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Cash-out refinance versus home equity loan: Which makes sense for you?
In this article:
- What's the difference between a cash-out refinance versus home equity loan?
- How to choose between a cash-out refinance and a home equity loan
- Cash-out refi or home equity loan? Two scenarios
- What other home equity options are there?
- Choosing the right way to access your home equity
- Frequently asked questions
Key points
A cash-out refinance replaces your existing mortgage with a new, larger loan, while a home equity loan is a second mortgage that lets you keep your current mortgage and borrow against your equity separately.
Your current mortgage rate can be an important factor in making a decision. A home equity loan lets you preserve your existing rate, while a cash-out refinance replaces it with a rate based on current market conditions.
There’s more to compare than how much you can borrow. Monthly payments, closing costs, interest rates, loan terms, and how long you plan to stay in your home can all affect which option better fits your needs.
U.S. homeowners hold an estimated $17.9 trillion in equity, averaging $310,500 per borrower. For retirees, that represents a meaningful resource for retirement—but accessing it isn’t always straightforward.
Many homeowners find themselves weighing an important choice when comparing their home equity options: whether to choose a cash-out refinance or a home equity loan. Understanding how these options compare may help you make a more confident decision. Here’s what you need to know.
Cash-out refinance vs. home equity loan differences at a glance
Both refinancing and a home equity loan may allow you to access your home equity, but they differ in structure, costs, and how they affect your existing mortgage loan and overall finances. The right option often depends on your current interest rate, cash flow preferences, how much equity you have, and how much you want to access.
Here’s a side-by-side look at how these options compare:
| Feature | Cash-out refinance | Home equity loan |
| Loan structure | Replaces your existing mortgage with a new, larger loan | Second-lien mortgage that sits alongside your existing loan |
| Monthly payments | One monthly mortgage payment | Two monthly payments (first mortgage + home equity loan) |
| Interest rate | Based on current mortgage rates; may be higher or lower than your existing rate | Typically fixed rate; often higher than first mortgage rates |
| Impact on existing mortgage | Resets your loan terms, including rate and repayment period | Keeps your original mortgage rate and terms intact |
| Closing costs | Typically 2%–5% of the loan amount | Typically ~2%–5% of the loan amount (Note: a lower loan amount means paying less interest over time) |
| Funding timeline | ~4–6 weeks (may vary) | ~2–4 weeks (may vary) |
| Maximum borrowing limits | Often up to 80% loan-to-value ratio (LTV) (higher for VA loans in some cases) | Typically up to ~85% combined loan-to-value ratio (CLTV) |
| Private mortgage insurance (PMI) | May be required if equity falls below 20% | Does not affect PMI on the existing mortgage |
A cash-out refinance may appeal to homeowners who want to combine their mortgage into a single payment or potentially secure a lower interest rate, depending on market conditions. However, extending the loan term or increasing the balance may result in paying more interest over time. If your equity falls below 20%, private mortgage insurance (PMI) may also be required.
A home equity loan may be a good fit for those who want to keep their existing mortgage rate while accessing funds for a specific expense. However, it adds a second monthly payment, which may affect cash flow and budgeting.
Finance of America does not offer home equity loans or cash-out refinances.
What’s the difference between a cash-out refinance versus home equity loan?
There are several structural differences between a cash-out refinance, also known as a refi, and a home equity loan. Here’s how those may affect your decision:
Your existing mortgage
The biggest difference between a cash-out refinance and a home equity loan is what happens to your existing mortgage.
- A cash-out refinance: Replaces your current mortgage with a new, larger loan. The new mortgage pays off your existing balance, and you receive a portion of the difference in cash.
- A home equity loan: A second mortgage that lets you borrow against your home equity without changing your existing mortgage. You receive the funds as a lump sum and repay the home equity loan separately.
Monthly payments
A cash-out refinance leaves you with one mortgage and one monthly mortgage payment, although the amount may change based on your new balance, interest rate, and loan term.
A home equity loan adds a second monthly payment on top of your existing mortgage payment. Home equity loans typically have fixed rates and predictable payments over a set repayment period.
Borrowing limits
Cash-out refinance limits are generally based on your loan-to-value (LTV) ratio. Conventional cash-out refinances often allow homeowners to borrow up to 80% of the home’s value, while VA cash-out refinance limits may be higher in certain circumstances.
Home equity loans typically use combined loan-to-value (CLTV), which accounts for both your existing mortgage loan and the new home equity loan. Lenders may allow a CLTV of around 85%, although requirements vary.
Closing costs and long-term costs
Cash-out refinancing generally has higher upfront closing costs because you’re refinancing your entire mortgage. Closing costs commonly range from about 2% to 5% of the new loan amount and may include origination, underwriting, appraisal, and title-related fees.
Home equity loan closing costs are often a similar percentage, but you’ll likely pay less because you’re taking out a smaller second loan rather than refinancing your full mortgage balance.
It’s also important to consider costs beyond closing. Increasing your mortgage balance or restarting your repayment term with a cash-out refinance could increase the total interest you pay over time. With a home equity loan, you’ll be paying interest on two separate loans.
Tax considerations
Interest paid on either option may be tax-deductible in certain circumstances, such as when the funds are used to buy, build, or substantially improve the home securing the loan. Because tax rules and individual circumstances vary, consider consulting a tax professional about your situation.
How to choose between a cash-out refinance and a home equity loan
Deciding between a cash-out refinance and a home equity loan isn’t just about which one lets you access more equity. The better fit may depend on your existing mortgage, how much you need to borrow, the costs involved, and how each option affects your monthly budget.
Work through these questions to help narrow down your options.
1. Do you want to keep your current mortgage rate?
Start by comparing your existing mortgage rate with the rates currently available.
If your current rate is significantly lower than today’s rates, replacing your entire mortgage with a cash-out refinance could mean paying a higher rate on your existing balance as well as the additional amount you borrow. A home equity loan allows you to keep your current mortgage rate and borrow additional funds separately.
If current rates are lower than your existing rate, a cash-out refinance may be more attractive because you could access equity while potentially lowering the rate on your mortgage.
2. How much equity do you want to access?
Consider how much money you actually need rather than simply how much you can borrow.
A cash-out refinance may allow you to access a larger amount of equity, depending on your home’s value, existing mortgage balance, and lender requirements. A home equity loan may make more sense for a specific, defined expense when you don’t need to refinance your entire mortgage.
3. Do you want one mortgage payment or two?
A cash-out refinance replaces your existing mortgage, leaving you with one loan and one monthly mortgage payment.
A home equity loan is a second mortgage, so you’ll make a separate payment in addition to your existing mortgage payment. Consider not only which structure you prefer, but how the total monthly payments for each option fit into your budget.
4. Which option has lower costs?
When comparing your options, don’t just look at one cost—such as interest rates or closing costs. Instead, consider the true cost to you over the life of the loan.
Cash-out refinancing typically has higher closing costs because you’re refinancing your entire mortgage balance. A home equity loan generally has lower upfront costs, although fees vary by lender.
You’ll also want to compare interest rates, payment schedules, and how long you’ll have the loan. A lower interest rate over a longer time period can mean you actually end up paying more.
5. How long do you plan to stay in your home?
Finally, consider your timeline. Refinancing may make more sense when you expect to stay in your home long enough for the potential benefits to outweigh the upfront costs. Generally, that is 5 to 7 years, but the true break-even point may be different for you.
If you expect to move relatively soon, calculate whether you’ll have enough time to recoup financing costs. A home equity loan doesn’t reset your primary mortgage, but you’ll still want to consider its closing costs, repayment term, and any penalties for paying it off early.
Cash-out refi or home equity loan? Two scenarios
To see how these options may play out in real life, consider two homeowners with similar amounts of equity but different financial priorities.
Barbara, age 64, has built up significant equity in her home and currently has a mortgage at an interest rate higher than today’s market rates. She wants to access funds to renovate her kitchen and set aside a cushion for future expenses. Because her existing rate is relatively high, she considers a cash-out refinance to access a larger portion of her equity, potentially lower her interest rate, and combine everything into a single monthly payment.
After reviewing her options, Barbara decides that a cash-out refinance may be a good fit. While it resets her loan term, the potential for a lower rate and a single monthly payment aligns with her goal of simplifying her finances.
Janet, aged 67, has a similar level of home equity but a low existing mortgage rate she wants to preserve. She plans to use the funds to cover medical expenses and prefers not to change her current loan terms. Instead, she considers a home equity loan to access a portion of her equity while keeping her primary mortgage in place.
Janet ultimately chooses a home equity loan. Although it means managing two monthly payments, the loan allows her to maintain her favorable mortgage rate. Now she has the funds available to make regular payments toward her medical expenses.
What other home equity options are there?
Cash-out refinancing and home equity loans aren’t the only ways to access home equity. Depending on your age, financial goals, and how you want to receive and repay the funds, other options may include:
- Home equity line of credit (HELOC): A revolving line of credit secured by your home that allows you to borrow as needed, up to your available credit limit. HELOCs typically have variable interest rates and require monthly payments. Read more: Is a HELOC a good idea? Here’s how to decide.
- Reverse mortgage (HECM): Homeowners age 62 and older may be eligible for a Home Equity Conversion Mortgage (HECM), an FHA-insured reverse mortgage that allows borrowers to access a portion of their home equity without required monthly mortgage payments as long as borrowers live in the home as their primary residence, pay property taxes and homeowners insurance, and maintain the home.
- HomeSafe Second: For eligible homeowners age 55 and older in certain states, HomeSafe Second is a second-lien reverse mortgage that allows borrowers to access equity without replacing their existing first mortgage. This may allow borrowers to preserve their current mortgage rate, although they must continue making payments on the first mortgage.
- Home equity agreement (HEA): An HEA allows homeowners to access a portion of their equity in exchange for a share of their home’s future value rather than taking out a traditional loan. HEAs generally don’t require monthly loan payments, but terms, costs, and repayment structures vary by provider.
Finance of America does not offer home equity loans or home equity agreements.
Choosing the right way to access your home equity
Cash-out refinances and home equity loans are two common ways to access home equity, each with distinct structures and trade-offs. Depending on your needs, other options—such as HELOCs, reverse mortgages, or home equity agreements—may also be worth exploring.
If you’re evaluating your choices, Finance of America may be able to help. Call (800) 820-1715 Monday through Friday, 9 AM-10 PM ET, or Saturday 9 AM-3 PM ET, to explore your options. Or, use our calculator to estimate how much you could access based on your home value and location.
Finance of America does not offer home equity loans or home equity agreements.
Frequently asked questions
Can you have a home equity loan and a mortgage at the same time?
Typically, yes. A home equity loan is a type of second mortgage, meaning you can keep your existing mortgage and take out a separate loan against your available home equity. You’ll generally make separate monthly payments on your primary mortgage and home equity loan.
Will refinancing or taking out a home equity loan affect my credit score?
Yes, both options can affect your credit score. Applying for a cash-out refinance or home equity loan typically involves a hard credit inquiry, which may temporarily lower your score. Taking on a new loan can also affect factors such as your total debt and credit history. Making payments on time may help you maintain a positive payment history.
Can I get a home equity loan if I’ve already refinanced my mortgage?
Yes, you may be able to get a home equity loan after refinancing your mortgage. Because a home equity loan is a separate, second-lien mortgage, refinancing your first mortgage doesn’t necessarily prevent you from being eligible. Approval will depend on lender requirements and factors such as your available equity, income, credit history, and debt-to-income (DTI) ratio.
Can retirees on a fixed income qualify for a home equity loan or cash-out refi?
Yes, retirees may qualify for a home equity loan or cash-out refinance if they meet the lender’s requirements. Qualifying income sources might include Social Security, pensions, and investment income. Lenders also consider factors such as credit history, available equity, DTI ratio, and the stability of qualifying income.
What happens to a home equity loan if I sell my house?
If you sell your home, your home equity loan generally must be repaid. The balance is typically paid from the sale proceeds at closing, along with any remaining balance on your primary mortgage. After those loans and other applicable costs are paid, the remaining proceeds belong to you.
Is it harder to qualify for a cash-out refinance or a home equity loan?
There’s no single answer—whether a cash-out refinance or home equity loan is easier to qualify for depends on the lender and your financial situation. Both typically consider your credit history, income, debt-to-income ratio, and available home equity. A cash-out refinance requires you to qualify for a new first mortgage, while a home equity loan requires you to qualify for a second loan in addition to your existing mortgage.
Is a cash-out refinance the same as a mortgage refinance?
No. A cash-out refinance replaces your current mortgage with a larger loan and delivers the difference between the loan amounts in cash. A traditional refinance simply replaces your current mortgage with a new loan, typically to change the interest rate, loan term, or both, without borrowing additional cash from your home equity.
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.
