Home equity loan vs. HELOC vs. cash-out refinance: which one keeps your 3% rate

The three tools in one table

The blended-rate math

Say you owe $250,000 at 3% and want $75,000 for a kitchen and to pay off cards. A cash-out refinance to $325,000 at today's rate, call it 6.5%, raises the rate on all $325,000. A home equity loan at 8% on the $75,000 only raises the cost of the new money. The blended rate on the two-loan option is (250,000 × 3% + 75,000 × 8%) ÷ 325,000, or about 4.15%. That's the number to compare against the refinance rate, and it's why keeping the first mortgage almost always wins when your rate is under 5%.

Flip the numbers. If you bought in 2023 at 7.25%, a cash-out refinance at 6.5% lowers the rate on the whole balance and adds the cash. There the single loan wins, and it gets rid of a second payment.

Home equity loan or HELOC?

Once you've decided to keep the first mortgage, the choice is about how you'll spend. A fixed home equity loan fits a single, known number: the contractor's bid, a tuition bill, a debt payoff. You get the payment on day one and it never changes. A HELOC fits a project with uncertain timing, a reserve you may never touch, or a bridge for a down payment on the next house. You pay interest only on what you draw, at a variable rate, with a draw period followed by repayment. Our HELOC is interest-only for ten years, then amortizes over twenty, with a $50 annual fee.

The risk in a HELOC is the variable rate. Prime has moved several points in a few years before. If you'd lose sleep over that, take the fixed loan.

How much equity you can use

Most programs cap combined loan-to-value at 80% to 85%, meaning your first mortgage plus the new loan can't exceed that share of the home's value. On a $450,000 Crystal Lake home with a $250,000 first mortgage, an 80% cap leaves $110,000 of usable equity. Cash-out refinances have similar caps; VA allows more for eligible veterans. Values in both our markets have risen enough since 2020 that many clients have more room than they expect.

What we do differently

Home equity loans and HELOCs at Home State Bank are portfolio products. They're decided in Crystal Lake, often within days, and the servicing never leaves the bank. We'll also tell you when the answer is none of the above, which happens: a small project is sometimes better funded from savings than from a lien on the house.