Many or all companies we feature compensate us. Compensation and editorial research influence how products appear on a page. Home Equity Home Equity Loans Cash-Out Refinance vs. Home Equity Loan: Which Is Better? Updated Sep 11, 2024 3-min read Expert Approved Expert Approved This article has been reviewed by a Certified Financial Planner™ for accuracy. Written by Jess Ullrich Written by Jess Ullrich Expertise: Banking, insurance, investing, loans Jess is a personal finance writer who's been creating online content since 2009. She specializes in banking, insurance, investing, and loans, and is a former financial editor at two popular online publications. Learn more about Jess Ullrich Reviewed by Erin Kinkade, CFP® Reviewed by Erin Kinkade, CFP® Expertise: Insurance planning, education planning, retirement planning, investment planning, military benefits, behavioral finance Erin Kinkade, CFP®, ChFC®, works as a financial planner at AAFMAA Wealth Management & Trust. Erin prepares comprehensive financial plans for military veterans and their families. Learn more about Erin Kinkade, CFP® In 2023, the average U.S. homeowner had more than $300,000 in home equity, which continues to climb. If you’re among the homeowners with substantial equity, there are several options for tapping into it to pay for an upcoming expense. A cash-out refinance and a home equity loan are two options for borrowing against your hard-earned equity. Here’s how these options compare and which might be better for you. Table of Contents Skip to Section Home equity loan vs. cash-out refinanceWhich is better? Home equity loan vs. cash-out refinance A home equity loan is a second mortgage against your home’s equity. Home equity loans are lump-sum installment loans, meaning you receive one loan and pay it back in installments with interest. Alternatively, you could opt for a home equity line of credit (HELOC), which is a credit line you borrow against as needed instead of a lump-sum loan. A cash-out refinance isn’t a second mortgage. With a cash-out refinance, you take out a new, larger first mortgage, use it to pay off your original one, and withdraw the difference in cash. Here’s how home equity loans and cash-out refinances compare. This is a general comparison, and terms, fees, and equity requirements will vary by lender. Home equity loanCash-out refinanceRatesHigher, fixedLower, can be variable or fixedTerms5 – 30 years15 or 30 yearsPaymentsFirst mortgage paymentSecond mortgage paymentOne mortgage paymentClosing costsLowerHigherApplication processShorterLongerEquity requirements15% – 20%20% A home equity loan and cash-out refinance both let you access your equity, but there are clear differences between the two. Understanding the differences and the pros and cons of each can help you make an informed choice about which is better for your situation. Pros and cons of a home equity loan Ask the expert Erin Kinkade CFP® I recommend a home equity loan if you have a specific goal (such as a home renovation or adding a pool), prefer a fixed payment, and do not want to extend the life of your mortgage. Pros Flexibility Tap into your equity for any purpose. Potentially larger loan A home equity loan might allow you to withdraw more of your equity than a cash-out refinance. No closing costs possible No closing costs with certain home equity loans or HELOCs. Possible tax advantages Interest payments may be tax-deductible if funds are used to substantially improve your property. Cons Higher rates Rates tend to be higher than first mortgage interest rates. Multiple payments Two monthly payments may be more difficult to manage than a single monthly payment. Foreclosure risk A home equity loan uses your house as collateral, so you could lose your home if you default. Negative equity risk If housing prices decline, you could end up underwater if your first and second mortgage exceed your home’s market value. Ask the expert Erin Kinkade CFP® A cash-out refinance may be more advantageous if you need a large sum, have a large equity position, interest rates are low, and can afford the new monthly payment without restricting your monthly cash flow. It is important to remember that you are obtaining an increased mortgage and restarting the clock on the terms, potentially extending the mortgage term. Pros and cons of a cash-out refinance Pros Flexibility Tap into your equity for any purpose. Potentially lower rates You may qualify for a lower interest rate on your new mortgage. Potentially lower payment A longer repayment term could reduce your monthly mortgage payment. Single payment You will only have one monthly payment with a cash-out refinance, as it isn’t a second mortgage. Possible tax advantages Interest payments may be tax-deductible if funds are used to substantially improve your property. Cons Higher interest costs Extending your mortgage term could mean paying more interest over time. Potentially higher payment The mortgage payment could be higher depending on the amount you cash out. Closing costs You’ll generally need to pay closing costs with a cash-out refinance, though they could be less than those of a first mortgage. Foreclosure risk A larger mortgage could make it more difficult to afford your monthly payments, putting you at risk of default. Negative equity risk If housing prices decline, you could end up underwater if your mortgage exceeds your home’s market value. Cash-out refinance vs. home equity loan: Which is better for me? Cash-out refinancing and home equity loans are two ways to achieve the same goal: withdrawing your equity. But as mentioned, there are some key differences between these options. Here are some scenarios in which one might make more sense than the other: If you want …Home equity loanCash-out refinanceA lower rate✅A shorter term✅A single payment✅To pay less interest over the life of your loan✅ Which product is cheaper? Unfortunately, there’s no clear-cut answer as to whether a cash-out refinance is cheaper than a home equity loan; it depends on your rate. That said, a cash-out refinance is often more expensive upfront than a home equity loan, as these refis may have higher closing costs. A home equity loan can make more sense than a cash-out refinance in a high-interest-rate environment, as you wouldn’t want to replace a lower-rate mortgage with a higher-rate one. Alternatively, a cash-out refinance could be a better choice if rates have gone down significantly since you got your initial home loan. If you’re considering either, check out our guides to the top cash-out refinance companies and the best home equity loans. Ask the expert Erin Kinkade CFP® When choosing between cash-out refi and home equity loans, I recommend initially making a list of the purpose of the loan, the amount you need, your timeline for repayment (i.e. aligning it with retirement, life expectancy, or other specific timeframe), and the current interest rate environment. You must understand and weigh your needs against the pros and cons. If you aren’t sure which option is best, consult a financial professional or reputable mortgage broker to provide additional guidance.