HELOC vs. Cash-Out Refinance: Which is Better for Florida Homeowners

You have $150,000 in home equity. You need $80,000 for a kitchen renovation and have been considering your options. A lender suggests a cash-out refinance at a 6.75% fixed rate. Your bank offers a HELOC at Prime + 2% (currently 9.25%, variable). Which should you choose? Here’s how to decide.

HELOC vs. Cash-Out Refinance: The Core Differences

Both let you borrow against home equity, but they work completely differently.

HELOC (Home Equity Line of Credit)

• Keep your current mortgage intact
• Get a revolving credit line up to your equity
• Borrow flexibly, repay flexibly
• Variable interest rate (adjusts with Prime Rate)
• Two-phase structure: draw period, then repayment
• Lower closing costs (~$0–$500)
• Can quickly tap funds during emergencies

Cash-Out Refinance

• Replace your current mortgage with a larger one
• Get lump sum upfront, pay off existing mortgage
• Borrow specific amount at closing
• Can lock fixed rate (rate protection)
• Single amortization: pay for 30 years (typical)
• Higher closing costs ($3,000–$8,000)
• Proceeds disbursed at closing (no flexibility after)

Rate Comparison: HELOC Variable vs. Refinance Fixed

This is the biggest strategic decision.

Scenario: You need $80,000, currently pay 4.50% on mortgage

Option A: HELOC

• Rate: Prime + 2.00% = 9.25% (currently)
• Draw period payment (interest-only): $617/month
• Repayment period (15 years): $758/month

Option B: Cash-Out Refinance

• New mortgage: $80,000 borrowed, existing $200,000 mortgage paid off
• New total mortgage: $280,000 at 6.75% fixed
• Combined payment (mortgage + previous): $1,848/month

Wait—that math doesn’t work. Let me recalculate:

If you refinance:

• Current mortgage: $200,000 at 4.50% = $1,013/month
• Cash-out refinance: Borrow $80,000 (to add to $200,000) = $280,000 total at 6.75%
• New payment: $1,835/month
• Old payment: $1,013/month
• Increase: $822/month

If you take HELOC instead:

• Keep current mortgage: $200,000 at 4.50% = $1,013/month (unchanged)
• HELOC draw-period interest-only: $617/month
• Total payment: $1,630/month
• Increase: $617/month

HELOC is cheaper monthly! But HELOC rate could rise if Prime increases.

Year 5 Scenario: Prime rises to 9.25% (rates rise generally)

HELOC worst case:

• HELOC rate becomes: 9.25% + 2.00% = 11.25%
• Interest-only payment: $750/month
• Total with mortgage: $1,763/month

Refinance (already locked):

• Refinance rate: 6.75% (unchanged, fixed for 30 years)
• Total payment: $1,835/month (unchanged)

Refinance is cheaper now, but only because rates rose sharply. If rates fell, HELOC would be better.

Cost Comparison: Closing Costs Matter

HELOC Closing Costs

• Appraisal: $400–$600 (sometimes waived)
• Title search: $200–$300
• Processing fee: $0–$300
• Underwriting: $0–$400
• Total: $600–$1,600 (often $0 if promotional)

Cash-Out Refinance Closing Costs

• Appraisal: $400–$600
• Title search/insurance: $800–$1,500
• Loan origination: 0.5–1.5% of loan = $1,400–$4,200
• Processing/underwriting: $800–$1,500
• Recording fees: $200–$500
• Discount points (optional): $2,800–$4,200
• Total: $5,600–$12,900 (often $8,000–$10,000)

HELOC is dramatically cheaper to open. Refinance closing costs are substantial.

When to Choose a HELOC

Choose HELOC if:

You Need Flexibility

• You don’t know exact amount you’ll need
• Kitchen renovation might be $60,000 or $100,000
• You want to borrow gradually as work progresses
• HELOC lets you draw only what you need, only when you need it

You Want to Keep Your Current Rate

• You have a 4.50% mortgage and refinancing would bring you to 6.75%
• You don’t want to reset your 30-year timer
• HELOC preserves your existing mortgage terms

You Want Lower Closing Costs

• HELOC costs $600–$1,600
• Refinance costs $8,000–$10,000
• If you only need $80,000 and refinancing costs $8,000, that’s 10% of borrowed amount in fees

You Might Pay It Off Quickly

• You have a $50,000 bonus coming in 8 months
• HELOC lets you pay off debt early without penalty
• Refinance has prepayment penalties (on some loans)

You Want Emergency Access

• You keep HELOC open but unused until emergencies
• Provides liquidity safety net
• Refinance locks funds at closing (no flexibility)

When to Choose a Cash-Out Refinance

Choose refinance if:

You Need Large Lump Sum Now

• You’re renovating entire home ($150,000+)
• You need money immediately for construction
• Refinance gives full amount at closing
• HELOC requires waiting and gradual draws

You Want Rate Stability

• You lock 6.75% fixed for 30 years
• Rates might spike—you’re protected
• HELOC rate will rise if Prime rises
• If rates are rising, locking fixed is smart

You Want Predictable Payments

• Refinance: Same payment every month for 30 years
• HELOC: Payment could rise 1% per year during draw, then jump 40% at repayment
• If you can’t handle payment uncertainty, fixed refinance is better

You Want to Reduce Overall Mortgage

• You have $500,000 mortgage at 7% rate
• You refinance $450,000 at 6.75% rate
• You also borrow $80,000 cash (for home improvements)
• Total: $530,000 at 6.75% (slightly higher balance, lower rate = overall save)
• This only works if rates have dropped significantly

You Can Offset Closing Costs with Savings

• Refinance closing: $8,000
• Current rate: 5.50%, new rate: 4.50%
• Monthly savings: $150 × 12 = $1,800/year
• Break-even: 5.3 years
• If you’re staying 10+ years, refinancing makes sense

The Rate Risk Analysis

If You Believe Rates Will Rise:

• Lock the refinance rate NOW
• Get 30 years of rate protection at today’s rate
• HELOC leaves you exposed to Prime increases

If You Believe Rates Will Fall:

• Take the HELOC at variable rate
• Benefit from Prime decreases
• Also benefit from lower overall monthly payments (HELOC cheaper monthly than refinance)

If You’re Uncertain About Rates:

• HELOC gives flexibility (if rates drop, you save)
• Refinance gives certainty (if rates rise, you’re protected)
• Choose based on your risk tolerance

Tax Deduction Considerations

Interest on borrowed money is usually NOT tax-deductible. EXCEPT:

If funds are used for home improvement:

• HELOC interest may be tax-deductible (consult tax advisor)
• Refinance interest may be tax-deductible (consult tax advisor)
• Only the portion attributable to home improvement qualifies
• $80,000 HELOC for kitchen renovation = interest might be deductible
• $80,000 HELOC for debt consolidation = interest NOT deductible

If funds are used for investment:

• Investment property purchase: Interest IS deductible
• Stock/bond investments: Interest NOT deductible
• Consult a tax advisor before borrowing

The Hybrid Approach: HELOC + Cash-Out Refinance

Some Florida homeowners do both:

Scenario:

• Current mortgage: $300,000 at 5% rate
• Home value: $500,000
• Home equity: $200,000
• Need: $100,000 now, might need $50,000 later

Hybrid Strategy:

• Cash-out refinance: Refinance $300,000 mortgage into $350,000 (get $50,000)
• Open HELOC: $150,000 credit line (keep open for future)
• Total new mortgage: $350,000 at 6.75% (replaces $300,000 at 5%)
• New HELOC: $150,000 available if needed

This gives you:

• Lump sum of $50,000 now (from refinance)
• $150,000 HELOC backup for future needs
• Only refinance once (instead of refinancing again later)

Downside: Refinance closing costs + HELOC closing costs.

Comparing Monthly Payments

Let’s do a realistic comparison:

Scenario: Need $80,000

Current Situation:

• Mortgage: $300,000 at 4.50% = $1,520/month

Option 1: HELOC Only

• Keep mortgage: $1,520/month
• HELOC draw-period interest-only: $617/month (at current 9.25%)
• Total: $2,137/month
• Repayment period (year 11+): $1,520 + $758 = $2,278/month

Option 2: Cash-Out Refinance Only

• New mortgage: $380,000 at 6.75% = $2,533/month
• Closing costs: $8,000 (rolled into loan or paid upfront)
• Total: $2,533/month

Option 3: Hybrid (Refi $50,000 cash-out + $150,000 HELOC)

• Refinanced mortgage: $350,000 at 6.75% = $2,335/month
• HELOC unused (no payment, emergency backup)
• Total: $2,335/month
• If you later need the $50,000 from HELOC: add $383/month interest-only

Decision Matrix: Which to Choose

Red Flags in Either Option

HELOC Red Flags:

• Lender won’t disclose repayment period payment
• No written rate cap documentation
• Lender pressures you to draw maximum ASAP

Refinance Red Flags:

• Closing costs above $10,000 (might be excessive)
• Prepayment penalty (especially for 10+ years)
• Interest rate significantly higher than your current rate

Ready to Choose Your Strategy?

Compare rates (HELOC margin vs. refinance fixed), calculate closing costs for each, and project 5-year and 10-year payments. HELOC is better for flexibility and low costs. Refinance is better for rate certainty and simplified payments. Your choice depends on your timeline, risk tolerance, and borrowing needs.

Through our lender directory, you can compare HELOC and cash-out refinance options from multiple Florida lenders and make an informed decision.