I often get asked by investors whether tapping home equity with a HELOC or doing a cash-out refinance is the smarter move — especially when the real goal is to preserve or even improve portfolio returns. I've run the numbers for clients, run scenarios for my own planning, and weighed the trade-offs this article lays out. Below I walk through how each option works, the cost and risk implications for an investment portfolio, and practical decision rules you can apply based on your goals and market conditions.
How a HELOC and a cash-out refinance actually differ
Before we dig into portfolio impacts, it's important to understand the functional differences.
- HELOC (Home Equity Line of Credit): a revolving credit line secured by your home. You pay interest only on the amount you draw. Terms often include a variable rate tied to Prime or SOFR, a draw period (commonly 5–10 years), then a repayment period.
- Cash-out refinance: you replace your existing mortgage with a new, larger mortgage and receive the difference in cash. This gives you a fixed (or sometimes adjustable) rate and resets the amortization schedule, so you start paying principal and interest on the full balance immediately.
Key practical contrasts:
- Cost up front: cash-out refinance usually incurs closing costs (2–5% of loan), while HELOCs often have lower upfront fees or promotional offers with minimal costs.
- Interest type: HELOCs are usually variable; cash-out refinances can lock in a fixed rate.
- Repayment: HELOCs can be interest-only during the draw period; refinances amortize over the new term.
- Available credit: HELOCs provide flexibility to draw only what you need; cash-out gives you a lump sum.
Which option better preserves portfolio returns?
When I evaluate preservation of portfolio returns, I focus on three mechanisms through which home-equity borrowing can affect your investments:
- Cost of capital: interest rate you pay on borrowed money versus expected portfolio return.
- Cash deployment flexibility: ability to time investments or rebalance without selling assets at inopportune moments.
- Balance-sheet and risk effects: added leverage can increase volatility and tail risk for your total household balance sheet.
Here’s my simple rule of thumb: if the after-tax cost of borrowing is meaningfully lower than your expected after-tax, risk-adjusted return on incremental invested capital — and you can tolerate the increased leverage — borrowing can enhance returns. Otherwise, the borrowing cost drags on performance.
Comparing costs and tax treatment (practical numbers)
Below is a compact comparison I use with clients to illustrate typical ranges. Replace the sample rates with current quotes when you decide.
| Feature | HELOC (typical) | Cash-out Refinance (typical) |
|---|---|---|
| Interest rate | Variable: Prime + 0.5–2.0% (e.g., 6–8% in many markets) | Fixed: 30-yr 5–7% (market-dependent) |
| Upfront costs | Low to none (application fee, appraisal sometimes) | High: 2–5% of loan (closing costs, origination) |
| Repayment | Interest-only during draw; principal later | Immediate amortization over new term |
| Tax deductibility | Interest may be deductible if funds used to buy/ substantially improve home; consult advisor | Same rules apply; new loan may reduce deductibility if used for investing |
Scenario analysis: When a HELOC preserves returns better
I favor HELOCs when:
- You need short-term liquidity (6–24 months) to bridge an opportunity or cash-flow gap. The flexibility to draw and repay reduces interest expense and avoids locking into a long-term rate that might be higher than your expected investment return.
- Rates are falling or you expect to refinance later. A HELOC allows you to preserve optionality.
- You want to avoid the frictional costs of a refinance — closing costs can eat 2–5% of the borrowed amount and materially reduce net proceeds that could be invested.
- Your portfolio is concentrated in illiquid assets and selling would trigger capital gains or disrupt diversification.
Example I use: borrow $100,000 with a HELOC at a 7% variable rate. If you plan to invest for 18 months and expect a conservative 8–10% return, the net spread after fees could be positive, and the HELOC permits paying interest only until the position matures or is sold. If you can repay the HELOC quickly, you avoid amortizing a larger mortgage at a higher fixed rate.
Scenario analysis: When a cash-out refinance preserves returns better
Cash-out refinances can be better when:
- You plan long-term deployment of capital (multi-year) and want rate certainty. Locking a fixed rate can be advantageous if market rates are attractive relative to expected portfolio returns.
- Your current mortgage rate is high and a refinance reduces the rate on your whole mortgage while still giving cash to invest. In that blended case, the effective cost of the cash can be lower than an unsecured or variable-rate HELOC.
- You are replacing an adjustable-rate mortgage (ARM) approaching reset — cash-out refinance can both consolidate and provide liquidity.
Example: existing 30-year mortgage at 6.5%. You refinance to a 4.5% 30-year mortgage with a $100,000 cash-out. The reduction in mortgage rate may offset closing costs over time, and you get a locked-in cost of capital for funds you deploy into longer-duration investments.
Risk considerations that affect portfolio returns
Aside from pure math, I weigh softer but important risks:
- Rate volatility: HELOCs often carry variable rates; a spike in rates can compress or erase expected net returns if your investments are short-duration or illiquid.
- Refinancing risk: If you count on refinancing later at a lower rate, rates may not move the way you hope.
- Margin pressure: Using home equity increases household leverage. If markets fall, you may face forced sales or stress selling that harms long-term returns.
- Behavioral risk: Access to cash can alter investor behavior. Clients who borrow to “double down” often increase risk exposure beyond their stated tolerance, which can reduce long-term returns.
Practical decision framework I use with clients
When advising, I run a quick checklist. If most answers are “yes,” a HELOC may win; otherwise, a cash-out refinance or not borrowing could be better.
- Is the investment horizon short-ish (under 2 years)? → HELOC preferred.
- Do you need rate certainty for multi-year deployment? → Cash-out preferred.
- Can you tolerate the additional leverage if markets decline 20%? → Proceed with caution.
- Would transaction costs (closing fees) materially reduce the capital available to invest? → HELOC can be better.
Implementation tips to preserve portfolio returns
- Shop rates and read terms. Some HELOCs have floor rates, annual fees, or prepayment penalties.
- Model after-tax returns. Compare the after-tax borrowing cost to expected after-tax portfolio returns, adjusting for additional volatility from leverage.
- Use conservative return assumptions. If you expect 8% from a portfolio, stress-test at 4–6% to see the downside.
- Consider a hybrid approach. For example, take a smaller cash-out refinance to lock some rate certainty and open a HELOC for optionality, keeping total LTV within comfort zones (commonly <80%).
- Document an exit plan. Know how and when you will repay the borrowed funds — sale, dividends, refinancing, or cash flow.
Deciding between a HELOC and a cash-out refinance is rarely binary. The better choice depends on your horizon, liquidity needs, rate expectations, and tolerance for household leverage. When the objective is to preserve portfolio returns, my default bias is toward flexibility and low upfront friction — which often points to a HELOC for near-term needs and a cash-out refinance for longer-term, rate-sensitive deployments.
