Cash-Out Refinance Vs Fixed-Rate Home Equity Loan

The choice between a cash-out refinance and a fixed-rate home equity loan ultimately comes down to whether you want to change your existing mortgage.

Both options let you tap into existing equity, but only a cash-out refinance also changes your existing mortgage.

This guide explains how each option works, how costs and rates compare, and which situations tend to favor one over the other.

Understanding Cash-Out Refinance

A cash-out refinance replaces your current mortgage with a new, larger loan and pays you the difference in cash.

Because it becomes your primary mortgage, it consolidates everything into a single payment and may change your rate, term, and monthly obligation.

Most lenders require a home appraisal to get a cash-out refinance, and approval typically depends on your credit profile, income stability, debt-to-income ratio, and sufficient remaining equity after the new loan closes.

Many conventional programs cap loan-to-value ratios around 80%, though limits vary by loan type and lender guidelines.

Understanding Fixed-Rate Home Equity Loan

A fixed-rate home equity loan is a second mortgage that provides a lump sum at a fixed interest rate with structured repayment over a defined term.

Your original mortgage remains unchanged. You add a separate monthly payment for the new loan.

Homeowners often use fixed-rate home equity loans for home improvements, tuition, or consolidating moderate debt while keeping their first mortgage rate and timeline intact.

Key Differences Between Cash-Out Refinance And Home Equity Loan

A cash-out refinance replaces your current mortgage and becomes the new first lien, while a fixed-rate home equity loan is a separate second mortgage with its own payment.

Comparison At A Glance

Interest Rates And Closing Costs Comparison

As a general rule of thumb, a cash-out refinance will have lower rates but higher closing costs than a home equity loan.

That comes down to lien position. Your first lien is your primary mortgage, while a second mortgage is a secondary lien. A cash-out refinance is a first-lien loan because it replaces your primary mortgage, and a home equity loan is a second-lien loan because it is in addition to your primary mortgage.

First-lien loans often price lower than second-lien loans. As a result, cash-out refinance rates are frequently lower than fixed-rate home equity loan rates, assuming similar borrower profiles.

Closing costs differ as well. Refinances commonly involve higher upfront costs because they replace the entire mortgage. Home equity loans may carry lower closing costs, though this varies by lender and structure.

Exact rates and fees depend on credit score, loan size, equity position, and market conditions.

Equity Requirements

A cash-out refinance becomes your primary mortgage. A home equity loan remains a second lien.

Many lenders cap cash-out refinance loan-to-value ratios near 80% for conventional programs. Combined loan-to-value limits for a first mortgage plus a home equity loan often range from 80% to 85%, depending on lender guidelines and property type.

Credit score and debt-to-income requirements vary. Many programs begin in the low-to-mid 600s, with debt-to-income ratios commonly expected to remain in the low 40 percent range or below.

You can use our CLTV calculator to explore different scenarios. Keep in mind you’ll need to connect with an expert loan officer to get a personalized estimate.

Pros and Cons of Cash-Out Refinances vs. Home Equity Loans

Cash-Out Refinance

Fixed-Rate Home Equity Loan

When To Choose Cash-Out Refinance

A cash-out refinance may make sense when you need a larger lump sum, prefer a single monthly payment, or can meaningfully improve your overall interest rate compared with your existing mortgage and other debts.

It is often most beneficial when you plan to stay in the home long enough to offset higher upfront costs.

When To Choose A Fixed-Rate Home Equity Loan

A fixed-rate home equity loan may be a better fit when you want to preserve a low first-mortgage rate, need a defined loan amount for a specific project, and prefer not to reset your primary mortgage term.

This option can be efficient for targeted borrowing with a clear payoff timeline.

Keep in mind a fixed-rate home equity loan isn’t the only type of a second mortgage that lets you access equity. A HELOC can provide more flexibility as a revolving line of credit.

The Bottom Line

A cash-out refinance and a fixed-rate home equity loan are both ways to tap into your home equity, but function in very different ways.

A cash-out refinance replaces your existing mortgage with a new one and lets you take a portion of your equity in cash. That means a higher loan amount, but one monthly payment. A home equity loan is a second loan on top of your mortgage, which means you can access your equity without affecting your existing mortgage.

Frequently Asked Questions

What Is The Difference Between A Cash-Out Refinance And A Fixed-Rate Home Equity Loan?

A cash-out refinance replaces your current mortgage with a larger loan and provides you the difference in cash, consolidating everything into one payment. A fixed-rate home equity loan is a second mortgage that provides a lump sum while leaving your original mortgage unchanged.

What Qualifications Do I Need For Each Option?

Both options typically require sufficient home equity, documented income, acceptable credit history, and a manageable debt-to-income ratio. Exact requirements vary by lender and loan type.

How Do Interest Rates And Closing Costs Compare?

Cash-out refinances often offer lower interest rates but may involve higher closing costs. Fixed-rate home equity loans typically carry higher rates but may have lower upfront fees.

How Much Can I Borrow?

Cash-out refinance limits often depend on a maximum loan-to-value ratio, commonly near 80 percent for conventional programs. Home equity loans may allow combined loan-to-value ratios up to the low-to-mid 80 percent range, depending on lender guidelines.

Which Option Is Better For Debt Consolidation?

For larger balances, a cash-out refinance can simplify payments and potentially reduce rates. For smaller or targeted balances, a fixed-rate home equity loan may provide predictable repayment without modifying your primary mortgage.