Credible
Get Rates
  • Refinance Student Loans
    • Compare Options
      • Best Refinancing Companies
      • Lender Reviews
      • Refinance Student Loans
      • Student Loan Consolidation
    • Learn the Basics
      • Fixed vs. Variable Rates
      • Forgiveness Programs
      • Consolidation vs Refinancing
      • Repayment Plans
      • More on Student Refi
    • How to
      • Consolidate Your Student Loans
      • Pay Off Your Student Loans
      • Lower Your Interest Rate
    • Tools
      • Current Student Loan Refi Rates
      • Refinancing Calculator
      • Repayment Calculator
  • Student Loans
    • Compare Options
      • Best Private Student Loans
      • Lender Reviews
      • Private Student Loans
      • Parent Student Loans
    • Learn the Basics
      • Student Loan Limits
      • Living Expenses
      • Applying for FAFSA
      • Federal Student Loans
      • Student Loan Interest Rates
      • More on Student Loans
    • How To
      • Pay for College
      • Take Out Student Loans
      • Apply Without Cosigner
      • Apply for Student Loans
      • Pay for Grad School
    • Tools
      • Current Student Loan Rates
      • Student Loan Interest Calculator: Estimate Payments
  • Personal Loans
    • Compare Options
      • Best Personal Loan Lenders
      • Lender Reviews
      • Get Personal Loan Rates
    • Learn the Basics
      • How to Qualify
      • How to Get a Loan
      • Where to Get a Loan
      • Personal Loans with Cosigner
      • Pay Off Credit Card Debt
      • More on Personal Loans
    • Best for
      • Credit Card Consolidation
      • Debt Consolidation Loans
      • Home Improvement Loans
      • Good Credit
      • Fair Credit
      • Bad Credit
    • Tools
      • Current Personal Loan Rates
      • Personal Loan Calculator
  • Mortgages
    • Compare Options
      • Mortgage Refinance
      • Home Loan
      • Mortgage Preapproval
      • Mortgage Payment Calculator
    • Compare Rates
      • Mortgage Refinance Rates
      • 30-Year Fixed Refinance Rates
      • 15-Year Fixed Refinance Rates
      • Home Loan Rates
      • 15-Year Fixed Mortgage Rates
      • 30-Year Fixed Mortgage Rates
    • Learn the Basics
      • How to Buy a House
      • How to Refinance Your Mortgage
      • How to Get the Best Rate
      • Cash-Out Refinancing
      • More on Home Loans and Refi
    • Pay Off Mortgage
      • Home Equity to Pay Off Debt
      • Paying Off Mortgage Early
      • Mortgage Refinance Cost
  • Company
    • About
    • Reviews
    • Blog
    • Lenders
    • Editorial Guidelines
    • FAQs
    • Press
  • Find My Rate
Advertiser Disclosure

Cash-Out Refinancing vs. Home Equity Loan: How to Choose

Cash-out refinancing and home equity loans both let you tap your home equity, though they’re not right for every situation.

Aly J. Yale Aly J. Yale Updated January 7, 2021

Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as "Credible."

If you’re a homeowner with a good amount of equity in your property, then a cash-out refinance or home equity loan could offer money when you need it.

Whether you’re facing high medical bills or just looking to cover a kitchen remodel, both financing options can give you the cash you need to pay the bills, all by tapping your home equity.

Here’s a look at these loan products more in-depth — as well as when homeowners may want to use them:

  • How a cash-out refinance works
  • How a home equity loan works
  • Cash-out refinance vs. home equity loan
  • How to choose between a cash-out refinance and a home equity loan

How a cash-out refinance works

A cash-out refinance is a method of replacing your existing mortgage loan. It’s a type of mortgage refinance where you apply for a new mortgage that’s larger than your current loan balance. Once approved, the new loan is used to pay off your old mortgage and any loan costs and closing costs you choose to pay, and you’ll receive the difference between the two loans in cash (this is the “cash-out” portion of the transaction). You’ll also get a new monthly payment based on your new loan terms and balance.

Here’s how it works: Let’s say you have a current mortgage balance of $100,000. You apply for a cash-out refinance worth $175,000. When your loan closes, you’ll receive a payment for $75,000 — the difference between the two balances. Your monthly payment will also change, though you’ll still only have a singular payment per month.

Learn More: Refinance Closing Costs: How to Lower and Avoid Fees

How a home equity loan works

A home equity loan is what’s called a second-lien mortgage. It allows you to borrow money based on how much equity you have in the home, but instead of replacing your existing loan, it’s done through a second, completely separate and additional mortgage. You’ll pay it down monthly, just like you do with your current mortgage (meaning you’ll have two monthly payments total).

Here’s how it works: Let’s say you apply for a home equity loan worth $50,000. Your lender says your monthly payment will be $500. Once your loan closes, you’ll pay this $500 to your new lender over the course of the loan and continue making your original mortgage payment just as before.

Home equity loans come with more of an inherent risk for mortgage lenders. This added risk typically means home equity loans can be harder to qualify for and come with higher interest rates. Because they’re a second mortgage, the lender doesn’t have a first-priority claim to the property if you fail to make payments, so this increases the chance of financial loss should you default on your loan payments.

Learn More: Home Equity Loan vs. Home Equity Line of Credit (HELOC)

Cash-out refinance vs. home equity loan

If you’re a homeowner and you’re in need of cash, either a cash-out refinance and home equity loan could be a solid option. The best choice really depends on your personal situation, budget, goals, and more.

Here’s a quick look at how the two types of loans measure up.

Similarities between cash-out refinancing and home equity loans

The biggest similarity between cash-out refinancing and a home equity loan is that they both allow you to leverage the equity you’ve built up in your home.

The other major similarities are that:

  • Both give you a lump-sum payment. You’ll get cash immediately after closing — not in installments or over time.
  • Both allow you to use the money for any purpose. You can use the funds for home improvements, tuition, medical bills, and many other costs.
  • You might be able to deduct the interest paid on both loans. There are scenarios in which you can deduct your interest costs from both loans on your annual tax returns.

Find Out: No Closing Cost Refinance: Will It Save You Money?

Differences between home equity loan vs. cash-out refinance

Though they share a few similarities, cash-out refinances and home equity loans function very differently. For one, cash-out refinances replace your existing loan (meaning one monthly payment), while home equity loans add a second payment to your monthly bills.

The other major differences are:

  • A cash-out refinance could come with an adjustable rate, while home equity loans are typically fixed-rate. With an adjustable-rate loan, you could see your rate and payment rise over time.
  • Cash-out refinances typically offer lower interest rates than home equity loans. Home equity loans are riskier and typically come with higher rates.
  • Cash-out refinances typically come with higher closing costs than home equity loans. Many home equity loans don’t have closing costs at all.
  • A home equity loan could be harder to qualify for than a cash-out refinance. Lenders take on more risk with home equity loans, so they’re more strict about who they’ll lend to.

When it makes sense to get a home equity loan

A home equity loan generally makes the most sense if you know you can pay off the loan quickly. Since these loans come with higher interest costs, this can minimize how much added interest you’ll pay to borrow the money.

Home equity loans can also be a good idea when:

  • You can comfortably handle a second monthly payment
  • Market interest rates are higher than the rate on your current mortgage (and you don’t want to lose that rate by refinancing)
  • You plan to use the money toward home improvements (you can only deduct the interest on home equity loans if used for these purposes)

When it makes sense to get a cash-out refinance

Cash-out refinancing is your best bet when you’re on a strict budget and need a consistent and singular payment each month.

A cash-out refinance can also be a good move if:

  • Your credit or financial profile isn’t great and you’re not sure you could qualify for a home equity loan
  • You’re consolidating debt and want a low interest rate
  • Market interest rates are lower than the rate on your current mortgage and you want to take advantage of the low rates
Get the cash you need and the rate you deserve

  • Compare lenders
  • Get cash out to pay off high-interest debt
  • Prequalify in just 3 minutes

Find My Loan
No annoying calls or emails from lenders!

Trustpilot

How to choose between a cash-out refinance and a home equity loan

The right choice really depends on your personal finances, budget, intended use for the funds, and your repayment timeline. Whichever you choose, make sure to shop around for your loan.

If you’re considering a cash-out refinance, Credible makes it easy — you can compare your prequalified rates from our partner lenders in the table below by filling out a single form.

About the author
Aly J. Yale
Aly J. Yale

Aly J. Yale is a mortgage and real estate authority and a contributor to Credible. Her work has appeared in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.

Read More

Home » All » Mortgages » Cash-Out Refinancing vs. Home Equity Loan: How to Choose

Home Equity Guide


  • What Is Home Equity
  • Home Equity Loans
  • Home Equity Line of Credit
  • Cash-Out Refinance
  • Reverse Mortgages
  • Refinance a Home Equity Loan

Understand Your Options

  • Pros and Cons of Second Mortgages
  • Home Equity Loan & HELOC Requirements
  • Cash-Out Refinance Tax Implications
  • HELOC vs. Home Equity Loan
  • Cash-Out Refi vs. Home Equity Loan
  • Bad Credit Home Equity Loans

Tools and Resources

  • Refinance Your Mortgage
  • Pay Off Your Mortgage Early
  • Today’s Mortgage Refi Rates
  • How to Find the Best Lenders
  • Lender Reviews

  • Click to share on Facebook (Opens in new window)
  • Click to share on LinkedIn (Opens in new window)
  • Click to share on Twitter (Opens in new window)

Related Articles

Mortgages

What Is a Rate and Term Refinance?

Mortgages

Limited Cash-Out vs. No Cash-Out Refinance: How to Choose

Mortgages

Refinancing a Home Equity Loan: What You Need to Know

  • Read More
    • Refi Student Loans
    • In School Loans
    • Personal Loans
    • Mortgages
  • Resources
    • Lender Reviews
    • Loan Calculators
    • Data Insights
    • Debt Statistics
    • Sitemap
  • Compare
    • Student Loan Refinance
      • Current Student Loan Refi Rates
    • Student Loan Consolidation
    • Private Student Loans
      • Current Student Loan Rates
    • Personal Loans
      • Current Personal Loan Rates
    • Refinance Mortgage
      • Mortgage Refinance Rates
        • 15-Year Fixed Refinance Rates
        • 30-Year Fixed Refinance Rates
    • Home Loans
      • Home Loan Rates
        • 15-Year Fixed Mortgage Rates
        • 30-Year Fixed Mortgage Rates
  • Top Lenders
    • Best Student Loan Refi Companies
    • Best Private Student Loans
    • Best Personal Loans
  • Company
    • About
    • Reviews
    • Blog
    • Editorial Staff
    • Editorial Guidelines
    • News
    • Press
  • Legal
    • Terms of Use
    • Privacy Policy

© 2021 Credible


Credible Operations, Inc. NMLS ID# 1681276 | NMLS Consumer Access | Licenses and Disclosures
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.