The core structural difference
A cash-out refinance replaces your existing mortgage entirely with a new, larger loan — you pay off your old mortgage and take the difference in cash. A HELOC (home equity line of credit) leaves your existing mortgage untouched and adds a second, separate loan secured by your home's equity, structured as a revolving line of credit rather than a lump sum.
How the two compare
| Factor | Cash-Out Refinance | HELOC |
|---|---|---|
| Your existing mortgage | Replaced entirely by the new loan | Stays in place, unchanged |
| Loan structure | Single lump-sum loan, typically fixed-rate | Revolving line of credit, typically variable-rate, with a draw period |
| Interest rate exposure | Your entire mortgage balance takes on the new rate — a factor if your existing rate is well below current market rates | Only the amount you draw accrues interest at the HELOC's rate; your original mortgage rate is unaffected |
| Closing costs | Typically calculated on the full new loan amount | Often lower, since it's a smaller, separate loan |
| Flexibility | You receive the full cash-out amount upfront | Draw only what you need, when you need it, during the draw period |
Why the interest-rate factor matters so much right now
If your existing mortgage carries a rate well below current market rates, a cash-out refinance means giving up that rate on your entire mortgage balance, not just the amount you're borrowing for your ADU. This is often the single biggest factor pushing homeowners toward a HELOC instead — it isolates the new borrowing to just the amount needed for construction, at whatever the current HELOC rate is, without disturbing the rest of your mortgage.
When a cash-out refinance can still make sense
- Your current mortgage rate is close to or above current market rates. In that case, there's less to give up by refinancing the whole balance.
- You want a fixed rate on the full amount rather than exposure to a HELOC's typically variable rate.
- You're also looking to change other loan terms, such as switching loan types or adjusting your term length, alongside funding the ADU.
This is general information, not a lending recommendation
Rates, terms, and qualification requirements vary by lender and by your specific financial situation. This page describes the general structural differences between these two products, not a recommendation for your specific circumstances. A mortgage lender can run the actual numbers for your situation, including your current rate, credit profile, and available equity.
Frequently asked questions
It depends heavily on your existing mortgage rate. If your current rate is well below market, a HELOC often avoids giving that up on your entire balance. If your rate is already close to market, a cash-out refinance may be more competitive. Get quotes for both from a lender to compare your actual numbers.
HELOCs are typically variable-rate, tied to an index that can move over time, though some lenders offer options to convert a HELOC balance to a fixed rate. Confirm the specific structure with your lender.
A construction loan is a separate product designed specifically to fund building work, with disbursements tied to construction milestones. See our HELOC vs. construction loan guide for how that comparison works.