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After years of elevated borrowing costs, homeowners finally began to see some relief in late 2025. The Federal Reserve’s December rate cut, the third of the year, capped off a series of moves that helped push down borrowing costs across the board, including for home equity products. And that shift is already showing up in household budgets. Case in point? The monthly cost to borrow $50,000 through a home equity line of credit (HELOC) has dropped by more than $100 compared to early 2024, according to the latest ICE Mortgage Monitor report.
A HELOC is just one option homeowners have for tapping their equity, though. Cash-out refinancing is another, and unlike a HELOC, this option allows you to access a lump-sum loan rather than a line of credit, which can be useful in many situations. However, it also means replacing your current mortgage loan with a new loan at a new rate, which won’t be the right option for everyone. So, if you’re planning to borrow via your home equity, you need to compare HELOCs with cash-out refinancing to determine which option makes the most sense.
After all, factors like variable-rate pricing, personal cash-flow needs and your existing mortgage rate all play a role in determining which option is more advantageous. So, here’s how to know when a HELOC could be the better move in 2026 — and when a cash-out refinance still deserves consideration.
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Why a HELOC could be better in 2026
A HELOC is a variable-rate line of credit tied to the equity you’ve built in your home, and heading into 2026, it’s becoming a more attractive way to borrow thanks to the broader rate trajectory. The Fed has signaled that its late-2025 cuts may represent the bottom of its current easing cycle, and most forecasts suggest rate hikes in 2026 are unlikely unless inflation unexpectedly rebounds.
That means HELOC rates, while technically adjustable, are entering the new year with downward momentum and limited expectations for volatility. So, borrowers get the benefit of lower initial rates today, plus the possibility of further modest reductions if lenders continue easing margins as the rate environment stabilizes.
Another major benefit of a HELOC is flexibility. You can draw funds as needed, repay only what you use and avoid restructuring your existing mortgage. That’s particularly valuable for homeowners who don’t want to risk raising their fixed mortgage rate through a cash-out refinance.
“If a homeowner is sitting at a lower rate, a HELOC might be a better option because it allows you to borrow against your home’s equity without changing the terms of your existing mortgage,” said Bhavesh Patel, head of field sales at Chase Home Lending.
Still, a HELOC should fit an actual financial need, not simply the appeal of lower borrowing costs. While the risk of rate hikes appears limited, the rate on a HELOC is still variable, so borrowers should be prepared for some fluctuation if economic conditions shift. But for many homeowners entering 2026, the combination of lower initial rates, limited expectations for increases and the ability to preserve an ultra-low mortgage makes a HELOC one of the more strategic ways to leverage home equity today.
But while a HELOC is looking more favorable after the Federal Reserve’s December rate cut, you shouldn’t let falling rates be the reason you take action. You should only take out a HELOC if you have an immediate cash need. Plus, the interest rate is variable, so any rate you get today can go up if the Federal Reserve raises rates in 2026.
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Why cash-out refinancing could be better in 2026
Cash-out refinancing replaces your current mortgage with a new, larger loan and gives you the difference in cash. Your new rate and terms will depend on market conditions at the time you refinance, as well as your home’s value and available equity. Most lenders cap your post-refinance loan balance at around 80% of your home’s value, but the real deciding factor is how today’s mortgage rates compare to the rate you already have.
If you’re carrying a mortgage rate that’s meaningfully higher than current market rates, a cash-out refinance in 2026 could help you secure a lower fixed rate while accessing a lump-sum payout. For some households, that combination — cash plus long-term interest savings — may be worth the trade-off.
But for homeowners whose existing mortgage rates remain well below today’s averages, refinancing to a new mortgage loan at a higher rate may be counterproductive. In that scenario, keeping your first mortgage intact and using a HELOC for your borrowing needs could preserve your low rate while still unlocking equity.
“If you have a low-rate mortgage, you may prefer a home equity line of credit, which allows the first mortgage to remain in place, and only the incremental funds are borrowed,” said Laurie Goodman, Institute Fellow at the Urban Institute.
How to decide between your home equity borrowing options
Choosing between a HELOC and a cash-out refinance comes down to your goals, your existing mortgage rate and how much cash you truly need. Cash-out refinances surged modestly in late 2025 as mortgage rates dropped from their mid-year highs, but most activity still centered on homeowners trying to lower their monthly payments, not necessarily those tapping equity.
“The recent rise in refinance activity, driven by falling rates, has primarily centered on borrowers aiming to lower their monthly payments rather than extract equity,” said Andy Walden, head of mortgage and housing market research at Intercontinental Exchange. “That said, we’ve also seen a modest uptick in cash-out refinances.”
Looking ahead to 2026, with the Fed signaling limited rate changes or a potential pause after multiple rate cuts, HELOCs may hold an advantage for borrowers with strong equity positions who don’t want to disturb a low-rate mortgage. A HELOC offers ongoing access to funds, which you can draw on gradually, making it ideal for phased expenses like renovations or tuition. A cash-out refinance, meanwhile, commits you to a higher loan balance and immediate repayment schedule.
Ultimately, though, your existing mortgage rate is a key deciding factor in this equation.
“For homeowners who were lucky enough to have been able to take advantage of the historically low rates that we saw during the pandemic, I think that it would be very hard for them to choose to refinance their home as opposed to utilizing a HELOC,” says real estate economist Matthew Gardner.
Households with mortgage rates above 5% may find a 2026 refinance more appealing, Gardner says, while those with current rates below 5% may lean toward a HELOC.
The bottom line
The choice between a HELOC or cash-out refinancing is an important one as the new year rolls around. Be sure to weigh all the factors during the process, and try to avoid unnecessary risk by borrowing more than you can pay back or committing those funds to depreciating assets.
“The American Dream can turn into the American Nightmare real fast if you make bad financial decisions and if you don’t understand the long-term ramifications of those decisions,” said Howard Dvorkin, founder of Debt.com. “Taking equity out of your house to pay for things that are going to depreciate, like a car or a vacation, or paying off credit cards, is not a smart move.”
You’ve worked hard to build your home’s equity. You should have an intended purpose for the cash or credit you take out of that equity, and it should be for something that will appreciate.
“I think people can possibly look at their mortgage and maybe shop for a better rate. Do I think they can save money? Yes,” said Dvorkin. “But watch the fees and have the tenacity to say, ‘No, I’m not taking equity out.'”
