A DC homeowner can borrow against home equity three ways: a cash-out refinance, a home equity line of credit (HELOC), or a home equity loan. The table below compares the three, and the sections after it say which one fits which situation.
Cash-out refinance, HELOC and home equity loan side by side
| Feature | Cash-Out Refi | HELOC | Home Equity Loan |
|---|---|---|---|
| Structure | Replaces your mortgage | Revolving credit line | Separate second loan |
| Rate type | Fixed | Usually variable | Fixed |
| Disbursement | Lump sum at closing | Draw as needed | Lump sum at closing |
| Closing costs | Vary by lender; see your Loan Estimate | Lower at some lenders; some charge none | Vary by lender |
| Repayment | Monthly mortgage payment | Draw period then repayment | Fixed monthly payment |
| Interest deductibility | Depends on use of funds and IRS limits | Same | Same |
How a cash-out refinance works and when it fits
A cash-out refinance replaces your entire existing mortgage with a new, larger loan. You receive the new loan amount minus your old balance and closing costs as cash.
Best when:
- You want a single, fixed monthly payment
- Today's rate is close to or below your current mortgage rate
- You need a lump sum of $50,000 or more
- You want a fixed rate for the life of the loan
Watch out for:
- If your current mortgage rate is well below today's rates, the new rate applies to your entire balance, old money and new
- Closing costs are charged on the full new loan, and are higher than on a second-lien loan
- DC recordation tax: the deed of trust on a residential property of five or fewer units is exempt, cash-out included, when your settlement agent records the one-page ROD 21 Security Affidavit (D.C. Code § 42-1102(21)), so budget $0 here
Example: You bought in 2020 at a rate below today's market and now have $200,000 in equity. A cash-out refinance replaces your entire balance at today's rate, so the old balance and the new cash both carry the new rate.
How a HELOC works and when it fits
A HELOC works like a credit card secured by your home. You get a credit line and draw from it as needed during a draw period, then repay over a set repayment period; the lengths vary by lender.
Best when:
- You're not sure exactly how much you'll need
- You want to borrow in stages (like a phased renovation)
- You want to keep your existing first mortgage rate intact
- You need flexibility to borrow and repay repeatedly
Watch out for:
- Variable rates mean your payment can increase
- Borrowing more than you planned, since you can draw at any time during the draw period
- Fees vary by lender and plan; ask for the plan's fee schedule
- Payments rise when the draw period ends and the repayment period begins
Example: You're renovating your Capitol Hill rowhouse room by room over the next two years. A HELOC lets you draw funds as each phase begins rather than borrowing everything upfront.
How a home equity loan works and when it fits
A home equity loan is a second mortgage with a fixed rate and fixed monthly payment. You receive a lump sum and repay over a set term.
Best when:
- You know exactly how much you need
- You want a fixed rate and predictable payment
- You want to keep your existing first mortgage rate
- You want a fixed repayment schedule
Watch out for:
- You'll have two mortgage payments each month
- Second-lien rates are higher than first-mortgage rates
- Closing costs are similar to a cash-out refinance
- You cannot draw more after closing, as you can with a HELOC
Example: You need a set amount to consolidate credit-card debt on a fixed schedule, and you don't want to disturb a first mortgage whose rate you like.
Choosing based on your current mortgage rate
Compare today's rates with the rate on your existing mortgage. Today's rates are on our rates page.
If current rates are near or below your existing rate
A cash-out refinance gives you the cash with little or no increase in your rate, and leaves you with one payment.
If current rates are well above your existing rate
A HELOC or home equity loan leaves your lower-rate first mortgage in place. You pay the higher rate only on the new borrowing.
If you expect to pay the balance down quickly
A variable rate carries less risk when the balance will be paid down soon. A HELOC can also be refinanced into a fixed-rate product later.
Combined LTV limits and how much you can borrow
All three options are limited by your combined loan-to-value ratio:
- Cash-out refi: Up to 80% LTV (conventional), 100% LTV (VA)
- HELOC: Combined LTV caps of 80–90%, depending on the lender
- Home equity loan: The same 80–90% combined LTV range
DC example with a $700,000 home and $350,000 remaining mortgage:
- Cash-out refi at 80% LTV: borrow up to $560,000 total, receive up to $210,000 cash
- HELOC or home equity loan: the second lien is capped by the lender's combined-LTV limit, so the available line or loan amount depends on the lender
Tax deductibility of home equity interest
Under current federal tax law, mortgage interest is only deductible if the funds are used to buy, build, or substantially improve the home that secures the loan, and only up to the IRS acquisition-debt limit ($750,000 of total mortgage debt, or $375,000 if married filing separately; IRS Pub. 936). The rule applies to all three options equally.
Interest on funds used for debt consolidation, education, or other purposes is not deductible under any of the three.
Which option to choose
Choose a cash-out refinance if you want one loan, need a large lump sum, and today's rates are close to your existing rate.
Choose a HELOC if you want flexibility, have ongoing funding needs, and want to preserve your current mortgage rate.
Choose a home equity loan if you need a specific amount, want fixed payments, and want to keep your existing mortgage terms.
If today's rates are well above your current rate, compare the cost of a second lien with the cost of repricing your whole balance before you choose.
Read the DC cash-out refinance guide or get a free refinance analysis. It takes two minutes and does not pull your credit.