A cash-out refinance and a fixed-rate home equity loan can both turn home equity into cash, but they affect your existing mortgage very differently.
A cash-out refinance replaces your current mortgage with a larger one. A fixed-rate home equity loan generally leaves the first mortgage alone and adds a second monthly payment. If your current mortgage already has a low rate, preserving it can become a major part of the comparison.
Cash-Out Refinance vs. Home Equity Loan Basics
| Feature |
Cash-Out Refinance |
Fixed-Rate Home Equity Loan |
| What happens to your current mortgage |
Replaced with a larger new mortgage |
Generally remains unchanged |
| Lien position |
New loan generally becomes the first mortgage |
Usually a second mortgage when a first mortgage already exists |
| How you receive funds |
Lump sum at closing after the existing mortgage and applicable costs are paid |
Lump sum at closing |
| Monthly loan payments |
One new primary mortgage payment after the refinance |
Separate first-mortgage and home equity loan payments when both remain outstanding |
| Rate structure |
Fixed or adjustable depending on the refinance |
Usually fixed |
| Rate applies to |
The entire new mortgage balance |
The home equity loan balance |
| Upfront costs |
Refinance closing costs apply to the new mortgage transaction |
Can include lender and third-party closing costs depending on the loan |
| Best comparison point |
Whether replacing the existing mortgage plus taking cash improves the overall financing |
Whether adding a second loan is preferable to changing the first mortgage |
How a Cash-Out Refinance Works
A cash-out refinance replaces your current mortgage with a new loan that is larger than the balance being paid off. After the existing mortgage and applicable transaction costs are satisfied, the remaining proceeds are available to you in cash.
For example, suppose your home is worth $500,000 and you owe $250,000 on your existing mortgage. If you refinance into a $325,000 mortgage, part of the new loan pays off the $250,000 balance and the remainder can provide cash after applicable closing costs and other amounts due.
The new mortgage has its own interest rate, term and monthly payment. That means a cash-out refinance replaces your current mortgage terms rather than simply adding another $75,000 of debt.
This distinction becomes especially important if your existing mortgage has a substantially lower rate than the refinance available today.
How a Fixed-Rate Home Equity Loan Works
A home equity loan lets you borrow a lump sum using your home equity as collateral.
The CFPB explains that home equity loans usually have fixed interest rates. If you already have a mortgage, the home equity loan generally becomes a separate second mortgage.
Your existing first-mortgage balance, interest rate and payoff schedule generally remain unchanged. You make a separate payment on the home equity loan until that debt is repaid.
This structure can be useful when you want a known amount of cash and prefer not to refinance the mortgage you already have.
The Existing Mortgage Is the Biggest Difference
The central question in a cash-out refinance vs. home equity loan comparison is whether you want to replace your current first mortgage.
Consider a homeowner who owes $300,000 on a fixed-rate first mortgage and wants another $50,000 for home improvements.
With a cash-out refinance, the homeowner could replace the $300,000 mortgage with a new loan of roughly $350,000 before accounting for closing costs and other adjustments. The refinance rate applies to the full new balance.
With a home equity loan, the $300,000 first mortgage generally stays intact. The homeowner instead takes a separate $50,000 second mortgage, and the new home equity loan rate applies to that $50,000 balance.
If the existing mortgage has a favorable rate, applying a higher new refinance rate to hundreds of thousands of dollars can outweigh a lower rate on the additional cash being borrowed.
If the current first-mortgage rate is already similar to or higher than available refinance pricing, replacing it can be less of a disadvantage.
Cash-Out Refinance vs. Home Equity Loan Interest Rates
A first mortgage and second mortgage do not carry identical pricing risk.
The CFPB notes that second mortgages often carry higher interest rates than first mortgages because the second-lien lender is repaid after the first mortgage if the home must be sold to satisfy the debt.
That means a home equity loan rate can be higher than the rate available on a comparable first-lien refinance. It does not automatically mean the cash-out refinance is cheaper.
A refinance rate applies to the entire new mortgage. The home equity loan rate applies only to the second-loan balance.
Compare the cost of the debt you already have with the proposed financing rather than comparing the two new rates in isolation.
Closing Costs and Upfront Fees
Both options can have upfront costs.
The CFPB explains that cash-out refinancing replaces the existing mortgage with a larger loan and often involves closing costs.
A home equity loan can also include upfront lender and third-party fees. The CFPB notes that these loans may have upfront fees and costs, so the monthly payment should not be the only comparison.
There is no universal rule that every cash-out refinance costs more upfront than every home equity loan. Compare the actual Loan Estimates and disclosures you receive.
Important costs can include appraisal or valuation charges, origination fees, title services and other closing expenses depending on the transaction.
How Much Equity Do You Need?
Both products limit borrowing relative to the value of the home, but they measure the debt differently.
Cash-Out Refinance LTV
Loan-to-value ratio, or LTV, compares the new first mortgage with the home's value.
For standard conventional cash-out refinancing on a one-unit primary residence, Fannie Mae and Freddie Mac currently set a maximum LTV of 80%, subject to the rest of their eligibility requirements.
For a home worth $500,000, 80% LTV corresponds to a maximum first-mortgage balance of $400,000 under that specific limit.
That does not mean every cash-out mortgage uses an 80% cap. Property type, occupancy, loan program and other guidelines can change the maximum.
Home Equity Loan CLTV
When you add a home equity loan without paying off your first mortgage, lenders generally look at combined loan-to-value, or CLTV.
CLTV compares the combined balances of loans secured by the property with the home's value.
For example, if your home is worth $500,000, your first mortgage is $300,000 and you add a $75,000 home equity loan:
($300,000 + $75,000) ÷ $500,000 = 75% CLTV
There is no single maximum CLTV that applies to every fixed-rate home equity loan. Limits vary by lender, property and financial profile.
Use our CLTV calculator to see how a second mortgage would change your combined leverage.
Cash-Out Refinance vs. Home Equity Loan Qualification Requirements
Both loans generally require enough income or other qualifying resources to support the new debt, acceptable credit and sufficient equity in the property.
The exact credit score and debt-to-income ratio requirements depend on the loan program, underwriting method and lender.
A cash-out refinance is a new first mortgage, so the lender underwrites the replacement loan using the applicable refinance rules.
A home equity loan adds a second debt payment. The lender needs to consider your first mortgage and other qualifying obligations when evaluating whether the additional payment is affordable.
A specific minimum score or DTI should therefore be treated as a requirement of the loan you are applying for rather than a universal rule for cash-out refinances or home equity loans.
Do You Need an Appraisal?
Home value affects how much equity you can access, so the lender needs an acceptable method for establishing the property's value.
A traditional appraisal is common, but it is not required in every conventional refinance transaction. Some eligible loans can receive an automated valuation or other appraisal alternative under applicable program rules.
The same principle applies to home equity lending. The lender determines what type of property valuation is required for its product.
See appraisal requirements for refinancing for a closer look at when a full appraisal may or may not be necessary.
Cash-Out Refinance Pros and Cons
Advantages of a Cash-Out Refinance
- Replaces the old mortgage and new borrowing with one primary mortgage
- Can provide a substantial lump sum when sufficient equity is available
- A first-lien mortgage can carry different pricing than a second mortgage
- Can change the rate or term of the existing mortgage when that change also fits your goals
Drawbacks of a Cash-Out Refinance
- Replaces the interest rate and terms on your existing mortgage
- Applies the new rate to the full refinanced balance, not only the cash you take out
- Can extend the time needed to repay mortgage debt if you choose a longer new term
- Includes refinance closing costs and other transaction expenses
Fixed-Rate Home Equity Loan Pros and Cons
Advantages of a Home Equity Loan
- Leaves your existing first mortgage intact
- Provides a lump sum for a known expense
- Usually has a fixed interest rate and predictable scheduled payment
- Applies the new loan rate only to the home equity loan balance
Drawbacks of a Home Equity Loan
- Adds another monthly loan payment
- Second mortgages can carry higher rates than first mortgages
- Still uses your home as collateral
- Upfront fees and closing costs can apply
When a Cash-Out Refinance May Make More Sense
A cash-out refinance can be worth comparing when you need a larger lump sum and replacing the first mortgage also makes sense.
For example, the structure can be more attractive when your current mortgage rate is not substantially below available refinance rates, you want to change the mortgage term or you prefer one primary mortgage instead of separate first- and second-mortgage payments.
Do not judge the transaction only by whether the refinance rate is lower than a home equity loan rate. Compare the remaining cost of your current mortgage with the entire proposed new loan.
When a Fixed-Rate Home Equity Loan May Make More Sense
A home equity loan can be a stronger fit when keeping your existing mortgage is a priority.
This often comes up when your first mortgage has a favorable rate and you need a defined amount for a project or other major expense.
A fixed-rate loan can also make sense when you want a predictable repayment schedule instead of a variable-rate revolving line.
For example, a homeowner planning a defined remodeling project can use a home equity loan for home improvements while leaving the first mortgage untouched.
Cash-Out Refinance vs. Home Equity Loan for Debt Consolidation
Either loan can turn unsecured debt into debt secured by your home. That makes the consequences of missed payments more serious.
The CFPB cautions that using home equity to consolidate other debts does not eliminate the debt. It replaces one form of borrowing with another and puts the home at risk if the secured debt cannot be repaid.
Do not choose between the products simply based on the size of the debt.
A cash-out refinance can consolidate the first mortgage and additional borrowing into one loan, but it also changes the rate and repayment schedule of the existing mortgage.
A home equity loan for debt consolidation preserves the first mortgage but creates another secured monthly payment.
Compare the total amount repaid and the repayment period with the debts being paid off. Moving short-term debt into a much longer mortgage can increase the time you remain in debt even when the interest rate is lower.
What About a HELOC?
A fixed-rate home equity loan is not the only way to borrow against your equity without refinancing the first mortgage.
A HELOC provides a revolving credit line rather than a single lump sum. You can draw from the available credit during the draw period and generally pay interest based on the outstanding balance.
HELOCs usually have variable rates, while home equity loans commonly use fixed rates. That makes a HELOC more flexible for expenses that occur over time, while a home equity loan can provide more payment predictability for a known lump-sum expense.
The Bottom Line
A cash-out refinance and a fixed-rate home equity loan can both provide cash from your home equity. The biggest difference is what happens to the mortgage you already have.
A cash-out refinance replaces the first mortgage, so the new rate and term apply to the full refinanced balance. A home equity loan generally leaves the existing mortgage untouched and adds a separate fixed-rate second mortgage.
If your first mortgage already has favorable terms, preserving it can make a home equity loan worth comparing even when the second-mortgage rate is higher. If replacing the first mortgage also improves your financing or better fits your repayment plan, a cash-out refinance can be the cleaner structure. Compare the complete cost of both loans, not just their advertised rates.
Frequently Asked Questions
What Is the Difference Between a Cash-Out Refinance and a Home Equity Loan?
A cash-out refinance replaces your existing mortgage with a larger new mortgage and provides the additional proceeds in cash. A home equity loan usually leaves your first mortgage intact and adds a separate lump-sum second mortgage.
Is a Cash-Out Refinance or Home Equity Loan Cheaper?
It depends on your existing mortgage and the new loan offers. A home equity loan can carry a higher rate because it is a second mortgage, but a cash-out refinance applies its new rate to your entire refinanced balance. Closing costs and loan terms also affect the comparison.
Which Has Lower Closing Costs?
There is no universal rule. Cash-out refinancing includes the costs associated with creating a new first mortgage. Home equity loans can also have lender and third-party fees. Compare the actual upfront costs for both options.
How Much Equity Do I Need for a Cash-Out Refinance?
It depends on the loan program and property. For standard Fannie Mae and Freddie Mac conventional cash-out refinancing on a one-unit primary residence, the current maximum LTV is 80%, meaning at least 20% equity remains based on the value used for underwriting. Other transactions can have different limits.
How Much Can I Borrow With a Home Equity Loan?
The lender generally considers the home's value, existing mortgage debt and the proposed home equity loan when calculating CLTV. Maximum CLTV requirements vary by lender and loan program.
Does a Home Equity Loan Change My First Mortgage Rate?
No, assuming the home equity loan is originated as a separate second mortgage. Your existing first mortgage generally keeps its current rate, balance and repayment schedule.
Which Is Better if I Already Have a Low Mortgage Rate?
A home equity loan can be worth comparing because it generally lets you keep the existing first-mortgage rate. A cash-out refinance would replace that mortgage, so the new rate would apply to the entire refinanced balance.
Is a HELOC Better Than a Home Equity Loan or Cash-Out Refinance?
A HELOC can be useful when you want revolving access to equity rather than a lump sum. It usually has a variable rate, while a home equity loan commonly has a fixed rate. The better option depends on how and when you need the money, your existing mortgage and your tolerance for changing payments.
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