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Cash-Out Refinance vs. Home Equity Loan or HELOC: Which is Better for You?

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Content was accurate at the time of publication.

If you’re looking to tap into the equity you’ve built in your home, you have three main options: a cash-out refinance, a home equity loan and a home equity line of credit (HELOC). With either a home equity loan or a cash-out refinance, you’ll have a stable monthly payment and a fixed interest rate. A HELOC, on the other hand, gives you access to your home equity at a variable rate, but it provides more flexibility as a revolving credit line.

If you’re considering a cash-out refinance versus home equity loan or HELOC, knowing how each of these equity-tapping options works can help you make the most cost-effective choice.

Feature
Cash-out refinance
Home equity loan
HELOC
How the funds are paid out You'll receive your funds in a lump sum.  You'll receive your funds in a lump sum.  You'll access your funds through a revolving credit line.
Monthly payments  Your monthly payment includes both principal and interest charges.  Your monthly payment includes both principal and interest charges.  Your monthly payment is based on your balance, plus interest charges. 
Minimum credit score  You may qualify with a credit score as low as 500.  You'll need at least a 620 credit score to qualify, though some lenders have higher minimums.  You'll need at least a 620 credit score to qualify, though some lenders have higher minimums. 
Borrowing limits  You'll need to keep at least 20% equity in your home after taking cash out (in most cases).  You'll need to keep at least 15% equity in your home after borrowing the loan (in most cases).  You'll need to keep at least 15% equity in your home after borrowing the loan (in most cases). 
Interest rate type You'll typically have a fixed interest rate that's lower than a home equity loan rate.  You'll typically have a fixed interest rate that's higher than a cash-out refi rate.  You'll typically have a variable interest rate that's higher than a cash-out refi rate. 

A cash-out refinance allows you to replace your existing mortgage with a new one that has a larger loan amount than you currently owe. The new mortgage pays off your old loan, and you can access some of your home equity by pocketing the cash difference.

You’re typically limited to an 80% loan-to-value (LTV) ratio with a cash-out refinance, meaning you can borrow up to 80% of your home’s value. Eligible military borrowers can get a VA cash-out refinance with a maximum 90% LTV ratio, however.

If you’re taking out an FHA cash-out refinance, you may qualify with a credit score as low as 500. Otherwise, you’ll need at least a 620 score for a conventional or VA-backed cash-out refi.

A home equity loan is an installment loan with a fixed interest rate and monthly payment. It’s a second mortgage, meaning each month you’ll make two payments: one toward the home equity loan and one toward your first mortgage. You can usually borrow up to 85% of your home’s value, minus what you owe on your first mortgage, and you’ll receive your funds in a lump sum.

Note that your house is used as collateral, so if you stop making payments you could lose your house to foreclosure. If that happens, your home equity loan balance is repaid only after the first mortgage has been paid off. This makes home equity loans riskier for lenders because they are second in line for repayment, so home equity loan rates are often higher than purchase mortgage rates.

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A home equity line of credit (HELOC) is another type of second mortgage, except this type is set up as a revolving credit line with a variable interest rate, rather than an installment loan. Homeowners often choose HELOCs because they can use (and reuse) their funds during a set time called a draw period, which is usually 10 years. In addition, payments are based only on your outstanding balance — not the full credit line amount.

Similar to home equity loan lenders, HELOC lenders often permit an 85% LTV ratio maximum, though some lenders offer high-LTV HELOCs and home equity loans.

 See current HELOC rates today.

When comparing a cash-out refinance versus a HELOC or home equity loan, you’ll first need to establish whether you can afford to manage two monthly mortgage payments. If that doesn’t work for your finances, then a cash-out refinance sounds like your best option. If a second mortgage is feasible, then your next step is to choose between a credit line and a cash lump sum.

Consider whether you plan to use your home equity to meet short- or long-term goals. For example, if you need to cover your child’s upcoming college expenses, you might prefer the lump sum that a home equity loan provides. But if you’re starting a long-overdue home improvement project, a HELOC could better suit the unpredictable expenses you’ll likely face along the way.

To help you decide whether a cash out refinance versus home equity loan or HELOC is right for you, we’ve highlighted how each option can meet your financial needs.

A cash-out refinance makes sense if:

You want the lowest possible monthly payment.

You have a lower credit score.

You’d prefer to only have one monthly payment.

You can get a mortgage rate that’s lower than your existing rate.

Interested in a cash-out refinance? Get Custom Rates Today

A home equity loan makes sense if:

You’re borrowing a small loan amount.

You have a higher credit score.

You can manage two house payments each month.

You want to leave your first mortgage balance alone.

A HELOC makes sense if:

You don’t need the funds in a lump sum.

You have a higher credit score.

You can manage two house payments each month.

You want to pay off and reuse your funds as needed.

Think a home equity loan or HELOC is right for you? Compare Top Lenders and Rates

Interest rates on home equity loans and HELOCs are usually higher than cash-out refinance rates because they’re second mortgages. Still, you’ll pay less home equity closing costs than closing costs on a cash-out refi because of the much larger loan amount.

You can use a home equity loan to fund virtually any financial goals you’d like to meet. For example, if you’re looking to consolidate your high-interest debt or purchase an investment property, you can borrow a home equity loan or HELOC to do so.

Yes, the mortgage interest deduction applies to home equity loans and lines of credit. As long as you use your home equity funds to “buy, build or substantially improve” your main home or second home, you may qualify to deduct the interest you pay on a home equity loan or HELOC.

It may make sense to borrow a home equity loan or HELOC over refinancing your first mortgage if:

  • You need to borrow a relatively small loan amount.
  • You want to leave your first mortgage balance alone and avoid restarting your loan term.
  • You’d like to tap your home equity over time — something a HELOC allows.

If you’re cashing out some of your home equity or rolling your closing costs into your new loan amount, you’ll lose equity when you refinance your mortgage.

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