If you’ve built equity in your home, you may be able to use it to finance major expenses such as home improvements, debt consolidation, education costs, or emergency expenses. Two of the most common ways to access your home’s equity are a cash-out refinance and a home equity loan.
Although both options allow you to borrow against your home’s value, they work differently and may affect your finances in different ways. Choosing the right option depends on your current mortgage, interest rates, borrowing needs, and long-term financial goals.
In this guide, we’ll compare cash-out refinancing and home equity loans, explain their advantages and disadvantages, and help you determine which option could save you more.
What Is a Cash-Out Refinance?
A cash-out refinance replaces your existing mortgage with a new, larger mortgage. The difference between your current loan balance and the new loan amount is paid to you as cash.
For example, if you owe $200,000 on your mortgage and refinance for $260,000, you receive $60,000 (minus applicable closing costs).
Your original mortgage is paid off, and you begin making payments on the new loan.
What Is a Home Equity Loan?
A home equity loan is a separate loan that allows you to borrow against the equity you’ve built in your home while keeping your current mortgage unchanged.
The loan is usually provided as a lump sum with fixed monthly payments over a specified repayment period.
Unlike a cash-out refinance, you’ll have two monthly payments:
- Your existing mortgage
- Your new home equity loan
Cash-Out Refinance vs. Home Equity Loan: Key Differences
| Feature | Cash-Out Refinance | Home Equity Loan |
|---|---|---|
| Existing Mortgage | Replaced with a new mortgage | Remains unchanged |
| Number of Monthly Payments | One | Two |
| Interest Rate | Based on current mortgage rates | Separate loan rate |
| Closing Costs | Typically higher | Usually lower |
| Loan Structure | New mortgage | Second mortgage |
| Best For | Replacing your current mortgage and accessing equity | Borrowing against equity while keeping your current mortgage |
Benefits of a Cash-Out Refinance
A cash-out refinance offers several advantages.
Benefits include:
- One monthly mortgage payment
- Opportunity to secure a lower interest rate if market rates have fallen
- Access to a large amount of cash
- Ability to change your mortgage term
- Potential long-term interest savings if refinancing improves your loan terms
This option is often ideal if current mortgage rates are lower than your existing rate.
Benefits of a Home Equity Loan
A home equity loan also offers unique advantages.
Benefits include:
- Keep your existing mortgage and interest rate
- Receive a lump-sum payment
- Fixed monthly payments
- Lower closing costs than many refinancing options
- Suitable when your current mortgage already has a favorable interest rate
This option is often preferred when you don’t want to refinance your primary mortgage.
Which Option Can Save You More?
The answer depends on your financial situation.
A cash-out refinance may save more if:
- Current mortgage rates are lower than your existing rate.
- You want to replace a higher-rate mortgage.
- You prefer one monthly payment.
- You plan to remain in your home long enough to recover refinancing costs.
A home equity loan may save more if:
- Your current mortgage already has a very low interest rate.
- You only need to borrow a smaller amount.
- You want to avoid replacing your existing mortgage.
- You want lower upfront costs.
Comparing the total borrowing costs—not just the monthly payment—is essential.
Factors to Consider Before Choosing
Before making a decision, evaluate:
- Your current mortgage interest rate
- Current market interest rates
- Home equity available
- Closing costs
- Loan amount needed
- Monthly budget
- Length of time you plan to stay in your home
These factors can significantly affect your long-term savings.
Common Uses for Home Equity
Homeowners often use borrowed equity for:
- Home renovations
- Kitchen or bathroom remodeling
- Debt consolidation
- College tuition
- Medical expenses
- Emergency repairs
- Major life events
Using home equity responsibly can improve your financial situation, but borrowing more than necessary increases your repayment obligations.
Common Mistakes to Avoid
Avoid these common borrowing mistakes:
- Borrowing more than you need.
- Comparing only monthly payments.
- Ignoring closing costs and fees.
- Failing to compare multiple lenders.
- Using home equity for unnecessary spending.
- Not calculating the total loan cost.
- Refinancing without evaluating long-term savings.
Careful planning can help you avoid costly financial mistakes.
Tips for Getting the Best Deal
To maximize your savings:
- Improve your credit score before applying.
- Compare loan offers from several lenders.
- Understand all fees and closing costs.
- Borrow only what you need.
- Review the total repayment amount—not just the interest rate.
- Choose the option that aligns with your long-term financial goals.
Shopping around can help you secure the most competitive financing.
Frequently Asked Questions
Which option has lower monthly payments?
It depends on your loan amount, interest rate, and repayment term. A cash-out refinance may lower payments if you secure a lower mortgage rate, while a home equity loan adds a second monthly payment.
Can I use either option for home improvements?
Yes. Both cash-out refinancing and home equity loans are commonly used to finance renovations, repairs, and remodeling projects.
Does a cash-out refinance replace my current mortgage?
Yes. A cash-out refinance pays off your existing mortgage and replaces it with a new mortgage.
Is a home equity loan considered a second mortgage?
Yes. A home equity loan is generally considered a second mortgage because it exists alongside your original home loan.
Which option is better?
Neither option is universally better. A cash-out refinance may be more beneficial when mortgage rates are lower than your current rate, while a home equity loan can be a smarter choice if you already have a low-rate mortgage and only need additional funds.
Final Thoughts
Both cash-out refinancing and home equity loans allow homeowners to unlock the value they’ve built in their homes, but the best choice depends on your financial goals and current mortgage situation. A cash-out refinance may provide greater long-term savings if you can secure a lower interest rate, while a home equity loan may be more cost-effective if you want to keep your existing mortgage unchanged.
Before deciding, compare multiple lenders, calculate the total cost of each option, and consider how long you plan to stay in your home. Making the right choice can help you save money, manage your finances more effectively, and achieve your long-term financial objectives.