Is HELOC interest tax deductible?

Since the 2017 Tax Cuts and Jobs Act, HELOC interest is only deductible if the funds are used to buy, build, or substantially improve your home. Using a HELOC for debt consolidation or other purposes eliminates the deduction. Cash-out refi interest is always deductible as mortgage interest, up to the $750,000 mortgage cap.

What happens to my HELOC payment if interest rates rise?

HELOCs are variable rate, tied to the prime rate. When the Federal Reserve raises rates, your HELOC rate and payment rise within 30-60 days. On a $40,000 HELOC balance, a 2% rate increase adds about $67 per month. The Rate Scenarios tab models your payment at +1%, +2%, and +3% increases.

What is the difference between a HELOC and a home equity loan?

A HELOC is a revolving credit line where you draw and repay multiple times, paying interest only on what you borrow. A home equity loan is a lump sum with a fixed rate and fixed payment. HELOCs offer flexibility; home equity loans offer rate certainty. For a specific project with a known cost, a home equity loan's fixed rate is often preferable.

How much equity do I need for a cash-out refi or HELOC?

For a cash-out refinance, most lenders require you to maintain at least 20% equity after the cash-out, allowing you to borrow up to 80% LTV. For a HELOC, most lenders allow up to 85-90% combined LTV. On a $400,000 home with $240,000 owed, you could access up to $80,000 via refi or $100,000 via HELOC.

Refinance vs HELOC Calculator

Q: When does a cash-out refinance make more sense than a HELOC?

A cash-out refi is better when your current mortgage rate is close to market rates, you want a single fixed payment with no variable rate risk, you need a large amount of cash, or you plan to stay long enough to recover closing costs. If your current rate is already near today's rates, the simplicity of one loan often wins.

Cash-out refi or HELOC — which is right for you? Compare monthly payments, total costs, break-even points, rate risk, and tax implications in one comprehensive analysis.

Current Mortgage Balance

Current Rate

Years Remaining

yrs

Cash Needed

New Refi Rate

HELOC Rate

Monthly Cost Comparison

HELOC saves $124/mo

HELOC + current mortgage is cheaper monthly

Refi Monthly Payment

$1,816

HELOC Combined Payment

$1,693

5-Year Cost (Refi)

$114,964

5-Year Cost (HELOC)

$101,552

Over 5 years: HELOC saves $13,412 including refi closing costs of $6,000.

Advanced

Break-Even Analysis & Rate Scenarios

When does refi beat HELOC, what if HELOC rates rise, and use case guide

Refi Closing Costs

Analysis Period

years

The refi monthly payment ($1,816) is higher than the HELOC combined payment ($1,693). There is no break-even point — the HELOC is cheaper both short and medium-term. Consider refinancing only if interest rates drop significantly or for simplification.

Refi Monthly

$1,816

30-year cash-out refi

HELOC Combined

$1,693

Existing mortgage + HELOC interest

Monthly Difference

$124

HELOC cheaper/mo

Closing Costs

$6,000

Upfront refi cost

Pro

Total Cost Model & Tax Analysis

Full interest over loan life, closing cost impact, tax deductibility comparison

Refi Closing Costs

HELOC Draw Period

yrs

HELOC Repay Period

yrs

Cash-Out Refinance (Total Life Cost)

$379,787

Total interest: $373,787

Closing costs: $6,000

New loan: $280,000 at 6.8%

Term: 30 years

HELOC + Keep Mortgage (Total Life Cost)

$209,666

HELOC draw interest: $35,000

HELOC repay interest: $44,836

Remaining mortgage: $129,830

No closing costs

The HELOC strategy costs $170,121 less over the full loan life — mainly because you preserve your existing low-rate mortgage balance.

Refi Interest: $373,787

Refi Closing: $6,000

HELOC Interest (draw): $35,000

HELOC Interest (repay): $44,836

Existing Mortgage Int.: $129,830

How to Use the Refinance vs HELOC Calculator

When you need cash from your home's equity, two main options exist: cash-out refinance (replace your entire mortgage with a new, larger one) or a HELOC (add a separate credit line on top of your existing mortgage). This calculator helps you compare them directly.

Quick Calculator

Enter your current balance, current rate, and years remaining on your mortgage. Enter how much cash you need, the new refi rate (for a 30-year cash-out refi), and the HELOC rate (typically prime + 0.5–2%). The calculator shows monthly payments for each option and their 5-year total cost comparison.

Advanced: Break-Even and Rate Scenarios

The Break-Even tab calculates how many months until the refi closing costs are recovered through monthly savings. The Rate Scenarios tab shows what happens to your HELOC payment if rates rise by 1%, 2%, or 3% — critical since HELOCs are variable-rate products. The Use Case Guide provides a decision framework based on loan size, timeline, and current rate.

Pro: Full Cost Model and Tax Analysis

The Full Cost Model compares total interest paid over the life of both options including closing costs. The Tax Deductibility tab explains when HELOC interest is and is not deductible (the 2017 tax law changed this significantly). The Hybrid Strategy tab shows when keeping your existing low-rate mortgage and adding a HELOC is smarter than refinancing everything.

Refinance vs HELOC Formulas

Cash-Out Refi New Balance = Current Balance + Cash Needed
Refi Monthly Payment = PMT(new rate/12, 360, new balance)

HELOC Interest-Only Payment = Cash Needed × (HELOC Rate / 12)
HELOC Combined Payment = Current Mortgage Payment + HELOC Interest Payment

Break-Even (months) = Refi Closing Costs / (HELOC Combined − Refi Payment)
(Only applicable when refi is cheaper monthly)

N-Year Cost (Refi) = Refi Payment × 12 × N + Closing Costs
N-Year Cost (HELOC) = HELOC Combined Payment × 12 × N

The HELOC payment shown is interest-only during the draw period — the actual cost during repayment is higher because principal must also be repaid. The Full Cost Model in the Pro section accounts for the full HELOC lifecycle including draw and repayment periods.

Example: $40,000 Needed on a $240,000 Balance at 4.25%

Current: $240K @ 4.25%, 22 years left | Cash needed: $40,000

Current Monthly Payment	$1,429
Cash-Out Refi: New Balance	$280,000
Refi Rate (30-yr)	6.75%
Refi Monthly Payment	$1,816
HELOC Rate	8.75%
HELOC Interest-Only Payment	$292/mo
HELOC Combined Payment	$1,721
Monthly: HELOC saves	$95/mo
Refi Closing Costs	$6,000
5-Year: HELOC saves	~$11,700

In this scenario (where the current rate is 4.25% — well below today's refi rate of 6.75%), the HELOC wins short and medium-term. Refinancing would reset the entire balance to a higher rate. The HELOC costs more per dollar borrowed, but only applies to $40,000 — preserving the 4.25% rate on the original $240,000.

Frequently Asked Questions

A cash-out refi is better when: your current mortgage rate is already close to or above current market rates (so refinancing does not significantly worsen your rate), you want a single fixed payment with no variable rate risk, you need a large amount of cash, or you plan to stay in the home long enough to recover closing costs. If your current rate is 6% or higher and refi rates are similar, the simplicity of one loan often wins.

Since the 2017 Tax Cuts and Jobs Act, HELOC interest is only deductible if the funds are used to "buy, build, or substantially improve" your home. Using a HELOC for home improvements (kitchen remodel, addition, roof replacement) preserves the deduction. Using it for debt consolidation, vacations, or other purposes eliminates it. Cash-out refi interest is always deductible as mortgage interest, regardless of use, up to the $750,000 mortgage cap. Always confirm with a tax professional.

HELOCs are typically variable rate, tied to the prime rate. When the Federal Reserve raises rates, your HELOC rate and payment rise accordingly, usually within 30–60 days. If the prime rate increases by 2%, your HELOC rate increases by roughly the same amount. On a $40,000 HELOC balance, a 2% rate increase adds about $67/month. The Rate Scenarios tab in the Advanced section models exactly this — showing your combined payment at current rates and at +1%, +2%, +3% increases.

A HELOC (Home Equity Line of Credit) is a revolving credit line — like a credit card secured by your home. You draw and repay multiple times during the draw period (typically 10 years), paying interest only on what you borrow. A home equity loan (HEL) is a lump sum with a fixed rate and fixed monthly payment from day one. HELOCs offer flexibility; HELs offer rate certainty. If you need a specific amount once (like for a home improvement project), the HEL's fixed rate is often preferable to a HELOC's variable rate.

For a cash-out refinance, most lenders require you to maintain at least 20% equity after the cash-out (meaning you can borrow up to 80% LTV). For a HELOC, most lenders allow up to 85–90% combined LTV (first mortgage + HELOC). If your home is worth $400,000 and you owe $240,000 (60% LTV), you have substantial equity to work with: up to $80,000 for a refi (to 80% LTV) or up to $100,000 for a HELOC (to 85% LTV). VA loans allow cash-out refis at up to 100% LTV.