Home Equity Loan vs. Cash-Out Refinance

Owning a home has many benefits, including the flexibility to use your home’s value to access cash. When homeowners need to borrow money, two popular options are home equity loans and cash-out refinances. While both of these loans let you borrow against the equity you’ve built up in your home, they each work a little differently and have unique pros and cons.  

In this article, we’ll compare a cash-out refinance vs. home equity loan to help you understand the differences, benefits, costs, and other considerations associated with these mortgage types. Once you understand the ins and outs of each one, you’ll be able to decide which loans best fits your needs.  

What’s the difference between a cash-out refinance and a home equity loan? 

While a cash-out refinance and a home equity loan both give you access to a lump sum of cash, there are some key differences between these two options.  

• A cash-out refinance replaces your existing mortgage with a new loan that includes new terms, including giving you back a portion of your home’s value in cash with the promise that you’ll repay it over time — plus interest.  
• A home equity loan is a second mortgage that allows you to borrow against a portion of the equity you have in your home. This means you’ll have an additional loan with separate terms from your mortgage and a second monthly payment.  

Since home equity loans are second mortgages, they represent a higher risk to the lender than a cash-out refinance. This is why home equity loans usually have slightly higher interest rates. 

What’s a cash-out refinance? 

A cash-out refinance lets you replace your current mortgage with a new one for a higher amount — giving you the difference in cash. It’s a way to tap into your home’s equity for things like home renovations, debt consolidation, or major expenses. 

Let’s look at an example: Say your home is worth $400,000 and you have $200,000 remaining on your existing mortgage. Your lender requires you to maintain 20% equity in your home — or $80,000 — allowing you to borrow up to $320,000 through a cash-out refinance. You’ll then have up to $320,000 in cash, along with a new $320,000 mortgage and a new monthly payment. 

Use our Cash-Out Refinance Calculator to plug and play different scenarios and determine how much money you could get or how much your monthly payment might be with this type of loan. 

What’s a home equity loan? 

A home equity loan (HEL) lets you borrow against the value of your home. It’s sometimes called a second mortgage because it’s separate from your primary home loan. You repay it in fixed monthly installments, usually over 5 to 30 years, with a locked-in interest rate. 

The amount you can borrow depends on your home’s equity — the difference between your home’s market value and what you owe on your mortgage. For example, let’s say your lender allows you to borrow up to 80% of your home’s equity. If your home is worth $400,000 and you owe $200,000, you can borrow up to $160,000.   

Unlike a home equity line of credit (HELOC), which is a revolving line of credit, a home equity loan gives you all the cash you borrow upfront. Talk with your lender and take some time to understand a HELOC vs. home equity loan to consider all your options for borrowing against equity.  

At a glance: Cash-out refinance vs. Home equity loan 

A cash-out refinance and home equity loan share several similarities, but there are a few important differences to consider before you make your decision. Use the table below to compare the features of both these loan types, including estimates of their costs.  

	Cash-out refinance	Home equity loan
Interest rates	Fixed or adjustable	Typically fixed, but some lenders may offer adjustable rates
Loan term	Usually 10 to 30 years	Usually 10 to 30 years
Interest rates	Similar to purchase mortgages	Usually 1% to 2% higher than rates on purchase mortgages
Closing costs	2% to 6% of the loan amount	1% to 5% of the loan amount
Home equity required	At least 20%	At least 15% to 20%
Mortgage position	First mortgage	Second mortgage

Which option is best for you?

The choice between a home equity loan vs. cash-out refinance depends on your personal preferences, financial situation, interest rates, and long-term goals. Before you apply, think about how much money you’ll need to borrow, what you’ll use it for, and how much it will cost you.  

When a cash-out refinance makes sense 

When you want to change the terms of your existing mortgage and borrow a lump sum of money against your equity in the process, a cash-out refinance might make sense.  

Maybe interest rates have dropped and you’re planning to build an addition on your house. A cash-out refinance could give you access to the money you need, along with a lower interest rate on your monthly payments. You might also consider a cash-out refinance when you want to consolidate high-interest debt or pay for education expenses, but don’t want to take on a second mortgage payment.  

When a home equity loan makes sense 

If you want to keep your existing mortgage and borrow a specific amount of money, a home equity loan may be a good choice for you.  

For example, you might have a low interest rate on your main mortgage but want to borrow $75,000 to remodel your kitchen and bathrooms. Other reasons to use a home equity loan might include consolidating debt, covering higher-education costs, starting a business, or even purchasing another property.  

Find the best way to tap into your home equity 

When you want to borrow money against your home equity, both a cash-out refinance and a home equity loan can help you access a lump sum of cash. To help you choose the right loan type, consider your goals and the costs of a cash-out refinance vs. a home equity loan. Think about how much money you’ll need, how much time you’ll need to pay it back, and the interest rates and closing costs. You’ll also want to look at your existing mortgage to see if it makes more sense to refinance and take advantage of a lower rate, or if it’s better to take out a second mortgage.  

Our Mortgage Experts are here to help you decide which loan options best fit your needs. Get started in just a few minutes.  

Frequently asked questions 

Can I refinance a home equity loan? 

Like most other mortgages, you can refinance a home equity loan. Just remember that you’ll have to apply for the new loan and pay for closing costs. 

Is a home equity loan cheaper than a refinance? 

A home equity loan might be a lower-cost option than refinancing, depending on the terms of the loan and how long you need to borrow the money. While refinancing typically offers lower interest rates, you might pay less in closing costs on a home equity loan.