By ADU Scope editorial team ยท Last verified: October 2026
Cash-out refinance vs HELOC comes down to one number: your current mortgage rate. A cash-out refinance replaces your whole mortgage at today’s rate, while a HELOC leaves your mortgage alone and adds a second loan. If your rate is far below market, a HELOC usually costs less each month. If your rate is close to or above market, a cash-out refinance can make sense. This guide shows the arithmetic with a hypothetical $150,000 ADU.
This article is general information, not financial advice. All examples are hypothetical and use the inputs listed. Ask lenders for a Loan Estimate on both options before you decide.
Cash-out refinance vs HELOC: how each works
Cash-out refinance
First, you take a new first mortgage larger than your balance, pay off the old loan and keep the difference. As a result, everything becomes one loan with one rate and one payment. Closing costs typically scale with the loan size, so they apply to the whole new balance, not only the cash you take out.
The Consumer Financial Protection Bureau (CFPB) warns that a cash-out refinance can be costly when it replaces a low-rate mortgage with a higher-rate one. Home equity lending lets you use your equity without that swap.
HELOC
A HELOC is a line of credit secured by your home. Meanwhile, your first mortgage stays as it is. Per the CFPB, the draw period typically lasts about 10 years. Repayment then runs about 10 to 20 years, and some plans end with a balloon payment. Also, the rate is usually variable, and the lender may freeze or reduce the line. Because a HELOC is a second mortgage, you could lose your home if you fall behind.
Cash-out refinance vs HELOC: side-by-side comparison
| Feature | Cash-out refinance | HELOC |
|---|---|---|
| Your current mortgage | Paid off and replaced | Stays in place |
| Rate on your existing balance | Resets to today’s rate | Keeps your current rate |
| Rate type | Usually fixed | Usually variable |
| Closing costs | Typically scale with the whole new loan | Appraisal, application, closing and annual fees vary by lender |
| How you receive funds | One lump sum at closing | Draw as needed during the draw period |
| Payment risk | Predictable payment | Payment can rise; lender may freeze the line |
| Fit for staged ADU costs | Cash arrives all at once | Borrow as invoices arrive |
Cash-out refinance vs HELOC: a hypothetical break-even test
First, these inputs are assumptions, not quotes. We used the Freddie Mac 30-year average of 7.28% (as of Oct 1, 2026) as a stand-in for a cash-out rate. Of course, your quote may differ. The 7.5% HELOC rate is prime of 7.00% (Federal Reserve H.15, week ending Oct 2, 2026) plus a hypothetical 0.5-point margin.
| Input | Hypothetical value |
|---|---|
| Existing mortgage | $300,000 balance, 3.5%, 25 years left |
| ADU cost | $150,000, fully borrowed |
| Path A: cash-out refinance | $450,000 at 7.28%, 30-year fixed |
| Path B: keep mortgage and add HELOC | $150,000 at 7.5%, interest-only for 10 years, then 20-year repayment |
Next, here are the monthly payments, principal and interest only.
| Path | Loans | Monthly payment |
|---|---|---|
| Baseline: no ADU loan | $300,000 at 3.5%, 25 years left | $1,501.87 |
| A. Cash-out refinance | $450,000 at 7.28%, 30 years | $3,078.96 |
| B. Mortgage plus HELOC, draw period | $300,000 at 3.5% plus $150,000 interest-only at 7.5% | $2,439.37 |
| B. Mortgage plus HELOC, repayment | $300,000 at 3.5% plus $150,000 amortized over 20 years at 7.5% | $2,710.26 |
The refinance costs about $640 more per month than the HELOC path during the draw period. It costs about $369 more once the HELOC enters repayment. In short, the reason is simple: the refinance moves the entire $300,000 from 3.5% to 7.28%. In addition, part of the refinance payment is held down because it restarts a 30-year clock, so the gap would be wider on equal terms.
Cash-out refinance vs HELOC: the break-even rate
Instead of guessing, solve for the rate that makes the two paths equal. For example, on these inputs, the $450,000 refinance would need a rate near 5.09% to match Path B during the draw period. It would need about 6.04% to match Path B in repayment. Therefore, any quote above those rates loses on monthly payment.
Cash-out refinance vs HELOC: five-year cost
Because monthly payment is not the whole story, we also added hypothetical closing costs: 2% of the new loan for the refinance ($9,000) and $1,500 for the HELOC. Then we counted interest plus closing costs over 60 months. That is payments plus closing costs, minus the principal you repaid. We assumed the HELOC stays interest-only and the rate stays flat.
| Five-year result | A. Cash-out refinance | B. Mortgage plus HELOC |
|---|---|---|
| Payments over 60 months | $184,737 | $146,362 |
| Closing costs (hypothetical) | $9,000 | $1,500 |
| Interest plus closing costs | $168,573 | $106,823 |
| Total debt after 60 months | $424,835 | $408,961 |
As a result, Path A costs about $61,750 more over five years. Path B also leaves you with less total debt after five years, although $150,000 of it is still a variable-rate HELOC balance.
Cash-out refinance vs HELOC: stress test
If the HELOC rate rises one point to 8.5%, Path B costs $2,564.37 in the draw period and $2,803.61 in repayment. Therefore, both stay below the refinance, by $514.59 and $275.35. However, the result flips only when your existing rate is high. At a hypothetical 7.0% on the same $300,000 balance, you would pay $2,120.34 today. Path B would then cost $3,057.84 in the draw period and $3,328.73 in repayment, against $3,078.96 for the refinance. In that case the refinance is about $21 higher than the interest-only path and about $250 lower than the amortized path.
To run your own test, follow these steps:
- Compute your current payment, principal and interest only.
- Compute the refinance payment on the full new balance, using a real quote.
- Add your current payment to the HELOC payment, both interest-only and amortized.
- Add each option’s closing costs from its Loan Estimate.
- Finally, compare the monthly totals and the cash needed at closing over the years you expect to keep the loan.
Cash-out refinance vs HELOC: which one wins for your ADU?
When a HELOC wins
- You hold a low-rate mortgage. In fact, keeping it is worth thousands of dollars a year, as the example shows.
- Costs arrive in stages. You borrow only what you have spent, so interest accrues only on drawn funds. Our guide to HELOC for an ADU payments shows how that works.
- You plan to repay quickly. Therefore, a short holding period favors the lower closing costs.
When a cash-out refinance wins
- Your current rate is close to market. Thus, resetting costs little, and you gain a fixed payment.
- You want one predictable payment. Also, a fixed-rate first mortgage removes variable-rate risk.
- You can restructure other terms. For example, you might drop mortgage insurance or shorten the term, if the savings cover the closing costs.
- You prefer one lump sum and have a fixed-price contract.
Neither product suits every owner, so also compare a home equity loan, a renovation loan and the other routes in our guide on how to finance an ADU. Our ADU loan payment examples add more numbers.
Cash-out refinance vs HELOC: common mistakes
- Comparing rates instead of payments. A 7.28% refinance looks close to a 7.5% HELOC. However, the refinance rate applies to your whole balance, not just the new money.
- Ignoring the repayment jump. In our example, the HELOC payment rises from $937.50 to $1,208.39 on the $150,000 line when repayment starts.
- Borrowing the full limit. Instead, borrow what the construction contract and a contingency need.
- Skipping quotes. Likewise, the CFPB recommends getting estimates from several lenders.
- Forgetting the budget. Total your project first with our ADU budget breakdown and check California ADU costs.
Frequently asked questions
Can I use a cash-out refinance for an ADU?
Often yes, because cash-out proceeds usually are not restricted to one use. So check the lender’s rules on maximum loan-to-value and occupancy. Our owner-occupancy rules guide covers the local side.
Is a HELOC rate fixed?
In most cases it is variable. Some HELOCs let you convert part of the balance to a fixed rate, which the CFPB says is usually higher than the variable rate.
Does rental income change the math?
The loan math stays the same, but rent can change affordability. Our rental income guide explains how lenders treat it.
What if my lender freezes my HELOC?
In addition, the CFPB says lenders can freeze or reduce a line under conditions in the agreement. Ask for those conditions in writing, and keep a cash reserve so a freeze does not stall construction.