Cash-Out Refinance vs Home Equity Loan: Which to Choose?

How a Cash-Out Refinance Works

A cash-out refinance replaces your current mortgage with a new, larger loan. The difference between the old balance and the new one lands in your bank account as cash. If you owe $220,000 on a home worth $400,000 and refinance into a $320,000 loan, you get roughly $100,000 (minus 2-5% in closing costs). Your old mortgage disappears. The new loan — with its new rate, new term, and new balance — takes over.

This means you’re resetting your mortgage timeline. If you were 10 years into a 30-year loan, you’re back to year one. That hurts in two ways: you’ve been paying mostly interest for the first decade, and now you restart that interest-heavy front end. On a $320,000 loan at 6.75% over 30 years, you’ll pay roughly $427,000 in interest. The cash feels free. It isn’t.

Closing costs are the same as a full mortgage origination: appraisal, title search, origination fee, recording fees. Budget 2-5% of the new loan amount. On $320,000, that’s $6,400 to $16,000. You can roll these into the loan balance, but then you’re financing your closing costs at 6.75% for 30 years. Run the numbers through our refinance calculator to see whether the math justifies the cost.

How a Home Equity Loan Works

A home equity loan is a second mortgage — a separate, fixed-rate loan that sits behind your first mortgage. The lender gives you a lump sum based on your available equity, typically allowing a combined loan-to-value of 80-85%. On a $400,000 home with $220,000 owed, you could borrow up to $100,000-$120,000 as a standalone second lien.

The key advantage: your first mortgage stays completely untouched. If you locked 3.25% in 2021, that rate stays. You make your original mortgage payment plus a separate payment on the home equity loan. The second loan has its own fixed rate (currently 8.00-9.25% for most borrowers), its own term (typically 5-20 years), and its own payoff schedule. Two payments, two loans, but your primary mortgage — the big one — keeps its favorable terms.

Closing costs on home equity loans are lower than a full refi, typically 2-4% of the loan amount. On a $60,000 home equity loan, that’s $1,200 to $2,400. Some lenders reduce or waive closing costs entirely for home equity loans above a certain threshold. The trade-off is a higher interest rate compared to a first mortgage because the lender is in second position — if you default, the first mortgage gets paid first from the sale proceeds.

Key Differences Between Cash-Out Refi and Home Equity Loan

The rate gap is the first thing to analyze. Cash-out refi rates track first-mortgage rates — around 6.50-7.00% in early 2026. Home equity loan rates are higher: 8.00-9.25%. On paper, the cash-out refi rate wins. But if your existing mortgage is at 3.5%, you’d be applying that 6.75% rate to your entire balance (say $220,000) plus the new cash — not just the cash portion. A home equity loan charges 8.50% only on the $60,000 you borrow. The math often favors the higher-rate home equity loan when you have a low existing mortgage rate.

Here’s the concrete comparison on a $400,000 home with $220,000 owed, borrowing $60,000:

The home equity loan saves $216/month and roughly $194,000 in total interest in this scenario. The only time the cash-out refi wins is when your current rate is at or above today’s rates — meaning the refi doesn’t cost you anything on the existing balance.

Structurally, the cash-out refi simplifies your life into one payment. Some people genuinely value that. The home equity loan means two separate payments to two lenders with two due dates. It’s not complicated, but it’s one more thing to track. If you’re the type who forgets bills, the single-payment simplicity of the refi has practical value.

When to Choose a Cash-Out Refinance

The cash-out refi makes sense in exactly one scenario: when your current mortgage rate is at or above today’s rates. If you’re sitting at 7.25% and can refi at 6.50%, you’re lowering your rate on the existing balance and pulling cash — a genuine two-for-one win. You might also choose the cash-out refi if you need a very large sum ($100,000+) because home equity loan rates on higher amounts can push total costs close to the refi anyway.

It’s also the right move if you’re consolidating a first mortgage plus existing home equity debt into one loan. If you have a $220,000 first mortgage at 5.5% and a $40,000 HELOC at 9.0%, refinancing everything into a $280,000 loan at 6.50% could reduce your blended rate and simplify your payments. Use the mortgage calculator to compare your current total payments against the new single payment.

When to Choose a Home Equity Loan

The home equity loan is the right call for most homeowners in 2026 who locked rates below 5% during 2020-2022. That 3.25% or 4.00% first mortgage is an asset — the financial equivalent of a golden ticket. Refinancing it away to access equity is like burning a $100 bill to light a candle. The home equity loan lets you borrow against your equity at 8.50% on just the new money while preserving the low rate on the bulk of your debt.

Home equity loans also fit better for defined, one-time expenses. Replacing a roof ($15,000), consolidating credit card debt ($30,000), or funding a child’s college tuition ($25,000/year) — these are known amounts with clear purposes. The fixed rate and fixed payment create a predictable payoff timeline. On $40,000 at 8.50% for 10 years, your payment is $496/month and you’re done in exactly 120 months. No surprises, no resets, no giving up your first mortgage rate. Check your DTI ratio before applying — the second payment needs to fit your budget.

Common Mistakes to Avoid

Refinancing a low-rate mortgage just to simplify payments. “One payment is easier than two” is a real argument, but it’s a $50,000-$200,000 argument depending on your rate differential. If you’re at 3.5% and refi to 6.75%, you’re paying 3.25% more on your entire existing balance for the convenience of one payment. On $220,000, that’s an extra $7,150/year in interest. Set up autopay on both loans and keep the savings.

Comparing monthly payments instead of total cost. A cash-out refi over 30 years will almost always have a lower monthly payment than a home equity loan over 15 years. That’s because you’re stretching the repayment over twice as long, not because it’s cheaper. Always compare total interest paid over the life of each option. The home equity loan with the higher monthly payment frequently costs $50,000-$150,000 less in total.

Ignoring the break-even timeline on closing costs. Cash-out refi closing costs of $8,000-$16,000 need to be recouped through either rate savings or investment returns on the cash. If you’re not saving on your rate (because your current rate is lower), those closing costs are pure loss. Divide the closing costs by your monthly savings — if there are no savings, the break-even is never. A home equity loan with $1,500 in closing costs reaches break-even much faster.

Borrowing more than you need because it’s available. A cash-out refi tempts you to pull the maximum 80% LTV because the marginal cost of additional cash feels small. But every extra $10,000 you borrow at 6.75% costs roughly $13,300 in interest over 30 years. Borrow only what you need for a specific, defined purpose. If you’re not sure of the exact amount, a HELOC might be more appropriate than either option.

Frequently Asked Questions

Can I get a home equity loan if I already refinanced recently?

Yes. There’s no waiting period for a home equity loan after a refinance — as long as you have sufficient equity and income. Some lenders prefer a “seasoning period” of 6-12 months after any mortgage transaction, but many don’t impose one. Your combined LTV (first mortgage plus home equity loan) still needs to stay under 80-85% of your home’s current appraised value.

Which has better tax deductions?

Both are deductible under the same rules. Interest on either product qualifies for the mortgage interest deduction only if the funds are used to “buy, build, or substantially improve” the home securing the debt. Using the money for renovations? Deductible. Using it for a car or vacation? Not deductible. The combined limit across all mortgage debt is $750,000. The type of loan doesn’t matter to the IRS — only the use of the funds does.

What if I want to sell my home soon?

If you’re selling within 2-3 years, the cash-out refi almost never makes sense. You’d pay $8,000-$16,000 in closing costs and barely recoup them before selling. A home equity loan with lower closing costs ($1,500-$2,500) reaches break-even faster. Better yet, if you only need the funds for a year or two, a HELOC with its low/no closing costs might beat both options. Both loans get paid off at closing from your sale proceeds — neither follows you to the next property.

Do I need an appraisal for both?

Yes, but the type differs. Cash-out refinances almost always require a full interior appraisal ($400-$700). Home equity loans may accept a desktop or drive-by appraisal ($150-$300), especially for loans under $100,000. Some lenders use automated valuation models (AVMs) for home equity products, which require no appraiser visit at all. If your home has unique features or recent improvements that boost its value beyond what an AVM would show, push for a full appraisal to maximize your borrowable equity.

Is a home equity loan harder to qualify for?

Credit requirements are similar — both typically need 680+ scores for competitive rates. Income requirements can be tighter for a home equity loan because lenders evaluate your ability to make two separate payments (first mortgage plus home equity). Your DTI ratio needs room for both. Cash-out refi underwriting focuses on one combined payment, which can sometimes be lower monthly. If your DTI is borderline, run the numbers on both to see which payment structure qualifies.

Can I pay off a home equity loan early?

Most home equity loans have no prepayment penalties. Making extra payments reduces your balance faster and saves interest. On a $60,000 loan at 8.50% for 15 years, adding just $100/month to your $524 payment saves roughly $12,800 in interest and shortens the loan by 3 years. Check your specific loan terms — a few lenders still include prepayment penalties in the first 2-3 years, typically 1-2% of the outstanding balance.

What happens to the home equity loan if I refinance my first mortgage later?

This is where it gets messy. Your home equity lender holds a second lien, and any first-mortgage refinance requires them to agree to stay in second position — called a “subordination agreement.” Most will agree, but it takes 2-4 weeks of additional processing and sometimes a fee ($200-$500). If the lender refuses, you’d need to pay off the home equity loan at closing or roll it into the new first mortgage (essentially doing a cash-out refi). Always check your home equity lender’s subordination policy before applying for a first-mortgage refi.