Are you a homeowner looking to tap into your home’s equity? Taking out a home equity line of credit (HELOC) on your house could be a good idea.

The Federal Reserve announced at its July meeting that it was holding the federal funds rate steady, and mortgage rates remained flat after that announcement. The Fed might lower the rate at its September meeting, but a lot could happen before then to affect its decision.

However, whether it's a good time to take out a HELOC is a complicated question that depends on more than just interest rates. You should consider numerous factors, including your financial situation, what you're using the money for, and more.

In this article:

First things first: What is a HELOC?

Pros and cons of taking out a HELOC now

HELOC interest rates

High home values are good for HELOCs

Is now the time to take out a HELOC?

How to apply for a HELOC

FAQs

Before deciding if now is the time for a HELOC, you should thoroughly understand what a HELOC is and how it works. A home equity line of credit is a second mortgage that works as a revolving credit line based on your home’s equity.

“Home equity” refers to the value of your home minus your outstanding mortgage balance. For example, your home is worth $400,000, and you still owe $250,000 on your original mortgage loan. You have $150,000 — or 37.5% — equity in your home. ($400,000 - $250,000 = $150,000.)

Homeowners take out HELOCs for various reasons, such as financing home improvements, paying off loans or other debt, putting a down payment on a second property, or even using the cash as a temporary emergency fund.

There are two main types of HELOCS: interest-only and fixed-rate.

With interest-only HELOCs, you make payments solely on the interest during the HELOC’s draw period. Once the repayment period begins, your monthly payments increase to pay off both the interest and principal.

Interest-only HELOCs usually have variable rates that change periodically. Meanwhile, with fixed-rate HELOCs, you can switch all or some of your balance into a fixed-rate loan. That section of your HELOC essentially acts as a home equity loan.

Dig deeper: HELOC vs. home equity loan — What are the differences?

Taking out a home equity line of credit has advantages and disadvantages, especially in today’s housing market, which has high home values, high interest rates, and a volatile economy.

Take advantage of your home’s value: Houses have appreciated significantly over the last few years. If your house has gained a lot of value, you might be able to get a hefty bit of cash by taking out a HELOC now.

Flexible credit line for any expense: HELOCs let you take out money at any time during the draw period (which typically lasts for 10 years on a 30-year term) and use it for any expense.

Lower interest rates: While interest rates for all kinds of loans are high right now, HELOCs still generally charge lower interest rates than alternatives such as credit cards and personal loans. Some HELOC lenders even offer an introductory low-APR period.

You put your home at risk: Two monthly mortgage payments can be overwhelming, especially during the HELOC repayment period, when your payment is higher. If you fail to make payments on your original mortgage or HELOC, you put your home at risk of foreclosure.

Variable interest: Most HELOCs charge variable rates, which could be a pro or con depending on whether rates are expected to increase or decrease in the future. Although economists expect rates to go down in the next couple of years, no one has a crystal ball for what rates will do over the next 30 years. Make sure you can afford the monthly payment at the upper end of the interest range as well.

Closing costs: Many HELOCs charge closing costs — although some lenders, such as Navy Federal Credit Union, don’t impose these fees.

Home equity line of credit interest rates are variable, meaning they change periodically. Some lenders offer an extra-low rate at the beginning of your term before bumping you up to a regular rate — and even then, your rate can change (unless you get a fixed-rate HELOC as mentioned above). Right now, the typical HELOC rate is between 8% and 9%.

Still, HELOC interest rates tend to be lower than other alternative forms of credit, such as credit cards, personal loans, or personal lines of credit. Additionally, many HELOC lenders offer special introductory APRs to start.

HELOC rates are not necessarily expected to plummet anytime soon. Most experts predict that interest rates on first mortgages will stay firmly in the low-to-high 6% range in 2025, as they have for the bulk of this year and the previous one.

However, it’s normal for interest rates to be higher on second mortgages than on first ones. So, 8% to 9% HELOC interest rates could remain the standard for a while.

Home values across the country have skyrocketed over the last several years. While this is not so great for prospective home buyers, it can be hugely beneficial to current homeowners looking to cash in on their house’s value.

According to Zillow, the median home value was $369,147 as of June 2025. Five years prior, the median home value was $259,340. That’s an increase of $109,807, or over 42%.

The combination of paying down your mortgage balance and living in an appreciating home could give you quite a bit of equity, making a HELOC a worthwhile choice for people covering large expenses.

Dig deeper: How much is my house worth? How to determine your home value.

Because HELOC rates aren’t expected to plummet anytime soon, now is a relatively good time to consider taking out a HELOC if you feel it benefits your situation. Still, there are a few things to consider about your home itself and current market conditions.

How much home equity do you have? Most lenders will require you to have at least 15% to 20% equity in your home before taking out a HELOC, meaning you have a minimum of 80% to 85% left to pay on your mortgage.

What are lenders offering? Many big-name HELOC lenders offer APRs ranging from 6.5% to over 20%. The better your financial profile, the lower your rate will be. Right now, some lenders offer special incentives, such as a lower APR for the first few months. So, if you’re seriously considering a HELOC, shop around for any perks or discounts.

Applying for a HELOC is a relatively simple process. First, research various HELOC lenders and compare their terms, rates, and closing costs.

Once you find the lender you want to work with, ensure you have all the necessary documents to apply, such as your identification, a recent mortgage statement, proof of income, and proof of homeowners insurance.

From there, you can apply online or in person. After you’ve submitted your application, your home will undergo the mortgage underwriting process, which will determine if your home is eligible for a HELOC. This process can take several weeks. If your application is approved, you can sign the final paperwork and access your HELOC funds.

In almost all cases, you need to prove a strong financial profile to qualify for a HELOC. An ideal borrower usually has proof of income, a minimum 680 credit score, and plenty of untapped equity in their home (most lenders require between 15% and 20%). HELOC lenders also require you to have homeowners insurance and a debt-to-income ratio (DTI) of 43% or less. Because home values are high right now, you might meet the home equity requirement. If you aren’t eligible based on other factors, work on increasing your credit score or paying down debt.

Home equity loans can be a good fit if you prefer fixed, predictable monthly payments and want a lump sum of cash rather than a revolving line of credit. Meanwhile, HELOCs allow homeowners to access funds when needed and only pay off the interest during the draw period. You also won’t pay interest on any money you don’t withdraw, which is good for borrowers who don’t know how much cash they’ll end up using. While home equity loans have fixed rates, a HELOC’s variable rates could be preferable since interest rates are expected to inch down in the near future.

While a HELOC is a second mortgage that acts as a revolving line of credit, a cash-out refinance pays off your existing mortgage and results in a new mortgage loan. This means you’ll replace your current mortgage with a new one with a different interest rate. Mortgage rates are relatively high right now, so if you currently have a low rate that you don’t want to give up, you may want to keep your original loan and add on a HELOC.

Laura Grace Tarpley edited this article.

If you’re a homeowner and have a credit score with a few dings and scratches, you might think a home equity line of credit (HELOC) is out of reach. The truth? Maybe not. While less-than-stellar credit can make the process more difficult, closing on a bad credit HELOC might be simpler than you think.

To understand the paths forward, it helps to step inside the HELOC approval process to see what lenders look for and how to position yourself in the best light. We’ll break down the process, pros and cons of a HELOC for bad credit, and some financial alternatives if qualifying becomes tricky.

Read more: How to get a mortgage with a bad credit score

In this article:

What is a HELOC, and how does it work?

Can you get a HELOC with bad credit?

Beyond the credit score: What lenders look for

Tips for getting a HELOC with bad credit

Pros and cons of bad credit HELOCs

HELOC alternatives for bad credit borrowers

FAQs

A HELOC is a second mortgage that lets you borrow against the equity you’ve built in your home. The easiest way to think about it is that it’s essentially a credit card where your home secures the credit line.

Instead of receiving a lump sum of money like you would if you took out a home equity loan, a HELOC gives you a revolving credit line you can draw from as needed — up to your credit limit — during the draw period, which usually lasts up to 10 years. After that, HELOCs enter a repayment phase when you’ll need to repay what you’ve drawn, plus interest, over a period of time.

A major advantage of HELOCs, like credit cards, is that you only pay interest on what you borrow. This feature makes them flexible financial tools for major expenses like making home improvements, consolidating higher-interest debt, or even repaying unexpected bills.

However, before taking out an HELOC, it’s important to understand the risks involved. Since your home secures your credit line, defaulting on your HELOC could have disastrous consequences, including the potential to lose your home.

The short answer here is yes — getting a HELOC with bad credit is possible. However, getting a HELOC when your credit has some blemishes may not be as straightforward as for someone with good credit.

Most HELOC lenders typically want borrowers to have a minimum credit score of 680 with a debt-to-income ratio (DTI) of no more than 43%. Before you start sweating, these are averages, not hard-and-fast rules. Some lenders, especially nontraditional ones, may have more lenient qualification criteria and look at more than just your credit score.

Your credit score isn’t the only thing lenders care about. Lenders want to know that, should they lend to you, they’re taking on as little risk as possible. These factors all work together to build a complete financial profile for a lender to consider when working with borrowers with lower credit scores seeking HELOCs.

Home equity. The more equity you have, the better. Most lenders require you to have at least 15% to 20% equity in your home, but having more may offset credit issues.

DTI ratio. Lenders want to know you’re not overextended. A DTI ratio under 43% is usually preferred, though some lenders have higher limits.

Income stability. A reliable, verifiable income — whether from full-time work, self-employment, or retirement benefits — can work in your favor.

Payment history. A record of consistent, on-time payments, especially for your mortgage and other major debts, can work in your favor.

When you find a lender willing to work with your entire financial picture, preparing for a few trade-offs is important. The most important one? You’ll likely face a higher HELOC interest rate than borrowers with top-notch credit.

Learn more: 7 ways to build equity in your home

If you’re still thinking that a HELOC is the right tool for your financial goals, taking a few proactive steps can help pave the way for application success.

First things first: Know your credit score and understand what’s dragging it down. Dispute any errors and focus on paying down existing debts. Even a modest score bump can make a big difference.

Not all HELOC lenders are created equal. Some credit unions, local banks, or online lenders may specialize in working with borrowers with credit challenges. Compare offers and read the fine print.

If you have a friend or family member with strong credit, their support as a co-signer on your second mortgage could tip the scales in your favor. Just know that they’ll be on the hook if you default.

The more of your home you own outright, the lower the risk for the lender. If you're close to reaching a higher equity threshold, consider waiting to apply.

Gather proof of income, employment, and any assets. The more you can demonstrate financial stability, the more confidence a lender will have, even if your score is low.

If your debt load is high, prioritize paying down balances before applying. Lenders see a low DTI ratio as a sign that you can handle new payments.

Sometimes, life happens. Medical emergencies, job loss, or divorce can all hurt your credit. Be honest and proactive. A personal letter explaining your situation might resonate with a lender on the fence.

Access to funds. HELOCs offer on-demand access to money when you need it most.

Lower interest rates than credit cards. Even HELOCs for homeowners with bad credit may offer lower interest rates than credit cards, since your home secures the debt.

Interest-only payments. You typically only need to make interest-only payments during the draw period, making monthly payments more manageable.

Potential tax benefits. If you use your HELOC to make substantial home improvements, the interest paid may score a tax deduction (check with your tax professional).

Higher interest rates than those with excellent credit. While it’s not ideal, the unfortunate reality is that bad credit generally means higher borrowing costs.

Foreclosure risk. If you can’t make the required payments, you could risk losing your home in foreclosure if your HELOC defaults.

Variable interest rates. Most lines of credit have adjustable rates. If interest rates rise, your HELOC payments could increase — adding to any existing financial stress.

If a HELOC for bad credit isn’t in the cards right now, you still have lending alternatives that could offer the funds you need. As you weigh the options, it’s important to consider the risks and rewards of each and how the new financial obligation could stress your monthly finances.

Home equity loans. Home equity loans provide fixed payments and interest rates, and they’re useful if you need a lump sum of money all at once. They’re not necessarily easier to qualify for than HELOCs, though.

Cash-out refinance. If today’s rates are lower than when you took out your mortgage, a cash-out refi could give you access to money — and at a lower rate than a HELOC. The catch is that a cash-out refinance replaces your current mortgage with an entirely new loan. So, if you have a super-low mortgage rate, you could lose it by opting for a cash-out refinance.

Personal loans. A personal loan could get you the cash you need, though you’ll likely find higher interest rates than you might on HELOCs.

Credit counseling. Improving your overall financial profile through credit counseling could help you reestablish control of your finances and secure lower rates in the future.

Dig deeper: How to choose between a HELOC and a home equity line of credit

To get a HELOC, most lenders want to see a credit score of at least 620 to 660. While some lenders may have lower score requirements, you’ll typically need a higher percentage of home equity, a lower debt-to-income (DTI) ratio, and a rock-solid income and employment history to make up the difference.

You may be disqualified from getting a HELOC loan if a lender views you as a significant credit risk. A poor credit score, low amount of equity in your home, high DTI ratio, and unstable income and employment history could all leave your application in the “denied” pile.

HELOCs aren’t necessarily hard to get approved for, but you’ll need to focus on making a strong case for lenders. This includes a good credit history, at least 20% equity in your home, a DTI ratio of around 43%, and a stable monthly income and employment history.

Laura Grace Tarpley edited this article.

Are you overwhelmed by credit cards, personal loans, or medical bills? Depending on your financial situation, using a home equity line of credit (HELOC) to pay off debt could be a smart move.

However, it’s crucial to understand how paying off or consolidating debt with a HELOC works to decide if it makes sense for you.

A HELOC is a line of credit drawn from the equity in your home. It functions like a credit card with a revolving line of credit, unlike a traditional mortgage or personal loan, which gives you a lump sum of money. A HELOC gives you access to money for just about anything, such as large purchases, home improvements, or debt consolidation.

Most HELOCs have variable interest rates, although some lenders offer fixed-rate HELOC options. HELOC annual percentage rates (APRs) are typically much lower than credit card rates. So, while they have some of the same features as a credit card, they can be more affordable and actually help you pay off credit card debt.

To pay off debt with a HELOC, you need to understand how to qualify and what rules you have to follow. Here are the basics on getting a HELOC and using the funds to pay off other debts.

HELOC lenders typically look for homeowners with 15% to 20% equity in their house. Equity is your home’s value minus your outstanding mortgage balance. That means you’re more likely to get approved if your mortgage balance is 80% to 85% less than your home’s appraised value. For example, if an appraiser claims your home is worth $400,000, your outstanding mortgage principal should be a maximum of $320,000 to $340,000. If your balance is higher, you won’t qualify for a HELOC.

You’ll also need to meet basic borrower requirements, such as having a good credit score, a low debt-to-income ratio, stable income, and a history of on-time payments.

Read more: How to get a HELOC with bad credit

There are two main phases of a HELOC.

The draw period: You can access as much or as little of the line of credit the lender approved you for during the draw period, which usually lasts up to 10 years. During this time, you’re typically required to make minimum interest-only payments on the amount you withdraw (though you can pay more). During this period, you can draw money as needed to pay off medical debt, credit card bills, or other significant debt payments.

The repayment period: In the repayment period, your minimum payment will increase to cover both interest and principal until you’ve paid off the balance. The repayment period usually lasts for 20 years, and you can no longer draw money during this time.

HELOCs are secured loans that use your home as collateral. Secured loans are considered less risky for lenders because if a borrower can’t repay the debt, the lender can seize the home.

Secured loans can be riskier for borrowers, though. If you struggle to afford monthly payments on both your HELOC and original mortgage, your home could go into foreclosure. So, while a HELOC can help you get out of debt, only consider this option if you’re confident you can keep up with the loan payments. You don’t want to lose your house in an attempt to pay off unsecured debt, such as a credit card or personal loan.

There are several benefits to a HELOC, especially if you’re dealing with high-interest debt. Here are a few pros to consider.

Lower interest rates: HELOC interest rates can be lower than those for credit cards or other unsecured loans, like personal loans. Using a lower-interest line of credit to pay off higher-interest debt will save you money on interest payments.

Affordable payments: For the first decade or so, you can typically make interest-only payments on your HELOC. This can be more affordable than the minimum payments for other borrowing methods.

May improve credit utilization: Credit utilization refers to the percentage of your available credit you’re using. The lower your utilization ratio, the better. For example, it’s better for your credit score if you owe $1,000 on your credit card with a $10,000 limit than if you owe $9,000. The FICO credit score model doesn’t usually include HELOCs when calculating credit utilization. (However, other scoring models might.)

Streamlined payments: Simplifying from multiple credit card payments to one HELOC payment could make it easier to manage your finances.

Before using a HELOC to pay off other loans, consider these potential downsides.

Requires enough home equity: You may have a hard time qualifying for a HELOC if you don’t have at least 15% equity in your home.

May come with closing costs: If the lender charges HELOC closing costs, you could pay 2% to 5% of the credit limit.

Variable interest rates: Repaying a variable-rate HELOC can be difficult to budget since the payment can change periodically.

Defaulting can risk home foreclosure: Your home is collateral with a HELOC, so if you have trouble repaying, the lender can repossess your home. There can be consequences for not repaying your credit card, personal loan, or student loan bills, but because these are types of unsecured debt, companies cannot take away things like your home.

Lower interest rates are one of the biggest advantages of a HELOC, making it a solid option for people with high-interest debt.

“Anytime you can consolidate debt by rolling into a loan with a lower interest rate, it can put you in a better financial position,” said Dre Torres, loan officer at Cornerstone First Mortgage, via email. “Savings from a HELOC can help you have a positive monthly cash flow or pay down other debts.”

However, struggling to repay a HELOC has serious consequences.

“A HELOC is tied to your home, so it’s not something you want to take lightly. Make sure you are financially diligent and don’t get back into debt,” noted Torres. “If you lack a solid budget or have poor spending habits, a HELOC is generally a bad idea."

There are other ways to consolidate debt if a HELOC is not right for you.

Home equity loan: Access your home’s equity in a lump sum, typically repaid at a fixed interest rate.

Cash-out refinance: Refinance for more than your existing mortgage if you have enough equity. Take the difference in cash and use it to pay off debt.

Personal loan: You can borrow a lump sum to consolidate or pay off higher-interest debt and repay it at a fixed rate, usually within five to seven years.

Credit card balance transfer: Transferring high-interest debt to a credit card with 0% APR could save you money if you can pay off the balance before the no-interest period ends. You typically need good to excellent credit to qualify.

Credit counseling programs: Some nonprofit agencies can help you negotiate more affordable payments with your creditors if you’re struggling to stay current.

Read more: HELOC vs. home equity loan — Choose the right one for you

It can be a good idea to use a HELOC to repay debt if you have high-interest credit card debt. HELOCs tend to have lower rates than credit cards because they’re secured by your home. But that also means you could lose your home if you struggle to repay the balance.

A HELOC typically shows up on your credit report as revolving credit. As with other credit accounts, missing payments can hurt your score. A HELOC can also impact your credit utilization. While FICO doesn’t include a HELOC in your utilization calculation, other credit score models might.

You can use a HELOC or home equity loan to pay off high-interest debt. Both use your home as collateral. HELOCs usually come with variable interest rates. Home equity loans have fixed rates, making them more predictable. Your HELOC payments could be more affordable if you choose interest-only payments during the draw period. However, your payments will increase significantly when the draw period ends.

Laura Grace Tarpley edited this article.

If you need to pay off debt, remodel your residence, or cover another large expense, consider tapping into your home equity. Two popular tools for doing so are a cash-out refinance and a home equity line of credit (HELOC).

We compared cash-out refinancing and HELOCs to help you decide which is the better fit. Keep reading to find out which home equity product may be right for you.

Read more: How to choose between a second mortgage vs. refinance

In this article:

Home equity explained

How does a cash-out refinance work?

How does a HELOC work?

Comparing cash-out refinances and HELOCs

Which is right for you?

FAQs

Your home equity is how much your house is worth minus your remaining mortgage balance. For example, if your property gets appraised at $400,000 and you still owe $200,000 on your mortgage, you have $200,000 worth of equity — or 50% equity.

Home equity products generally require you to have at least 10% to 20% home equity to qualify. Following the above example, if a lender asks you to have 20% equity to get a HELOC or cash-out refinance, your mortgage loan balance must be $320,000 or less.

Lenders may also use the term loan-to-value (LTV) ratio. Your LTV ratio is another way to describe how much you owe on your house compared to its worth and is the inverse of your home equity percentage. For example, if you have 20% home equity, your LTV ratio is 80%, which signifies that you still owe 80% of your residence's appraised value.

With a cash-out refinance, you take out a new mortgage that’s large enough to both pay off your existing mortgage and put a lump sum into your pocket. Then, you can use the extra funds any way you see fit.

Getting a cash-out refi will feel similar to securing your original mortgage. You’ll need to:

Get a home appraisal to determine how much you can borrow. Generally, you can borrow up to 80% of your residence’s value. However, if you’re a VA home loan holder, you may be able to borrow up to 100%.

Pay closing costs to finalize your new loan. Your costs will be a percentage of your new mortgage amount and may include an origination fee, attorney fee, or other expenses.

Meet lender-specific eligibility requirements. While each cash-out refinance mortgage lender will have its own criteria, you'll typically need at least a fair credit score and a debt-to-income ratio (DTI) — the amount you pay toward debts each month compared to the amount you earn — below 43%.

Once you’ve closed on your new mortgage, you’ll start making full principal and interest payments almost immediately. Most lenders offer 15-year and 30-year terms, and some may have even more term lengths to choose from.

Your cash-out refi could have a fixed or adjustable interest rate. With a fixed interest rate, your monthly mortgage payments will be stable over the life of the debt. However, with an adjustable interest rate, your monthly payments may fluctuate.

You’ll only have one mortgage to keep track of and repay.

Your monthly payment will stay consistent (with a fixed-rate loan).

You can take quick action toward your goals after receiving your lump sum.

Your home loan may be more expensive since mortgage rates have increased in recent years.

You’ll have to pay closing costs.

You could lose your home if you default on your new mortgage.

Read more:

FHA cash-out refinance

VA cash-out refinance

With a home equity line of credit (HELOC), you take out a second mortgage you must manage and repay alongside your existing mortgage loan. Instead of receiving a lump sum upon closing, you’ll gain access to a line of credit you can use for any purpose. You may be able to borrow up to 80% or even 90% of your property’s value, depending on the lender.

As a second mortgage, a HELOC presents a greater risk to your lender because your primary mortgage will get repaid first should your home go into foreclosure. That increased risk translates into stricter qualification requirements than a cash-out refinance.

For example, you’ll generally need a higher credit score to qualify for a HELOC. Plus, you’ll likely pay a higher interest rate than you would if you refinanced your initial mortgage.

Your HELOC will be split into two phases: the draw period and repayment period. During the draw period, which usually lasts up to 10 years, you can spend up to your approved credit limit. You can replenish your available funds by paying down the principal balance as you would with a credit card. Many HELOC lenders only require you to make interest payments during this phase, though.

Your HELOC will likely come with a variable interest rate, but some lenders do offer fixed-rate HELOCs.

Once you enter the repayment period, you can no longer access your line of credit. You must then make principal and interest payments for the remainder of the loan term, generally up to 20 years.

Your new interest rate will only apply to the money you take out with your second mortgage — you’ll keep your old rate on your original mortgage balance. This is a pro if rates have increased since you bought your home.

Your line of credit gives you flexible access to your money. You’ll only need to repay what you actually use.

You’ll probably pay few (or maybe even no) closing costs to get your second mortgage.

You’ll have two housing debts to repay: your existing mortgage and the HELOC.

Your monthly payment could fluctuate due to the loan’s variable interest rate.

You may have difficulty transitioning from the interest-only payments of the draw phase to the full payments of the repayment phase.

You could lose your home to foreclosure if you don’t repay the debt as agreed.

Dig deeper: How to get a HELOC in 6 simple steps

While both financial products can help you borrow against your home’s equity, one may be a better fit for your situation than the other. You should consider several factors, including the interest rate, repayment term, closing costs, the purpose of the loan, and how much you need to borrow.

A cash-out refinance may be appropriate if you want to use the money to pay off a significant amount of more expensive debt. “Credit card interest rates are 20%+, and that is really taking up people's income,” said Kadyn Nannini, mortgage loan officer at One Real Mortgage, via email.

“A refinance, even at 7% but amortized over 30 years, can really reduce the overall monthly debt load of a household and create some peace of mind, which I think has a non-tangible value to it that needs to be considered. I have seen people refinance to a 7% rate and pay off all other debt and be so happy because now their only debt is an appreciating asset,” Nannini continued.

That being said, weigh the pros and cons of using a secured loan (which is attached to collateral, like a house) to pay off a non-secured loan. Although there are consequences for not repaying your credit card, there’s a much more significant consequence for not paying back your mortgage — namely, you could lose your house in foreclosure.

A cash-out refi may also be your best bet if you want a predictable monthly payment over the life of the debt.

“Some people do not like interest-only payments, and that is what a HELOC is to start for the first 10 years,” said Nannini.

“[Many borrowers] like to set their payment and forget it. So in a situation where someone needs to take some money out of their house, and their first mortgage is relatively low, like less than $200,000, then a cash-out refinance might make sense so they can set their fixed payment and not have to worry about it,” Nannini explained.

Dig deeper: Cash-out refinance vs. home equity loan — Which should you choose?

A HELOC could be better if your current mortgage has a low interest rate and you only need to borrow a relatively small amount.

“Since most people have low rates below 4%, it might not make sense to completely refinance all of their housing debt when their debt is so cheap. A HELOC is the perfect solution. They can take the [required sum] out at a higher rate, keep their first mortgage payment low, and then figure out what they need to pay to work down the [new debt],” said Nannini.

In addition, you may be able to qualify for a HELOC with less equity in your home, depending on which lender you use. “HELOCs allow you to have a higher LTV (loan-to-value) ratio on your home versus a cash-out refinance. Between your first mortgage and a HELOC, you can use up to 90% of your home's value, whereas a cash-out refinance only allows you to go up to 80%,” said Nannini.

Lastly, a HELOC can be appropriate if you’re unsure how much you want to borrow. You only have to repay the amount you borrow, so you’re off the hook if you don’t end up using the full amount available.

Learn more: How an interest-only HELOC works

There are a few differences between a cash-out refinance and a HELOC. With a cash-out refinance, you take out a new mortgage to replace your existing home loan, receive your money as a lump sum, and begin making full payments shortly after closing. With a HELOC, you take out a second mortgage, can borrow money up to your credit limit for the duration of your draw period, and often only need to pay the interest on what you borrow until the repayment phase begins (generally after 10 years).

A cash-out refinance may be better than a HELOC in select circumstances. For instance, a cash-out refinance makes sense if mortgage interest rates have dropped since you took out your original home loan. A cash-out refinance could also make sense if you want to limit your housing debt to one loan or borrow a large sum.

No, you don’t have to pay taxes on the money you receive on a cash-out refinance. Since the funds are loaned to you, the cash isn’t considered taxable income.

This article was edited by Laura Grace Tarpley