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Refinancing vs. Home equity loan: Which option makes sense?
In this article:
- What is a cash-out refinance?
- What is a home equity loan?1
- Cash-out refinance vs. home equity loan: key differences
- Cash-out refinance pros and cons
- Home equity loan pros and cons
- How to choose between a cash-out refinance and a home equity loan
- What other home equity options are there?
- Choosing the right way to access home equity
- Frequently asked questions
U.S. homeowners are sitting on a record amount of home equity—and in retirement, this can take on new importance. You may be navigating unexpected expenses, like healthcare costs or supporting a loved one. Or you may be looking ahead to long-awaited projects, like installing your dream kitchen or finally creating an outdoor oasis in your backyard. While your income may be more fixed, your home may offer a way to help fund these needs and goals using the equity you’ve built over time.
A June 2025 report from ICE Mortgage Technology helps put this into perspective: U.S. homeowners hold an estimated $17.6 trillion in equity, with about $11.5 trillion considered “tappable,” meaning it may be accessed while maintaining a 20% equity cushion. In total, 48 million homeowners have an average of $212,000 in accessible equity.
That’s a meaningful resource—but deciding how to use it isn’t always straightforward. Many homeowners find themselves weighing an important choice: a cash-out refinance or a home equity loan. The right option depends on factors like your mortgage rate, how much cash you need, and your overall financial plans.
Understanding how these options compare—and when each may make sense—may help you make a more confident decision about how to put your home equity to work.
What is a cash-out refinance?
A cash-out refinance replaces your existing mortgage with a new, larger loan, allowing you to access a portion of your home equity as a lump sum at closing. The new loan pays off your current mortgage balance, and you receive the difference in cash, which may be used for expenses like paying off higher-interest debt, making home repairs, or covering other costs such as medical bills.
The amount you receive is generally based on your home’s value, your remaining mortgage balance, and closing costs. For example, if your home is worth $400,000 and you owe $200,000 on your mortgage, you may be able to refinance into a larger loan. You could then receive a portion of your remaining equity in cash, depending on your lender’s loan-to-value limits and closing costs. These costs may include fees such as origination, underwriting, appraisal (if required), and title-related services, which may reduce the amount you receive.
Because this option replaces your original mortgage, it resets your loan terms—including your interest rate, repayment period, and monthly payment—resulting in a single new mortgage rather than a second loan.
Eligibility and loan size are typically based on loan-to-value (LTV) limits, which vary by loan type. For example, conventional loans often allow borrowing up to 80% of the home’s value, while loans backed by the U.S. Department of Veterans Affairs (VA) may allow up to 100% in certain cases.
Like other mortgage refinances, a cash-out refinance involves closing costs, which generally range from about 2% to 6% of the loan amount. These costs may be paid upfront or rolled into the new loan balance. Extending the loan term or increasing the balance may result in paying more interest over time.
Because a cash-out refinance takes the first position on the property, it may offer lower interest rates compared to second-lien options.
What is a home equity loan?1
A home equity loan is a type of second mortgage that allows you to borrow against the equity in your home while keeping your existing mortgage in place. Instead of replacing your first lien, it sits alongside it as a separate loan with its own terms.
Home equity loans typically provide a lump sum at a fixed interest rate, with predictable monthly payments over a set repayment period—often ranging from 5 to 30 years. This structure may appeal to borrowers with one-time expenses, such as home renovations, education costs, or paying down higher-interest debt.
Eligibility and loan size are generally based on combined loan-to-value (CLTV) requirements, which typically allow borrowing up to about 85% of the home’s value when factoring in both the first mortgage and the home equity loan.
Because this loan does not replace your original mortgage, you keep your existing interest rate and loan terms on the first lien. However, you will have two monthly payments—one for your primary mortgage and one for the home equity loan—which may increase your overall monthly obligations.
Closing costs for home equity loans are generally lower than those of a full refinance, although they may still include fees such as origination costs, appraisal fees, and title-related expenses.
In some cases, interest on a home equity loan may be tax-deductible if the funds are used to buy, build, or substantially improve the home securing the loan. A tax professional may help you understand how this applies to your specific situation.
Cash-out refinance vs. home equity loan: key differences
Both refinancing and a home equity loan allow you to access your home equity, but differ in structure, costs, and how they affect your existing mortgage 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 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%–6% of the loan amount | ~1%–3% of the loan amount (varies by lender) |
| Funding timeline | ~30–60 days (may vary) | ~2–4 weeks (may vary) |
| Maximum borrowing limits | Often up to 80% LTV (higher for VA loans in some cases) | Typically up to ~85% CLTV |
| Primary 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.
Cash-out refinance pros and cons
A cash-out refinance may be a good fit for homeowners who want to simplify their payments or adjust their interest rate while accessing equity. Key advantages and considerations include:
Advantages
- May offer a lower interest rate, depending on market conditions
- May combine your mortgage and cash into one monthly payment
- May allow access to more of your home equity
Considerations
- May involve higher upfront costs, including closing costs
- May reset your loan term, which could increase total interest over time
- May replace a lower existing rate with a higher one
- May result in higher monthly payments due to a larger loan balance
Home equity loan pros and cons
A home equity loan may be a good fit for homeowners who want to preserve their existing mortgage terms while accessing funds for a specific need. Key advantages and considerations include:
Advantages
- May allow you to keep your existing mortgage rate and terms
- May come with lower closing costs than a refinance
- May offer a fixed interest rate and predictable payments
Considerations
- May require managing two monthly payments
- May have higher interest rates than a primary mortgage
- May offer a lower maximum borrowing amount
How to choose between a cash-out refinance and a home equity loan
Choosing between a cash-out refinance and a home equity loan often comes down to how each option fits into your broader financial picture. Rather than focusing on a single feature, it may help to evaluate a few key factors:
1. Compare your current mortgage rate to today’s rates
Your existing interest rate is a helpful starting point.
- If your rate is higher than current rates → a cash-out refinance may help you access equity and potentially lower your rate
- If your rate is lower than current rates → a home equity loan may help you keep your existing rate while accessing funds
2. Consider how much cash you need
The amount you need may help determine which option fits best.
- If you need a larger amount → a cash-out refinance may allow access to a greater portion of your home equity
- If you have smaller, defined expenses → a home equity loan may be a better fit, depending on lender limits
3. Evaluate your comfort with monthly payments
Repayment structure plays a key role in affordability.
- If you prefer a single monthly payment → a cash-out refinance may be a better fit
- If you’re comfortable managing two payments → a home equity loan may be an option
4. Think about how long you plan to stay in your home
Your timeline may also influence the decision.
- If you plan to stay in your home longer term → spreading costs over a new loan term through a refinance may align with your goals
- If your timeline is shorter or uncertain → taking on a second loan without resetting your primary mortgage may offer more flexibility
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 with an interest rate that is 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 as a way to access a larger portion of her equity while potentially lowering her interest rate and combining 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, age 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 as a way 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, it allows her to maintain her favorable mortgage rate and provides predictable payments for her medical expenses.
What other home equity options are there?
In addition to cash-out refinancing and home equity loans, other options may be available depending on your financial goals and needs.
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) is a revolving line of credit secured by your home, similar to a credit card. During a set draw period, you may borrow as needed up to a credit limit.
After the draw period ends, the balance is repaid over a set repayment period. Interest rates are typically variable and may change over time, and some HELOCs may allow interest-only payments during this time.
This flexible structure may make HELOCs useful for ongoing or phased expenses, such as home renovations. Like home equity loans, they typically require monthly payments and are based on factors such as income, credit, and CLTV.
Some lenders may also charge an annual fee, depending on the terms of the line of credit.
→ Read more: Is a HELOC a good idea? Here’s how to decide.
Reverse mortgage (HECM)
For homeowners age 62 and older, a reverse mortgage—such as a home equity conversion mortgage (HECM), which is insured by the Federal Housing Administration (FHA)—offers another approach. Other proprietary reverse mortgage options may also be available and may have different eligibility requirements, including minimum age thresholds, which can vary by lender. This option allows eligible homeowners to convert a portion of their home equity into cash without required monthly mortgage payments.
Repayment is deferred until the borrower sells the home, moves out, passes away, or no longer meets the loan requirements. The borrower must continue paying property taxes, maintaining homeowners insurance, and keeping the home in good condition.
Borrowers are also required to complete a counseling session with a counselor approved by the U.S. Department of Housing and Urban Development (HUD) before obtaining this loan.
The 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.
To learn more, please visit the CFPB’s “Reverse Mortgage: A Discussion Guide.”
HomeSafe Second (second-lien reverse mortgage)2
For eligible homeowners age 55 and older in certain states, HomeSafe Second is a type of second-lien reverse mortgage that allows borrowers to access a portion of their home equity without refinancing their existing first mortgage. Because it does not replace the primary loan, borrowers may be able to keep their current mortgage rate while accessing additional funds.
You’ll still need to keep up with your existing mortgage, and eligibility depends on combined LTV limits and a home appraisal.
For certain HomeSafe products only, excluding Massachusetts, New York, and Washington, where the minimum age is 60, and North Carolina and Texas where the minimum age is 62.
Home equity agreements (HEAs)
Home equity agreements (HEAs) are a newer option that allow homeowners to access equity in exchange for a share of the home’s future value, rather than taking on a traditional loan.
Instead of monthly loan payments, repayment typically occurs when the home is sold or at the end of a set term, based on the home’s value at that time. Because repayment is tied to future appreciation, the amount owed may be higher or lower than the amount initially received.
HEAs may appeal to homeowners who want to access funds without taking on monthly payments, but terms, costs, and availability can vary widely by provider.
Choosing the right way to access home equity
Deciding how to access your home equity often comes down to your existing mortgage, how much equity you want to use, and your comfort with monthly payments and long-term costs.
Cash-out refinancing and home equity loans are two common approaches, each with different structures and trade-offs. Other options—such as HELOCs, reverse mortgages, or home equity agreements—may also be worth exploring depending on your needs.
For homeowners age 62 and older looking to access equity without required monthly mortgage payments, reverse mortgages may be one option to consider. Finance of America offers solutions designed to support a range of financial goals. If you’re evaluating your choices, a Finance of America loan officer may help you compare options based on your situation. To get a better sense of what may be available to you, use our calculator to estimate how much you could access based on your home value and location.
The 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.
Frequently asked questions
Is it better to refinance or get a home equity loan right now?
It depends on your current mortgage rate and overall financial goals. If your existing rate is higher than current market rates, a cash-out refinance may allow you to access equity while potentially lowering your rate. If your rate is already low, a home equity loan may help preserve that advantage while still providing access to funds.
How much equity do I need for a cash-out refinance vs. a home equity loan?
Requirements vary by lender, but cash-out refinances typically allow borrowing up to about 80% of your home’s value. Home equity loans are usually based on combined loan-to-value (CLTV), often allowing borrowing up to around 85% when factoring in both your first mortgage and the new loan.
Does a cash-out refinance or home equity loan have lower closing costs?
A home equity loan generally has lower closing costs than a cash-out refinance because it does not replace the original mortgage. Cash-out refinances typically involve full mortgage closing costs, which range from about 2% to 6% of the loan amount.
Will refinancing or a home equity loan affect my credit score?
Both options may affect your credit. Applying for a new loan may result in a temporary dip due to a hard credit inquiry, and taking on additional debt may impact your credit profile. Over time, consistent on-time payments may help support your credit.
Can I get a home equity loan if I’ve already refinanced my mortgage?
Potentially, yes. A home equity loan is a second mortgage, so it may be available even if you have recently refinanced your primary mortgage. Eligibility will depend on factors such as your available equity, credit history, and income.
Can retirees on a fixed income be eligible for a home equity loan or refinance?
Possibly. Lenders may consider income from sources such as Social Security, pensions, or investments. However, eligibility is typically based on factors like income stability, credit, and debt-to-income (DTI) ratios, which may make approval more complex for some retirees.
What happens to a home equity loan if I sell my house?
When you sell your home, the proceeds are typically used to pay off both your primary mortgage and any home equity loan. After those balances are repaid, any remaining equity belongs to you.
1Finance of America does not currently offer home equity loans.
2The borrower must meet all loan obligations, including meeting those under the first lien mortgage, living in the property as the principal residence and paying property charges, including property taxes, fees, 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.
About the author
Lisa Lacy
Lisa Lacy 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.
