HELOC or cash-out refinance: which is better?

So which one is better?

It depends on how much debt you're carrying and the interest tied to it. Most people only look at their mortgage rate. I look at your Life Rate: the blended interest rate on everything you owe, from your mortgage to credit cards, car loans, and solar or PACE liens. See what your Life Rate is and how to figure it.

The better option is the one that lowers your Life Rate and your total monthly payments without stretching debt out longer than it needs to be.

When does a HELOC win?

• Your other debts are small compared with your mortgage.
• Your first mortgage rate is low, and re-pricing the whole balance would raise your Life Rate.
• You need a set amount for a project or a few debts, and you want your first mortgage untouched.

Example: $420,000 left on a 3% mortgage and $15,000 on credit cards at 22%. Your Life Rate is about 3.7%. Refinancing everything at today's rates would raise it, so a HELOC for the $15,000 is the smarter move.

When does a cash-out refinance win?

• You're carrying a lot of high-interest debt: credit cards at 20% to 29%, car loans, personal loans, or solar and PACE liens that can run 11% or more.
• Your mortgage balance is modest compared with that debt, so the high-interest balances drive your Life Rate.
• You want one loan and one payment instead of five or six.
• You also want to change your loan, like dropping FHA mortgage insurance or paying off a PACE lien that has to be cleared anyway.

Example: $180,000 left on a 3.25% mortgage, plus $38,000 in cards at 24%, a $30,000 car loan at 9%, and a $25,000 solar lien at 11%. Their Life Rate is about 7.5%, and those debts take a big bite out of every paycheck. A cash-out refinance at a rate below 7.5% that pays everything off lowers the Life Rate and can free up hundreds of dollars a month, even though the mortgage rate itself goes up.

What should I watch for either way?

• Total cost, not just the payment. Stretching car and card debt over 30 years can raise total interest. We set a payoff plan, like paying extra toward principal, so you get the lower payment and get out of debt faster.
• Your home secures the debt. Consolidating turns unsecured debt into debt secured by your home, so the payment has to fit your budget.
• Closing costs. Build them into the comparison.
• Don't run the cards back up. That's the one mistake that undoes everything.

Our take

Wealthy families don't marry their mortgage rate; they do the math. A 3% mortgage doesn't help much if you're drowning in 24% credit card interest. I'll calculate your Life Rate today, then show you the HELOC route and the cash-out route side by side, with the payment, the total cost, and the payoff date for each. Pick the one that lowers what your money actually costs you.