Home Equity Loan vs Cash-Out Refinance
Last updated July 2026
Home Equity Loan
Second-lien fixed-rate lump sum against your equity
Advantages
- Fixed rate, predictable payment
- Doesn't touch your existing first mortgage rate
- Faster to close than a cash-out refi
- Lower closing costs than a full refinance
- Interest may be tax-deductible for home improvements
Drawbacks
- Rate typically higher than a cash-out refi at market rates
- You have two mortgage payments after closing
- Your home is collateral
- Closing costs still $500-$3,000+ typical
Cash-Out Refinance
Replace your existing mortgage with a bigger one and take the difference in cash
Advantages
- Single mortgage payment after closing (simpler)
- Fixed rate on the full new mortgage amount
- If current rates are below your existing rate, lowers monthly payment while pulling cash
- Can extend the term to reduce monthly payments (but pay more total interest)
- Interest may be tax-deductible for home improvements
Drawbacks
- Replaces your existing mortgage rate, dangerous if current rates are above yours
- Full closing costs 2-5% of the loan amount
- Resets your mortgage term to 15-30 years
- Higher monthly payment if you increase the loan amount and rate
Home equity loans and cash-out refinances both deliver a fixed-rate lump sum against your home equity. A home equity loan is a second lien on top of your existing mortgage. A cash-out refi replaces your existing mortgage with a larger new one. Whether current rates are above or below your existing mortgage rate decides which is smarter.
Feature Comparison
| Feature | Home Equity Loan | Cash-Out Refinance |
|---|---|---|
| Loan Structure | Second lien, fixed-rate installment loan | Replaces first mortgage with new, larger loan |
| Interest Rate Type | Fixed; typically 7.5-10% | Fixed; current market rate |
| Draw Period | N/A, full amount at closing | N/A, lump sum at closing |
| Repayment Term | 5-30 year fixed term | 15-30 year fixed term |
| Closing Costs | $500-$3,000+ typical | 2-5% of new loan amount |
| Loan Terms | Fixed lump-sum term | Standard mortgage terms |
| First Mortgage Impact | Untouched | Replaced entirely |
| Best Use Case | One-time expense while preserving existing first mortgage rate | Large one-time cash needs when current rates are favorable |
Too Close to Call
Home equity loan wins when your current first mortgage rate is well below market. Cash-out refi wins when current rates are below your existing rate or you want a single payment.
Same logic as HELOC vs cash-out refi: don't replace a low fixed rate with a higher current market rate just to pull cash out. A home equity loan preserves that low first-mortgage rate and adds a second lien at market rates on just the equity amount. If your current rate is above market, a cash-out refi lets you lower your rate and pull cash simultaneously, a much better deal. Simplicity of one payment can also justify a cash-out refi when the rate math is close.
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