Home Equity Loan vs. Cash-Out Refinance
A home equity loan adds a second fixed-rate loan (7.5%–10.5% in 2026) on top of your existing mortgage, while a cash-out refinance replaces your entire mortgage with a new, larger one (6.5%–8.5%). The best choice depends on your current mortgage rate: if it’s below 5%, keep it and add a home equity loan. If it’s above 7%, a cash-out refinance may lower your overall rate while giving you cash.
Key Takeaways
- Home equity loan: keeps your existing mortgage, adds a second fixed-rate payment
- Cash-out refinance: replaces your mortgage entirely with a new rate and term
- If your current mortgage is under 5%, a home equity loan preserves that low rate
- If your current mortgage is above 7%, a cash-out refi may lower your blended rate
- Home equity loans close faster (2–6 weeks vs. 4–8 weeks) with lower closing costs
- Cash-out refis offer lower rates (first-lien position) but higher total closing costs
Key Differences at a Glance
Both products tap your home equity, but the mechanics are completely different:
| Feature | Home Equity Loan | Cash-Out Refinance |
|---|---|---|
| Rate type | Fixed (7.5%–10.5%) | Fixed (6.5%–8.5%) |
| Your current mortgage | Unchanged | Replaced with new mortgage |
| Number of payments | Two (mortgage + HEL) | One (new mortgage) |
| Funds received | Lump sum | Lump sum |
| Closing costs | 2–5% of loan amount | 2–6% of total new loan |
| Time to close | 2–6 weeks | 4–8 weeks |
| Max LTV | 80–90% | 80% |
| Best scenario | Low current mortgage rate | High current mortgage rate |
The Rate Comparison That Matters Most
The single most important factor is your current mortgage rate compared to today’s rates. This determines which option saves you money.
Rule of thumb: if your current mortgage rate is more than 1% below today’s refinance rates, keep your mortgage and get a home equity loan. If your current rate is at or above today’s rates, a cash-out refinance can potentially lower your rate while giving you cash.
| Your Current Rate | Best Option | Why |
|---|---|---|
| Under 4% | Home equity loan | Preserve your exceptional rate — can’t get it back |
| 4%–6% | Home equity loan (usually) | Today’s rates are higher — keep the lower rate |
| 6%–7% | Run the numbers on both | Depends on amount needed and closing costs |
| Above 7% | Cash-out refinance (likely) | You may lower your rate AND get cash |
Real-World Comparison: $60,000 Needed
Home value: $400,000. Current mortgage: $240,000 at 3.75% (28 years remaining). Need: $60,000.
| Home Equity Loan | Cash-Out Refinance | |
|---|---|---|
| New loan details | $60K at 8.5% for 15 years | $300K at 7% for 30 years |
| Current mortgage payment | $1,112/mo (stays) | Gone — replaced |
| New payment | +$590/mo | $1,996/mo (one payment) |
| Total monthly | $1,702/mo | $1,996/mo |
| Total interest (all loans) | ~$181K remaining mortgage + $46K HEL | ~$418K on new mortgage |
| Closing costs | ~$2,400 | ~$9,000 |
| Monthly savings | +$294 cheaper | — |
Winner in this scenario: The home equity loan saves $294/month and roughly $80,000+ in total interest over the life of both loans — because it preserves the 3.75% mortgage rate. The cash-out refi replaces a great rate with a much higher one.
Tax Implications
Both home equity loans and cash-out refinances may offer tax-deductible interest, but the rules differ slightly. For home equity loans, interest is deductible only if funds are used to buy, build, or substantially improve your home (up to $750,000 total mortgage debt).
For cash-out refinances, the interest on the original mortgage amount is deductible regardless of use, while interest on the additional cash-out portion follows the same rules as home equity loans — deductible only for home improvements.
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Frequently Asked Questions
Can I do a cash-out refinance if I just got my mortgage?
Most lenders require a 6–12 month waiting period (seasoning period) after your original mortgage before allowing a cash-out refinance. FHA loans require at least 6 months; conventional loans vary by lender. You may also need to demonstrate you’ve built equity through payments or appreciation.
Which has lower closing costs?
Home equity loans have lower closing costs in absolute dollars. On a $60,000 home equity loan, expect $1,200–$3,000. A cash-out refinance of $300,000 might cost $6,000–$18,000 since closing costs are based on the entire loan amount, not just the cash-out portion.
Does a cash-out refinance require a new appraisal?
Yes. A cash-out refinance requires a full home appraisal since you’re taking out an entirely new mortgage. Home equity loans also typically require an appraisal, though some lenders waive it for smaller amounts.
Can I switch from a home equity loan to a cash-out refinance later?
Yes. You can refinance your primary mortgage and home equity loan into a single new mortgage at any time, provided you qualify. This is actually a common strategy — take a home equity loan now, then consolidate everything if rates drop significantly in the future.
Last updated: March 2026. Rates and requirements are subject to change. Always verify current terms with lenders directly.