Have you built equity in your home and are now wondering how best to use it—through a cash-out refinance or a home equity loan? If so, you’re not alone. Many homeowners, from first-time buyers to seasoned investors, are exploring these two popular financing strategies to access the wealth stored in their property.

Understanding the difference between a cash-out refinance and a home equity loan can help you make smarter financial decisions. This article offers a clear, structured breakdown of both options, their pros and cons, numerical comparisons, and when one may be more beneficial than the other. Let’s dive in.

Cash-Out Refinance vs. Home Equity Loan: Which Is Right for You?

A cash-out refinance lets you replace your existing mortgage with a new, larger one. The excess amount above your old mortgage is given to you in cash. It’s often used to pay down high-interest debt, finance home renovations, or invest.

How it works

• Home value: $400,000
• Existing mortgage: $250,000
• New mortgage: $320,000
• Cash out: $70,000

Pros

• Potentially lower interest rate
• One monthly payment
• Long repayment term (15-30 years)

Cons

• High closing costs (2-5%)
• Restarts your mortgage clock
• Risk of higher payments if rates are up

What Is a Home Equity Loan?

A home equity loan is a second mortgage. You borrow a lump sum against your equity without changing your original mortgage. Ideal for one-time costs.

Example:

• Home value: $400,000
• Existing mortgage: $250,000
• Home equity loan: $70,000

Pros:

• Keeps current mortgage untouched
• Fixed interest rate
• Predictable payments

Cons:

• Two monthly payments
• Higher interest rates than first mortgage
• Risk of foreclosure if you default

Side-by-Side Comparison

Feature	Cash-Out Refinance	Home Equity Loan
Loan Type	Replaces mortgage	Second mortgage
Interest Rate	Usually lower	Usually higher
Rate Type	Fixed or adjustable	Fixed
Number of Payments	One	Two
Closing Costs	2% – 5%	1% – 3%
Loan Term	15 or 30 years	5 to 20 years
Best Use Case	Major expenses, debt	Fixed-cost projects

How to Choose Based on Your Needs

Choose Cash-Out Refinance If:

• Interest rates are lower than your current mortgage
• You want a single loan and longer term
• You’re consolidating debt or funding large investments

Example: Emma refinanced at a lower rate and used the equity to pay off $60,000 in credit card debt, reducing her monthly payments.

Choose Home Equity Loan If:

• You want to retain your current mortgage
• You’re funding a one-time, known expense
• You can handle two payments

Example: Mark took a $50,000 home equity loan for a backyard renovation while keeping his 3.25% mortgage intact.

Additional Considerations

• Credit Score: Both options typically require 620-680+. Higher scores get better rates.
• Loan-to-Value (LTV): Most lenders allow up to 80-85% of your home value.
• Tax Implications: Interest may be tax-deductible if used for home improvements (consult a tax advisor).
• Market Trends: Refinancing during low-rate periods is more favorable. Rising rates make equity loans more appealing.

Real Estate Investors’ Approach

• Use cash-out refinance to acquire new rental properties
• Use equity loans for value-adding upgrades
• Increase portfolio cash flow and property value

FAQs

What’s the difference between a cash-out refinance and a home equity loan?

Refinance replaces your mortgage with a bigger one; equity loan adds a second loan on top of your current mortgage.

How do I decide which is better for my finances?

Consider your current rate, loan amount needed, comfort with two payments, and how long you plan to stay in the home.

Are there risks with either option?

Yes. Falling home values may put you underwater. Over-borrowing and closing costs can also reduce financial benefit.

Final Takeaway

Choosing between a cash-out refinance and a home equity loan depends on your financial goals:

• Need a large sum and better mortgage terms? Consider refinancing.
• Want fixed costs and to keep your mortgage? Opt for a home equity loan.

Pro Tip: Compare lender offers, calculate long-term costs, and consult a financial expert before deciding.