timeline all change the result, so run the test with real written quotes.
Two more things belong in the comparison: closing costs, and how long you will keep the debt. A HELOC’s variable rate can rise, and a cash out refinance restarts your loan term, which can increase the total interest you pay even at a lower rate.
Want the blended rate test on your numbers?
Ryan can run it on your actual balance and rate and show the total cost of a HELOC and a cash out refinance side by side.
Which one fits your situation?
A HELOC often fits when you
- Locked a first mortgage rate well below today’s market
- Need funds in stages, such as a remodel or an ADU build paid as work is completed
- Plan to repay the balance within a few years
- Want a line available for planned expenses, like tuition, without borrowing it all at once
A cash out refinance often fits when you
- Have a current rate close to or above today’s rates
- Need a large lump sum, or want to consolidate debt into one fixed payment
- Want to change your loan in other ways, such as removing FHA mortgage insurance, removing a borrower or moving from an adjustable to a fixed rate
- Prefer a payment that will not change with the prime rate
Planning a major remodel? A renovation loan can base the loan on the home’s value after improvements, which may give you more room than either option. And if your main goal is a lower rate rather than cash, see Ryan’s refinance home loans page.
What are other ways to use your home equity?
- Home equity loan. A second mortgage paid out as a lump sum with a fixed rate and fixed payment. It keeps your first mortgage in place like a HELOC, with the predictability of a fixed loan.
- Reverse mortgage. Homeowners age 62 or older may be able to access equity without a required monthly mortgage payment through a Home Equity Conversion Mortgage (HECM). You must keep paying property taxes, insurance and upkeep. See Ryan’s reverse mortgage page.
- Buying your next home. If you are buying in a high cost county, a second lien can sometimes keep your first mortgage under the conforming limit. See the 2026 loan limits for Orange County and Los Angeles.
What about taxes, the right to cancel and risk?
Taxes. Under IRS rules, interest on home equity debt is generally deductible only when the money is used to buy, build or substantially improve the home that secures the loan, and only within the overall mortgage interest limits. Using the funds for debt payoff or other expenses usually does not qualify. Confirm your situation with a tax professional.
Right to cancel. When you open a HELOC or refinance the mortgage on your primary residence, federal law generally gives you three business days after signing to cancel for any reason. This right does not apply to purchase loans, and your funds are released after the cancellation period ends.
Risk. Both options are secured by your home. Moving credit card or other unsecured debt into your mortgage can lower the rate, but missed payments can put your home at risk, and running balances back up afterward leaves you worse off. Borrow with a clear repayment plan.
Frequently asked questions
Is a HELOC or a cash out refinance better if I have a low mortgage rate?
A HELOC is usually better if your current rate is well below today’s rates, because it leaves your low rate untouched and charges the higher rate only on the amount you borrow. Run the blended rate test with real quotes to confirm.
How much equity do I need for a HELOC?
Many lenders allow a combined loan to value of 80% to 90%, meaning your first mortgage plus the HELOC can total 80% to 90% of your home’s value. The exact limit depends on the lender, your credit and the property.
Does a HELOC replace my first mortgage?
No. A HELOC is a separate loan recorded behind your existing mortgage. You keep your current mortgage and its rate, and you make a separate payment on the HELOC.
How much can I take out with a cash out refinance?
For a conventional or FHA cash out refinance on a primary residence, the new loan can generally be up to 80% of the home’s appraised value. Your cash is that amount minus your current payoff and closing costs.
Is HELOC interest tax deductible?
Under current IRS rules, HELOC interest is generally deductible only if you use the money to buy, build or substantially improve the home that secures the line, and you itemize deductions. Ask a tax professional how the rules apply to you.
Can I get a HELOC on a rental property?
Some lenders offer HELOCs on investment properties, but options are more limited and borrowing limits are usually lower than on a primary residence. A cash out refinance of the rental, including a DSCR loan, is often the more available route.
Ryan O’Kane
Founder and Chief Mortgage Officer, ARBOR Financial Group, Santa Ana, California
NMLS #292685
DRE #01328641
Licensed in California and Nevada
Thinking about tapping your equity?
Compare a HELOC and a cash out refinance with real numbers.
Ryan O’Kane can run the blended rate test on your actual mortgage and show you the total cost of each option.
Sources and official resources
Information checked September 27, 2026. Loan limits, program rules and assistance funding change, so confirm current terms before you rely on them.
This article is for general education only and is not a loan offer, commitment to lend, or tax or legal advice. Rates, terms, fees and programs vary by lender and are subject to change without notice. All loans are subject to credit approval, underwriting guidelines and property eligibility. Ryan O’Kane, NMLS #292685, DRE #01328641. ARBOR Financial Group is a DBA of The Turnkey Foundation Inc., NMLS #236669 (NMLS Consumer Access). Equal Housing Opportunity.
