If you need money and have a significant amount of home equity built, we recommend using that stock for your money. Both cash-out refinance and home equity loans allow you to use your home as collateral to borrow against the shares of your ownership.
But they work differently. Cash-out refinance involves replacing your existing mortgage with a new mortgage, but a home equity loan is the second mortgage in addition to your main mortgage.
If you are weighing cash out refinance and home equity loans, how do you decide which option it is? The benefits and risks to consider for each are as follows:
Cash-out refinance and home equity loans
Cash-out refinance |
Home Equity Loan |
|---|---|
| Fixed or adjustable interest rates | Fixed interest rate |
| Interest rates comparable to a mortgage purchase | Interest rates exceed mortgage fees by 2-3% |
| You need to maintain a 20% stake I’ll bet on the house | You need to maintain 15%-20% impartial I’ll bet on the house |
| Tax-deductible interest on the mortgage principal. If used at home, the cash-out portion can be deducted. | Tax-deductible interest if funds are used to “purchase, build, or significantly improve the home.” |
| Lone Principal 2-6% closure costs | Lone Principal 1-5% closure costs |
| Debt to income ratio Up to 43% | Debt-to-revenue ratio up to 43% |
| Loans and Value 80% Limit | 80-85% loans and value limits |
| Minimum 620 Credit Score | Minimum 640 credit score |
What is a cash-out refinance?
A cash-out refinance will pay the remaining balance of your first mortgage and replace it with a new mortgage. The newly refinanced loan amount is due to the remaining debts on your first mortgage and the amount you are “cashing out” or borrowing (i.e. amounts from fairness). The loan period can be up to 30 years, and interest rates can be fixed or fluctuating – reflects general market rates. Cash-out refi fees tend to be a little higher than traditional fees and term refinance rates, but overall they are comparable to purchase mortgages.
Some lenders and federal programs may set low credit score requirements for cash-out refinance. The refinance lender expects his first mortgage during the cash-out refi, so that the lender will become the primary lien holder in the case of default. It’s easy to access your home as collateral, and lenders may be willing to offer a lower fee compared to what you get with a home equity loan.
Cash-out refinance fee
Cash Outlift closing costs typically range from 2-6% of the loan amount. Cash-out refis is usually lower than a major mortgage because it doesn’t require specific costs such as general title searches or title insurance when purchasing a home. However, you can expect to see certain familiar prices. For example, the lender may charge you for an assessment of the property.
What is a Home Equity Loan?
A home equity loan is the second mortgage for your home with unique terms and interest rates separate from your first mortgage. They are opposed to home equity by using home equity loans to refinance. It’s the difference between the valued value of a home and what you owe on a mortgage. Usually you can rent up to 85% of your home’s capital. However, the size of the loan depends on other financial factors, such as income and credit history, and on outstanding balances on your initial mortgage.
A home equity loan typically has a repayment period of up to 30 years, just like a mortgage. Home equity loan fees may be higher than Refis’ shares. However, differences vary widely from lender to lender and over time.
Home Equity Loan Fees
Home equity loan fees vary considerably among lenders, highlighting the importance of comparing offers. Some lenders will abandon origination fees, a large chunk of total closure costs, but may implement slightly higher interest rates as compensation. And like Refi, you may have to pay for valuations and various management fees. However, in general, the cost of closing a residential equity loan tends to be lower than the cost of closing a Refi. It is possible that 5% of loan principals are 5%, but in many cases it is as low as 1%. This is because the cost may be low, but because there is a high chance that you will borrow a small amount of money, which means that you will be less on a percentage basis, such as origination fees.
When does refinance cash-out make sense?
Cash-out refis is usually attractive to those with perfect credit scores as they have low interest rates and are easy to qualify. They offer the option for homeowners to borrow a lump sum for planning costs with only a single repayment to track.
However, replace your existing mortgage with a new mortgage that means new payment periods and interest rates. You will also need to pay for new closure fees. If you get a lot from your first mortgage, you may not want to give up if your fees get significantly higher. Or, if you’ve had a mortgage for a long time and your payments are primarily directed towards principal (not interest), you may not want to reset your amortization clock with a new loan.
Cash-out refi tends to make sense, if you were thinking about replacing your current mortgage anyway, perhaps due to a significant drop in interest rates. We also recommend that you adjust the loan repayment period if you can get a better rate on a newer mortgage than your existing mortgage.
When does home equity loans make sense?
Home Equity Loans allow you to maintain your existing mortgage. If you take a fair deal on your original loan and want to hold it for as long as possible, it helps. Or you just don’t want to ruin it in general.
Home equity loans are a good option for those who pay off a solid chunk of mortgages, build a lot of fairness in their homes, and have a strong credit history and score. The overall process of acquiring a home equity loan can be simpler and faster than the cash-out refinance process.
If your finances guarantee you get a good rate on the loan (competing with the Refi rate), and you can find lenders who will abandon most closing costs, a home equity loan could be the right choice.
Cost comparison: 15-year cash out refi vs 15-year home equity loan
The table below compares the cost of cash-out refinance and home equity loan coststhen June 17th2025. In this scenario, Refi is cheaper despite the higher closure costs. This is because the interest rate is significantly lower than residential equity loans.
15 years cash out refi |
15 years of home equity loan |
|
|---|---|---|
| Loan amount | $150,000 | $150,000 |
| Closure costs | $2,400 | $600 |
| interest rate | 6.16% | 8.33% |
| Monthly principal and interest | $1,279 | $1,462 |
| Total cost in the first 24 months | $33,091 | $35,693 |
| Total cost for the first 48 months | $63,782 | $70,786 |
| Total cost for the first 120 months | $155,855 | $176,064 |
| Total loan costs | $232,620 | $263,760 |
Conclusions about cash outreffies and home equity loans
Remember that both cash-out refinance and home equity loan contests are strategic ways to access the stocks you have built in your home. However, you need to consider the financial situation, goals, and how you use your funds to determine your best approach. It is equally important to consider eligibility criteria for both options that are most likely to be approved.
Regardless of the path you choose, always shop and compare offers from several lenders. Also make sure you get an itemized list from your lender before committing. This will allow you to calculate the cost of your loan.
