Cash-Out Refinance vs. Home Equity Loan: Rates, Costs & Differences

Your home may be one of your most valuable financial assets. As you make mortgage payments and property values change, you may build equity that can potentially be used to finance major expenses.

Homeowners in the United States commonly consider two options when accessing that equity: a cash-out refinance and a home equity loan.

Both financing options allow you to borrow against the value of your property. However, they work differently and can produce very different long-term financial outcomes.

A cash-out refinance replaces your existing mortgage with a larger mortgage, allowing you to receive the difference in cash. A home equity loan provides a separate loan secured by your property while leaving your original mortgage in place.

The difference matters, especially if you currently have a mortgage with a favorable interest rate.

Choosing the wrong option could increase your borrowing costs, extend your repayment period, or put your home at unnecessary financial risk.

In this guide, we compare cash-out refinancing and home equity loans, explain their costs, and show how to evaluate which option may be appropriate for your financial situation.

What Is a Cash-Out Refinance?

A cash-out refinance is a mortgage refinancing arrangement that allows homeowners to borrow more than their existing mortgage balance and receive the difference in cash.

The new mortgage pays off the original mortgage. After paying applicable transaction costs, the remaining amount is provided to the homeowner.

For example, assume your home is worth $450,000 and your outstanding mortgage balance is $250,000.

You apply for a new mortgage of $320,000.

The transaction could look like this:

• Estimated home value: $450,000
• Existing mortgage balance: $250,000
• New mortgage amount: $320,000
• Gross additional borrowing: $70,000
• Closing costs: Excluded from this simplified example

The lender uses the new mortgage to pay off your existing $250,000 balance. The remaining $70,000 is the gross cash-out amount before applicable expenses.

You now have a new $320,000 mortgage instead of your original $250,000 mortgage.

The new loan may have a different interest rate, repayment term, and monthly payment.

Cash-out refinancing is commonly considered for home renovations, large expenses, or other financing needs. However, using home equity to repay unsecured debt requires particular caution because your home becomes the collateral for the additional borrowing.

What Is a Home Equity Loan?

A home equity loan allows you to borrow against the equity you have accumulated in your property.

Unlike cash-out refinancing, a home equity loan generally does not replace your existing mortgage.

Instead, it creates a separate loan secured by your home. This is commonly referred to as a second mortgage.

You receive the approved loan amount as a lump sum and repay it through scheduled monthly payments.

For example:

• Home value: $450,000
• Existing mortgage balance: $250,000
• Home equity: $200,000
• New home equity loan: $50,000

You keep your original $250,000 mortgage and take out an additional $50,000 home equity loan.

You now have two separate repayment obligations.

A home equity loan often has a fixed interest rate, although some products offer adjustable rates. Your exact payment depends on the interest rate, loan amount, repayment period, and applicable fees.

The main advantage is that you can access home equity without replacing an existing mortgage that may already have a favorable rate.

Cash-Out Refinance vs. Home Equity Loan: Key Differences

Although both products use your home as collateral, they have important differences.

Neither product is automatically less expensive.

Your current mortgage rate is particularly important when comparing the two.

If your existing mortgage has a substantially lower interest rate than current refinance offers, replacing it with a larger mortgage could increase the cost of borrowing on your entire outstanding balance.

A home equity loan may allow you to keep that original mortgage while borrowing only the additional amount you need.

Example: How Much Does Each Option Cost?

Consider a homeowner with the following financial situation:

• Property value: $450,000
• Current mortgage balance: $250,000
• Current mortgage interest rate: 4%
• Desired additional funds: $50,000

The homeowner is comparing two options.

Option A: Cash-Out Refinance

The homeowner replaces the existing mortgage with a new $300,000 mortgage.

Assume the new mortgage has a 7% interest rate and a 30-year repayment period.

The estimated principal-and-interest payment would be approximately $1,996 per month.

Option B: Home Equity Loan

The homeowner keeps the original $250,000 mortgage at 4% and borrows an additional $50,000 through a home equity loan.

Assume the home equity loan has an 8% interest rate and a 15-year repayment period.

The approximate monthly payments would be:

Under these simplified assumptions, the home equity loan arrangement requires approximately $324 less per month than the cash-out refinance.

However, the two options have different repayment periods and interest costs.

The cash-out refinance combines everything into one 30-year loan. The home equity loan arrangement keeps the original mortgage and adds a separate 15-year obligation.

This comparison excludes taxes, insurance, mortgage insurance, closing costs, and other fees. It also assumes the original mortgage has the stated balance, rate, and remaining amortization period.

The example illustrates why homeowners should compare the complete financing arrangement rather than looking only at the advertised interest rate.

How Much Home Equity Can You Borrow?

The amount you can borrow depends on your property’s value, existing mortgage balance, lender requirements, credit profile, income, and loan-to-value limits.

Loan-to-value ratio (LTV) compares your outstanding mortgage debt with the estimated value of your property.

The formula is:

LTV = Outstanding mortgage balance ÷ Property value × 100

For example:

• Property value: $400,000
• Existing mortgage balance: $240,000

LTV = $240,000 ÷ $400,000 × 100 = 60%.

This means 60% of the property’s estimated value is currently represented by the mortgage balance.

Your home equity is:

$400,000 − $240,000 = $160,000.

However, having $160,000 in equity does not mean you can necessarily borrow the entire amount.

Lenders generally impose maximum combined loan-to-value requirements and assess your ability to repay the new debt.

Some lenders may also require a minimum credit score, sufficient income, and a satisfactory debt-to-income ratio.

Interest Rates: Which Option Has Better Rates?

Home equity loan rates and cash-out refinance rates depend on market conditions and borrower qualifications.

Cash-out refinance rates are generally influenced by conventional mortgage pricing, while home equity loan rates are determined by the lender’s second-mortgage pricing structure.

A home equity loan may have a higher interest rate than a first mortgage because it is a subordinate loan.

However, the rate on the new home equity loan applies only to the additional amount borrowed.

With cash-out refinancing, the new mortgage rate generally applies to the entire refinanced balance.

This distinction can make a home equity loan more attractive when your current first mortgage has a low rate.

When comparing offers, examine:

• Interest rate.
• APR.
• Loan term.
• Origination fees.
• Appraisal expenses.
• Title services.
• Closing costs.
• Prepayment provisions.
• Total repayment amount.

Do not assume that the loan with the lowest advertised interest rate will have the lowest overall cost.

What Is a HELOC, and How Is It Different?

A home equity line of credit (HELOC) is another way to access home equity.

Unlike a traditional home equity loan, which provides a lump sum, a HELOC gives you access to a revolving credit line.

You can borrow money as needed, up to your approved credit limit, during the draw period.

For example, suppose a lender approves a $60,000 HELOC.

You initially borrow $15,000 for home improvements. Later, you borrow another $10,000 for a separate expense.

Your outstanding balance becomes $25,000, rather than the full $60,000.

HELOCs commonly have variable interest rates, although fixed-rate options may be available.

Many HELOCs have two phases:

1. Draw period: You can borrow against the available credit line and make payments under the agreement.
2. Repayment period: You can no longer make ordinary draws and must repay the outstanding balance.

Payments can increase when the repayment period begins, particularly if you previously made interest-only payments.

A HELOC may be appropriate when you need access to funds over time rather than one large lump sum.

When Is Cash-Out Refinancing a Better Choice?

Cash-out refinancing may be worth considering when:

• Your existing mortgage interest rate is relatively high.
• Current refinance offers provide competitive terms.
• You want to replace your existing mortgage.
• You need a large lump sum.
• You want to change your mortgage repayment term.
• The overall refinancing cost is reasonable.

For example, a homeowner with a 7.5% existing mortgage might find a refinance offer attractive if they qualify for a meaningfully lower rate.

However, compare the entire new mortgage balance and the additional borrowing costs before proceeding.

When Is a Home Equity Loan Better?

A home equity loan may be worth considering when:

• You want to preserve a low existing mortgage rate.
• You need a specific lump sum.
• You prefer predictable fixed monthly payments.
• You want a separate repayment schedule.
• The new loan’s APR and fees are competitive.

It can be especially relevant for homeowners who do not want to refinance their entire existing mortgage.

However, remember that you are adding another secured debt obligation.

If you fail to repay it, the lender may pursue foreclosure according to applicable law and the loan agreement.

Tax Considerations for Home Equity Borrowing

Interest on home equity loans and cash-out refinances is not automatically tax-deductible.

Under current U.S. federal tax rules, interest on home-secured debt may qualify for the mortgage interest deduction when the applicable requirements are satisfied.

For example, the use of funds matters. Interest may qualify when proceeds are used to buy, build, or substantially improve the home securing the loan, subject to applicable debt limits and other requirements.

Using home equity proceeds for personal expenses or credit card debt generally does not qualify under those home acquisition debt rules.

Tax rules can change, and individual circumstances matter.

Consult IRS Publication 936 or a qualified tax professional before assuming that your home equity borrowing costs will be deductible.

Common Mistakes to Avoid

Ignoring Your Existing Mortgage Rate

Replacing a favorable first mortgage with a more expensive mortgage can increase your overall borrowing costs.

Borrowing More Than Necessary

Just because a lender approves a larger amount does not mean you should borrow the maximum available equity.

Focusing Only on Monthly Payments

A longer repayment term can make payments smaller while increasing the total amount of interest paid.

Using Home Equity for Uncontrolled Spending

Borrowing against your home to fund discretionary expenses can increase financial risk.

Forgetting Closing Costs

Compare itemized loan estimates and account for all applicable fees.

Use a Mortgage Calculator Before Borrowing

Before deciding between cash-out refinancing and a home equity loan, estimate the monthly payment and total repayment costs of both arrangements.

Use Finacing’s Mortgage Calculator to compare mortgage balances, interest rates, repayment terms, taxes, and insurance.

You can also use the Loan Calculator to estimate the cost of the additional home equity borrowing.

Compare the combined monthly payments against your household budget before accepting an offer.

Frequently Asked Questions

Is a cash-out refinance the same as a home equity loan?

No. A cash-out refinance replaces your existing mortgage with a larger mortgage, while a home equity loan creates a separate loan secured by your home.

Which has lower interest rates?

Cash-out refinance rates may be lower than home equity loan rates, but the actual comparison depends on your credit profile, loan terms, lender fees, and existing mortgage rate.

Can I get a home equity loan if I already have a mortgage?

Yes. Home equity loans are commonly structured as second mortgages, meaning you keep your existing mortgage and add a separate loan.

Does a cash-out refinance increase my mortgage balance?

Yes. You replace your existing mortgage with a larger mortgage and receive the additional amount in cash, less applicable expenses.

Can I use a home equity loan to pay off credit cards?

Many lenders allow home equity loan proceeds to be used for debt consolidation. However, this converts unsecured debt into debt secured by your property, which introduces additional risk.

Is a home equity loan tax-deductible?

Interest may qualify for the federal mortgage interest deduction when specific IRS requirements are satisfied. The purpose of the borrowing is important.

Can I lose my home if I cannot repay a home equity loan?

Yes. Because the property secures the loan, failure to repay can result in foreclosure.

Final Thoughts

Cash-out refinancing and home equity loans provide different ways to access the financial value of your home.

Cash-out refinancing may be useful when you also want to replace your existing mortgage or obtain more favorable mortgage terms.

A home equity loan may be more attractive when you want to preserve your existing mortgage and borrow only the additional amount needed.

Before choosing either option, compare the APR, fees, repayment terms, total borrowing costs, and the potential risks to your property.

Use Finacing’s Mortgage Calculator and Loan Calculator to estimate your payments and evaluate the financial impact of borrowing against your home.