Cash-out refinance vs. HELOC: Which is better for Wisconsin homeowners?

Rob Miller, Branch Manager at MadCity Home Loans, answers one of the most common questions we get from Wisconsin homeowners.

Cash-out refinance vs. HELOC: Which is better for Wisconsin homeowners?

If you need to tap into the equity in your home to pay for renovations, consolidate debt, or cover college tuition, you have two main options: a Cash-Out Refinance or a Home Equity Line of Credit (HELOC).

Both allow you to use your home as a piggy bank, but they work in very different ways. Here is how I help my clients in Madison choose the right one.

The Cash-Out Refinance (The "Clean Slate")

A cash-out refinance completely replaces your current mortgage with a brand new, larger mortgage. You get the difference in a lump sum of cash at closing.

• Pros: You only have one monthly payment. It usually offers a fixed interest rate (so your payment never changes). It is generally easier to qualify for larger amounts of money.
• Cons: You are resetting your entire mortgage terms. If you currently have a 3% interest rate on your first mortgage, you will lose that rate when you refinance the whole balance into today's market rate.

The HELOC (The "Credit Card on Your House")

A HELOC is a second mortgage. You keep your first mortgage exactly as it is (protecting your low interest rate), and you open a separate line of credit based on your equity. You only pay interest on the money you actually draw out.

• Pros: You get to keep the low interest rate on your first mortgage. You only borrow what you need, when you need it (great for phased remodeling projects). Closing costs are usually much lower than a full refinance.
• Cons: HELOCs almost always have variable interest rates, meaning your monthly payment can go up if the Federal Reserve raises rates. You also have two separate monthly payments to manage.

The Rob Miller Verdict

Choose a HELOC if: You secured a historically low rate (like 3%) in 2020/2021 and you absolutely do not want to touch it. A HELOC lets you access cash without destroying that incredible first mortgage rate.

Choose a Cash-Out Refinance if: Your current rate is fairly close to today's market rates, OR you have massive high-interest credit card debt. Even if your mortgage rate goes up slightly, rolling 25% interest credit card debt into a 7% mortgage will massively improve your financial life.

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Related Guide: Dig deeper into equity options in our Madison WI Home Equity Loan & HELOC Guide.