HELOC vs. Cash-Out Refinance to Pay Off Credit Card Debt - Compared
Credit card debt is a deeply personal and often sensitive subject. It can creep up slowly and silently, then become overwhelming almost overnight. Whether it’s the result of job loss, rising living costs, or unexpected expenses, carrying a balance on credit cards can turn into a long-term financial struggle. With interest rates on credit cards often hovering around 18% to 25%, many Canadians start looking for ways to escape the cycle of minimum payments and compounding interest.
One of the solutions people often consider is tapping into the equity in their homes.
Two common ways of doing this are through a Home Equity Line of Credit (HELOC) or a cash-out refinance. Both allow you to access some of the value you’ve built up in your property—but they work differently and have different risks and rewards. If you're thinking about using either strategy to pay off credit card debt, it's important to understand the details before making a decision.
Be Cautious With Home Equity
Before we get into the comparisons, it’s important to highlight one thing:
Using your home to access cash should always be approached with caution. Some people fall into a pattern of treating their home as a bank—drawing from it whenever expenses get tight. This approach may feel like a solution in the short term, but it can lead to long-term financial risk, especially if habits don’t change.
Keep in mind: when you use home equity to pay off credit cards, you’re converting unsecured debt into secured debt. That means your home is now at risk if you can’t make your payments.
With that said, let’s explore how HELOCs and cash-out refinancing compare in a Canadian context.
What Is a HELOC?
A Home Equity Line of Credit (HELOC) is a revolving credit product that lets you borrow against the equity in your home. It functions similarly to a credit card in that you can draw funds at any time, repay them, and borrow again—so long as you stay under the credit limit.
You can borrow from the line as needed—up to an approved limit—), and you only pay interest on the amount you actually use. Later on, you can save interest by converting your HELOC into a fixed term mortgage. With a fixed term, you begin a repayment period where you can no longer withdraw funds and must pay back both principal and interest.
Pros of Using a HELOC to Pay Off Credit Cards:
Flexibility: You control how much you borrow and when.
Lower interest rates: Usually much lower than credit card rates.
No need to refinance your existing mortgage: Helpful if you already have a great rate on your current mortgage.
Cons:
Variable interest rates: Your rate may fluctuate depending on the market.
Temptation to borrow again: It can be easy to fall into a cycle of using the HELOC repeatedly.
Your home is collateral: If you fail to make payments, you could face foreclosure, although this is also true for refinancing.
What Is a Cash-Out Refinance?
A cash-out refinance replaces your existing mortgage with a new, larger one. You receive the difference between the new loan and your old one in cash, which can be used to pay off credit card debt or other expenses.
For example, if your home is worth $600,000 and you still owe $350,000, you may be able to refinance up to 80% of the home’s value (i.e., $480,000), giving you access to $130,000 in cash (before fees and penalties).
Pros of Using a Cash-Out Refinance to Pay Off Credit Cards:
Fixed interest rate: Most refinances are fixed-rate, which protects you from future interest increases.
Lower interest than credit cards: Even at today’s higher mortgage rates, they’re often significantly lower than unsecured credit.
Single monthly payment: You consolidate everything into one mortgage payment.
Cons:
You may give up a better rate: If your current mortgage is locked in at a lower rate than today’s offerings, refinancing could cost you more over time.
Closing and legal fees: Expect to pay roughly $2000-$2500 plus prepayment penalty.
Less Flexibility: You don’t have the option to pay in full.
So, Which Option Is Better for Paying Off Credit Cards?
The right choice depends entirely on your situation. Here are some examples to help guide you:
A HELOC may be the better choice if:
You already have a mortgage rate that’s better than today’s best offers, with lots of time left on it.
You only need to borrow a smaller amount.
You want flexibility and don’t want to change your existing mortgage.
You’re confident in your ability to avoid falling back into debt.
A cash-out refinance may make more sense if:
You’re already planning to refinance (e.g., switching from a variable rate mortgage to a fixed rate).
You need a larger lump sum to eliminate all your credit card debt.
You prefer a single, fixed monthly payment and are comfortable with your new rate.
You’re not planning to move or sell your home anytime soon.
Additional Considerations
Your Financial Habits Matter
Consolidating your credit card debt into a HELOC or refinance won’t help long term if you continue spending beyond your means. It’s important to address the habits that created the debt in the first place.
More Of Your Equity At Stake
With unsecured debt (like credit cards), the consequences of missed payments are limited to your credit score and potential collections. When you use your home to secure a loan, missed payments could lead to foreclosure.
Debt Is Still Debt
No matter how you restructure it, you still owe the money. Lower interest rates can help with cash flow, but you’ll still need a disciplined plan to get out of debt and stay out.
The Bottom Line
HELOCs and cash-out refinances are tools—not solutions. Used strategically, they can help reduce the financial pressure of high-interest credit card debt. But they come with significant responsibilities, and choosing the right one depends on your current mortgage, financial stability, spending habits, and future plans.
If you're considering either option, it’s wise to speak with a mortgage professional who understands your full financial picture. That way, you can make a choice that works for today—and protects your tomorrow.
