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Cash-out refinance versus home equity loan: Which one is right for you?
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Quick answer: Cash-out refinance may be a good fit for borrowers who want to access a large chunk of their equity and are okay with resetting their loan terms. A home equity loan may be a better fit for borrowers who want to keep their current mortgage in place and are comfortable taking on a second monthly payment.
Key points
The biggest difference is what happens to your current mortgage: a cash-out refinance replaces your existing loan with a new one, while a home equity loan leaves it in place and adds a second loan and payment.
The true cost of each loan depends on how each rate applies to different amounts of debt, as well as closing costs, repayment terms, and how long you plan to keep the loan.
Depending on age and financial goals, homeowners may also consider a HELOC, a reverse mortgage, a second-lien reverse mortgage, or a home equity agreement.
U.S. homeowners are sitting on a record amount of home equity. An August 2026 report from ICE Mortgage Technology found U.S. homeowners hold an estimated $18 trillion in home equity, with an average of $212,000 per borrower.
That’s a meaningful resource that can carry even more importance in retirement. But deciding how to use it isn’t always straightforward, and many homeowners find themselves weighing two common options: a cash-out refinance versus a home equity loan.
Understanding how these options compare—and when each might make sense for your situation—may help you make a more confident decision about how to put your home equity to work. Below, we’ll cover the core differences between the two and provide a framework to help you determine which option may work for you.
Cash-out refinance vs. home equity loan: key differences
Cash-out refinancing and home equity loans both allow you to borrow against your home equity, but they work quite differently:
- Cash-out refinance: Replaces your existing mortgage with a new, larger mortgage. Your old mortgage is paid off, and you receive a portion of the difference in cash. Say you owe $200,000 on your home that is now valued at $500,000. You might borrow $300,000, pay off the $200,000 mortgage, and receive $100,000 in cash, before applicable closing costs. However, it may also reset your mortgage term.
- Home equity loan: A home equity loan adds a second mortgage while leaving your existing mortgage in place. You receive the new loan proceeds as a lump sum and repay them separately from your first mortgage.
The biggest difference between a cash-out refi and a home equity loan is what happens to your current mortgage. With a cash-out refinance, you give up your existing mortgage rate and terms and take on a new first-lien mortgage. With a home equity loan, you keep your existing mortgage in place and take on an additional loan and a monthly payment.
Here’s how the two options compare across different features:
| Feature | Cash-out refinance | Home equity loan |
| Loan structure | Replaces your existing mortgage with a new, larger mortgage | Generally sits behind your existing mortgage (if you have one) |
| How you receive funds | Lump sum at closing | Lump sum at closing |
| Existing mortgage | Paid off and replaced | Remains unchanged |
| Number of mortgage payments | One | Two, if you still have a first mortgage |
| Interest rate | Based on current mortgage rates, it may be higher or lower than your existing rate | Typically fixed; often higher than first-mortgage rates |
| Repayment term | Starts a new mortgage term, typically 15 or 30 years | Separate repayment term, often 5–30 years |
| Closing costs | Typically 2%–6% of the loan amount | Generally lower than a full refinance; costs vary by lender |
| Borrowing limits | Potentially up to 80% loan-to-value ratio (LTV); limits vary by loan type | Potentially up to about 85% combined loan-to-value (CLTV), including your first mortgage |
| Effect on the monthly budget | Replaces your current mortgage payment with a new payment that may be higher | Adds a second monthly payment in addition to your current payment |
| Effect on existing mortgage rate | You exchange your existing rate for today’s rates (may be higher or lower) | You may keep your current rate for your existing mortgage |
| PMI (private mortgage insurance) | May be required depending on the new loan’s LTV and other requirements | Does not change PMI requirements on the existing first mortgage |
| How the loan is secured | New first mortgage secured by your home | Second-lien mortgage secured by your home |
Let’s explore these differences in more detail, including what they might mean for your monthly payments, budget, and long-term financial plans.
A cash-out refinance replaces your existing mortgage
With a cash-out refinance, you take out a new mortgage loan for more than you currently owe. The new loan pays off your existing mortgage, and you receive a portion of the remaining amount in cash, minus applicable closing costs.
Because you are replacing the entire mortgage, your interest rate, loan balance, repayment term, and monthly payment may all change. For example, if you currently have a relatively low mortgage rate, refinancing when market rates are higher means giving up that rate on your entire mortgage balance—not just the additional cash you want to access.
On the other hand, if current mortgage rates are lower than your existing rate, a cash-out refinance may allow you to access equity while potentially lowering your mortgage rate. It also leaves you with one mortgage and one monthly mortgage payment rather than adding a second payment.
A home equity loan leaves your current mortgage in place
When you have an existing first mortgage, a home equity loan is typically structured as a second-lien mortgage, allowing your existing mortgage to remain in place. Instead, you borrow against your available home equity and repay the home equity loan separately.
This can be an important consideration if you have a lower rate on your current mortgage. For example, if you were able to buy during COVID’s historically low interest rates, you wouldn’t want to replace a 3% rate with today’s much higher rates. With a home equity loan, you keep your original loan and its existing rate and terms.
The trade-off is that you’ll generally have two monthly payments. Home equity loans typically have fixed interest rates and set repayment periods, so payments are generally predictable.
Interest rates apply to different amounts of debt
When comparing a home equity loan and a cash-out refinance, it’s important to look beyond the advertised interest rates. A lower rate doesn’t necessarily mean you’ll pay less in interest overall.
With a home equity loan, the interest rate applies only to the amount you borrow. Your existing mortgage stays in place, so you keep its current interest rate.
With a cash-out refinance, you replace your existing mortgage with a new, larger loan. That means the new interest rate applies to your entire refinanced mortgage balance, not just the additional cash you receive.
For example, say you owe $200,000 on your mortgage and want to access another $50,000 in home equity.
- With a home equity loan: You keep your existing $200,000 mortgage at its current rate. The home equity loan interest rate applies only to the $50,000 you borrow.
- With a cash-out refinance: You replace your existing mortgage with a new loan of approximately $250,000. The new interest rate applies to the entire amount.
This distinction is especially important if your current mortgage has a low interest rate. Even if a cash-out refinance offers a lower rate than a home equity loan, you could end up paying more in interest by refinancing your existing mortgage balance at a higher rate.
Borrowing limits are calculated differently
Cash-out refinance limits are generally based on your loan-to-value ratio (LTV), which compares the amount of your new mortgage with your home’s value. Conventional cash-out refinances often allow borrowing up to 80% of the home’s value, although limits vary by loan type. Department of Veterans Affairs (VA) cash-out refinance requirements, for example, may differ.
Home equity loans generally use combined loan-to-value (CLTV), which considers both your existing mortgage and the new home equity loan. Lenders may allow a CLTV of around 85%, although requirements vary by lender.
How much you could actually borrow with either option also depends on factors such as your home’s value, existing mortgage balance, credit, income, and lender requirements.
Closing costs and repayment terms can affect the total cost
A cash-out refinance involves replacing your entire mortgage, so it generally incurs the same closing costs as any new first mortgage. These may include origination, underwriting, appraisal, and title-related fees. Cash-out refinance closing costs typically range from about 2% to 6% of the loan amount.
Home equity loans may have lower closing costs because you’re taking out a smaller second mortgage rather than replacing your first mortgage. Costs vary by lender and may include origination, appraisal, and title-related fees.
It’s also important to look beyond upfront costs. Refinancing may restart or extend your mortgage repayment period, potentially increasing the amount of interest you pay overtime. A home equity loan leaves your first mortgage repayment schedule unchanged but adds a separate loan with its own repayment term.
How to choose between a cash-out refinance and a home equity loan
Choosing between a cash-out refinance and a home equity loan isn’t just about which one has the lower advertised interest rate. Consider how each option would affect your existing mortgage, monthly budget, and total borrowing costs, and think about the following questions.
- Do you want to keep your existing mortgage? If you have favorable loan terms you don’t want to give up, keeping your first mortgage may be important. If current mortgage rates are lower than your existing rate, refinancing could allow you to access equity while changing your mortgage terms.
- How do the total borrowing costs compare? Don’t just compare interest rates—also consider closing costs, loan terms, monthly payments, and the estimated total interest for each option.
- Are you comfortable with a second monthly payment? A cash-out refinance leaves you with one mortgage payment, while a home equity loan adds a separate payment. Can your budget support a second payment each month?
- How much equity do you want to access? Before deciding, compare how much you may actually have access to after accounting for lender limits and closing costs.
- How long do you expect to keep the loan? A cash-out refinance starts a new mortgage term, which could extend the time you’re paying off your home, affect total interest payments, and incur closing costs. Make sure you’ll have the loan long enough to justify those additional costs.
What other home equity options are there?
A cash-out refinance and a home equity loan aren’t the only ways to access your home equity. Depending on your age, financial situation, and how you want to receive and repay the funds, other options include:
- Home equity line of credit (HELOC): A HELOC is a revolving line of credit that lets you borrow against your home equity as needed, up to an approved limit. HELOCs typically have variable interest rates and require monthly payments.
- Reverse mortgage: For older homeowners, a reverse mortgage could provide access to home equity without required monthly mortgage payments.1 A Home Equity Conversion Mortgage (HECM) is the most common type, although proprietary reverse mortgages may offer different eligibility requirements and features.
- Second-lien reverse mortgage: A second-lien reverse mortgage, such as HomeSafe Second, allows eligible homeowners to access equity without replacing their existing first mortgage. This may allow borrowers to keep their current mortgage rate while accessing additional funds.2
- Home equity agreement (HEA): An HEA, sometimes called a home equity contract, provides cash in exchange for a share of the home’s future value rather than through a traditional loan. There are typically no monthly loan payments, but the amount ultimately owed depends on the terms of the agreement and the home’s value.
These options have different eligibility requirements, costs, repayment structures, and effects on your existing mortgage, so it can be helpful to compare more than just the amount of equity you may be able to access.
1The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.
2 Borrowers must continue to meet all loan obligations, including occupying the property as their principal residence, paying property taxes and homeowners insurance, maintaining the property, and complying with applicable loan terms. Failure to meet these obligations may cause the loan to become due and payable.
Choosing the right way to access your home equity
Choosing between a cash-out refinance and a home equity loan comes down to more than which option offers the lowest rate. Consider what happens to your existing mortgage, how much you need to borrow, the impact on your monthly budget, and the total cost of borrowing over time.
And remember, these aren’t your only choices. Depending on your age, financial goals, and existing mortgage, other ways to access home equity may be worth considering.
At Finance of America, we believe your home equity should work for you. If you’re exploring your options, you can see how much home equity you may be able to access or learn more about our home equity solutions.
Frequently asked questions
What can you use home equity for?
Most home equity loans have few restrictions on how you can use the cash. Many borrowers use money from a cash-out refi or home equity loan for home improvements, educational costs, or to pay down higher-interest debt. Both typically offer lower rates than personal loans, but the loans are secured by your home, which can put your house at risk if you cannot maintain payments.
Can you have a home equity loan and a mortgage at the same time?
Yes. A home equity loan is typically a second mortgage, so you can have one while you still have a primary mortgage. Your existing mortgage remains in place, and the home equity loan has its own interest rate, repayment term, and monthly payment.
Can you refinance if you already have a home equity loan?
Potentially. If you have a home equity loan and want to refinance your first mortgage, the home equity lender may need to agree to remain in second-lien position, or the home equity loan may need to be paid off as part of the refinance. Requirements depend on the lenders and loans involved.
Can you pay off a home equity loan or cash-out refinance early?
Generally, yes, but check your loan terms before making a decision. Some loans may include prepayment penalties or other conditions related to early payoff. Paying a loan off early may reduce the amount of interest you pay over time.
Will a cash-out refinance or home equity loan affect my credit score?
Both may affect your credit. Applying typically involves a hard credit inquiry, which may temporarily lower your credit score. Taking on a new or larger loan can also affect factors such as your total debt. Making payments on time can help you maintain a positive payment history.
Are retirees on a fixed income eligible for a cash-out refinance or home equity loan?
Potentially. Retirement income does not automatically limit your eligibility. Depending on lender requirements, eligible income may include sources such as Social Security, pensions, and investment income. Lenders also typically consider factors such as credit history, debt-to-income ratio, and available home equity.
What happens to a home equity loan if you sell your house?
A home equity loan generally must be repaid when you sell the home. At closing, proceeds from the sale are typically used to pay off the first mortgage and home equity loan, along with other applicable costs. Any remaining proceeds go to the homeowner.
Is interest on a cash-out refinance or home equity loan tax-deductible?
It may be in certain circumstances. The tax treatment can depend on how you use the borrowed funds and other factors. For example, interest may be eligible for a deduction when loan proceeds are used to buy, build, or substantially improve the home securing the loan. Consult a qualified tax professional about your individual situation.
About the author
is a Senior Web Content Writer at Finance of America and a journalist with more than 20 years of experience specializing in business, and technology. Her work has been published in The Wall Street Journal, The Financial Times, and numerous other leading outlets.
Disclaimer
This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For tax advice, please consult a tax professional. For more information about whether a reverse mortgage fits into your retirement strategy, you should consult your financial advisor.
