A cash-out refinance and a home equity loan can both turn part of your home equity into a lump sum of cash. The biggest difference is what happens to the mortgage you already have.
A cash-out refinance replaces your existing mortgage with a larger new mortgage and gives you part of the difference in cash. A home equity loan generally leaves your first mortgage in place and adds a second loan, usually providing the borrowed amount upfront.
That distinction affects your interest rate, monthly payments, closing costs, repayment timeline, and total borrowing cost. If you're comparing the two, your current mortgage rate is one of the first numbers worth checking.
Cash-Out Refinance vs. Home Equity Loan at a Glance
| Cash-Out Refinance | Home Equity Loan | |
|---|---|---|
| Existing mortgage | Replaced with a larger mortgage | Generally stays in place |
| Cash received | Lump sum | Lump sum |
| Mortgage payments | One replacement mortgage payment | First mortgage plus second-loan payment |
| Rate structure | Depends on the mortgage selected | Commonly fixed |
| Effect on existing mortgage rate | Replaces it | Preserves it |
| Borrowing limit | Depends on property value, equity, loan program, and underwriting | Depends partly on combined debt secured by the home and lender requirements |
| Home used as collateral | Yes | Yes |
| Main advantage | Access equity through one replacement mortgage | Access equity without replacing the first mortgage |
The CFPB describes a home equity loan as a second mortgage in which borrowers typically receive the money upfront and repay it through regular monthly payments. With a cash-out refinance, the existing mortgage is replaced by a larger one.
The Biggest Difference Is What Happens to Your Current Mortgage
Suppose you owe $200,000 on your mortgage and want to access another $50,000 of your equity.
With a cash-out refinance, you're generally replacing the existing mortgage with a larger loan that accounts for the old balance and the additional cash, subject to closing costs and the final loan structure.
With a home equity loan, the $200,000 first mortgage generally remains untouched. You take a separate loan for the additional amount and repay both loans.
This matters because a cash-out refinance doesn't apply a new interest rate only to the money you're taking out. It replaces the existing mortgage too.
Your Current Mortgage Rate Can Change the Math
Say you already have a low fixed rate on your first mortgage. Refinancing means giving up that mortgage and replacing it with a new loan at the rate and terms available when you refinance.
If current refinance rates are higher than your existing mortgage rate, you could end up paying the new rate on a substantially larger balance than the amount of cash you actually need.
A home equity loan avoids that particular problem because the original mortgage stays in place. The separate home equity loan has its own rate and payment.
The CFPB specifically advises homeowners considering cash-out refinancing to pay attention to the new interest rate, especially when it exceeds the rate on the existing mortgage.
The reverse can matter too. If refinancing terms compare favorably with your existing mortgage, replacing the first loan while accessing equity may deserve consideration.
The rate alone doesn't settle the decision, though. The new balance, term, fees, and total interest expense matter as well.
Compare the Total Payment, Not the Number of Payments
A cash-out refinance generally leaves you with one mortgage payment. A home equity loan normally means paying your original mortgage plus the new second loan.
Having one payment may sound simpler, but it doesn't automatically make cash-out refinancing cheaper.
A larger replacement mortgage can produce a higher payment even when the new interest rate is lower than the old one. Likewise, a home equity loan creates a second payment, but the rate on your existing first mortgage remains unchanged.
Compare what you would actually pay each month under both scenarios rather than deciding based on having one bill or two.
Also look beyond the monthly payment. Extending debt across a longer repayment period can reduce the payment while increasing the amount of interest paid over time.
LTV and CLTV Affect How Much Equity You Can Access
Your home equity is the difference between your home's current value and the debt secured by it. But having $100,000 in equity doesn't necessarily mean a lender will let you borrow the entire $100,000.
Two measurements can help explain borrowing limits.
Loan-to-value (LTV) compares a mortgage balance with the property's value.
For example, if your home is worth $300,000 and your mortgage balance is $180,000:
$180,000 ÷ $300,000 = 60% LTV
When another loan is secured by the property, combined loan-to-value (CLTV) accounts for multiple balances.
Suppose the same homeowner takes a $45,000 home equity loan. The combined secured debt becomes $225,000:
$225,000 ÷ $300,000 = 75% CLTV
The amount you can borrow depends on factors including the property's value, existing mortgage debt, lender requirements, loan program, credit profile, income, and other underwriting criteria. Avoid assuming that one LTV or CLTV limit applies to every borrower or lender.
Closing Costs Can Change Which Option Is Cheaper
A cash-out refinance creates an entirely new first mortgage, so closing costs deserve particular attention.
Depending on the transaction, costs may include lender charges, appraisal expenses, title-related expenses, prepaid items, and other charges. Some costs may be rolled into the new mortgage balance rather than paid upfront. Freddie Mac confirms that eligible closing costs, financing costs, and prepaid items can be incorporated into certain cash-out refinance loans.
Home equity loans can carry their own fees and closing expenses, which vary by lender.
When comparing quotes, don't stop at the advertised interest rate. Look at the APR, lender fees, closing costs, monthly payment, repayment term, and total amount you'll repay.
A slightly lower rate doesn't necessarily compensate for significantly higher fees or a much longer repayment period.
Loan Terms Can Affect Your Total Interest Cost
A cash-out refinance can change how long you'll be paying mortgage debt.
Suppose you're several years into your current mortgage and refinance into another long-term loan. Your monthly payment might look manageable because the new balance is being spread across a fresh repayment schedule.
That doesn't automatically make it less expensive.
A longer repayment period can mean paying interest for additional years. That's why comparing monthly payments alone can produce a misleading result.
For both a cash-out refinance and a home equity loan, compare:
- Interest rate and APR
- Monthly payment
- Closing costs and other fees
- Loan term
- Total projected interest
- Total projected repayment
The lowest monthly payment and the lowest overall cost aren't necessarily the same option.
When a Cash-Out Refinance May Make Sense
A cash-out refinance may deserve consideration when replacing your current mortgage works financially as well as accessing equity.
That could be the case when the new mortgage terms compare favorably with your existing loan, you need a lump sum, and you prefer having one mortgage rather than a first and second mortgage.
It can also simplify the debt structure because the old mortgage is paid off through the refinance and replaced with the new loan.
Freddie Mac notes that cash-out refinance proceeds can be used for purposes such as accessing cash, home improvements, or consolidating other debt.
The important comparison is the cost of the entire replacement mortgage, rather than the rate attached to the transaction by itself.
When a Home Equity Loan May Make Sense
A home equity loan may deserve stronger consideration when you want a fixed lump sum without replacing an attractive first mortgage.
That's particularly relevant if your existing mortgage has terms you don't want to give up.
Because the home equity loan is generally a second mortgage, you'll have another required payment. The CFPB notes that second mortgages commonly carry higher interest rates than first mortgages because the second lender has a junior claim if the property must be sold to satisfy the debts.
Still, paying a higher rate on a smaller second loan can produce a different result from replacing an entire first mortgage at a new rate.
The comparison needs to be made using actual loan quotes.
Both Options Put Your Home Up as Collateral
The two products have one significant risk in common: your home secures the debt.
A cash-out refinance increases or restructures debt secured by the property. A home equity loan adds another debt secured by the property.
Failure to make required payments can therefore put the home at risk.
Borrowing against the property also reduces your available equity. If home values decline significantly, a homeowner with substantial mortgage debt could end up with little equity or owe more across home-secured loans than the property is worth.
That makes borrowing against home equity different from taking unsecured credit.
Using Home Equity to Pay Off Credit Cards Has a Tradeoff
Debt consolidation is a common reason homeowners access equity.
Replacing high-interest credit card balances with lower-cost borrowing can reduce interest expense in some situations. But the interest rates aren't the only thing changing.
Credit card debt is generally unsecured. A cash-out refinance or home equity loan is secured by your property.
The CFPB warns that converting non-mortgage debt into mortgage debt can increase foreclosure risk because the home now secures that debt.
There's also a behavioral risk. Paying off credit cards with home equity doesn't solve the problem if the card balances are quickly rebuilt.
Compare the total cost of both strategies and have a repayment plan before moving unsecured debt onto your home.
Mortgage Interest Isn't Automatically Tax-Deductible
Don't choose either product based on an assumption that all of the interest will qualify for a federal tax deduction.
Current IRS guidance states that interest on qualifying home-secured debt may be deductible when applicable requirements are met and the borrowed funds are used to buy, build, or substantially improve the home securing the debt. Other limits and itemization requirements apply.
For example, IRS guidance states that interest on a home equity loan used to pay personal debts such as credit cards isn't deductible as home mortgage interest under the rules described by the agency.
Refinancing can involve additional tax rules, including the treatment of points.
Check current IRS guidance or speak with a qualified tax professional about your individual situation.
What About a HELOC?
A home equity line of credit provides another way to borrow against home equity, but it works differently from the two lump-sum options above.
Instead of receiving one fixed loan amount upfront, a HELOC generally provides a revolving line that lets you borrow as needed, subject to the agreement's limits. A home equity loan generally provides the full borrowed amount upfront.
That can make a HELOC worth researching when expenses will occur at different times or when you don't know exactly how much you'll need.
How to Choose Between a Cash-Out Refinance and Home Equity Loan
Start with your existing mortgage.
Write down its balance, interest rate, remaining term, and monthly principal-and-interest payment. Then determine how much additional cash you actually need.
Get quotes for both options when they're available to you and compare what happens to the entire debt, not only the new money.
Pay particular attention to:
- Your existing mortgage rate
- The new interest rate and APR
- Amount borrowed
- Monthly payment or combined payments
- Closing costs and lender fees
- Repayment term
- Total projected interest
- Equity remaining afterward
- How long you expect to keep the home and loan
A cash-out refinance can make sense when replacing the existing mortgage and accessing equity work well together. A home equity loan can make sense when preserving the first mortgage is financially valuable and a separate second payment fits comfortably into the budget.
Neither is automatically cheaper.
The stronger choice is the one that provides the cash you need while producing an acceptable total cost, monthly payment, repayment timeline, and level of risk for your finances.
