Difference between cash-out refinance and home equity loans
Before jumping into the specifics, here’s a quick comparison table to help you see the main differences between cash-out refinance and home equity loans:
| Feature | Cash-out refinance | Home equity loan |
|---|---|---|
| Interest rates | Usually lower than home equity loans | Typically higher, but fixed |
| Loan terms | Generally 15 to 30 years | Often 5 to 20 years |
| Repayment structure | One new mortgage payment replaces your old | Separate loan; two payments |
| Closing costs | 2 to 5% of the loan amount | Usually lower, but still apply |
| Eligibility | Sufficient home equity and lender approval | Home equity and good credit |
| Impact on mortgage | Replaces your entire mortgage | Keeps your mortgage; adds a second lien |
What is a cash-out refinance?
A cash-out refinance, also called a cash-out refi, is a type of mortgage refinancing where a borrower takes out a new mortgage that is larger than their current one and receives the difference in cash. How much you can borrow depends on a few different factors, including the home’s current value, the remaining mortgage balance owed and your creditworthiness.
Your home’s current value will be evaluated by a professional appraiser during the refinance process — you cannot simply base its value on popular real estate websites. David from Virginia made that mistake: “The appraiser valued the home at 10k less than all of the online real estate sites, so my total cash out was less than we'd hoped for,” he said.
Qualifications
Beyond that, exact qualifications for a cash-out refinance vary by lender. However, there are a few minimum guidelines. Most lenders will want to see a credit score of at least 620 and a debt-to-income (DTI) ratio less than or equal to 43%.
Repayment terms
A shorter loan term generally comes with a higher monthly payment but lower interest rate, while a longer loan term will cut your monthly payment but increase your interest rate — meaning you'll pay more in interest over the life of the loan.
Costs and fees
Additionally, your monthly payment can increase depending on how much equity you borrow and if you are refinancing at a higher interest rate.
Tax deductions
In some cases, the IRS will allow you to deduct the interest used on home improvement costs. These circumstances are usually related to improvements made for medical needs or office additions.
Dealing with tax deductions on cash-out refinancing loans can get complicated, so it's a good idea to work with a tax professional to ensure you deduct the correct amount.
What can you use a cash-out refinance for?
“Most homeowners do a cash-out refi for home improvements to increase its value and thus the equity in the home, but it can be used for other reasons as well,” said Alex Caras, a real estate broker in Chicago at Magellan Realty.
You can use the equity to consolidate debt, pay for college or fund your dream vacation — you can pretty much use your equity for anything.
Here are some popular uses for a cash-out refinance:
- Consolidating and refinancing high-interest debt
- Paying medical bills
- Covering emergency expenses
- Funding education
- Making a down payment on a second home or rental property
» MORE: Should you refinance your mortgage to pay off student loans?
What is a home equity loan?
A home equity loan lets you borrow a lump sum of cash against the equity you have in your home. Because a home equity loan uses your home as collateral and doesn’t replace your original mortgage, it’s considered a second mortgage.
Qualifications
Home equity loans also have income and credit qualifications. You can calculate your home equity using two key figures: the balance on your mortgage and the current value of your home.
Generally, you’ll need a credit score of at least 620 and a DTI ratio no larger than 43%. The credit score and income requirements may vary based on the amount of equity and debt you have.
Repayment terms
Remember: Shorter term lengths will come with higher monthly payments but lower interest rates. Longer term lengths reduce your monthly payments but include a higher rate.
Costs and fees
Typically, home equity loans come with higher interest rates than refinancing. Since a home equity loan is like a second mortgage, you will be paying it off alongside your regular monthly mortgage payment.
Tax deductions
However, you might be able to deduct the interest on a home equity loan if the funds are used for home remodeling projects for medical needs or home office additions.
What can you use a home equity loan for?
As with a cash-out refinance, you can use your home equity loan for virtually any purpose. Some common uses include:
- Consolidating and refinancing high-interest debt
- Making home improvements
- Paying for home repairs
- Creating an emergency fund
- Funding a child’s college tuition
» MORE: How to use home equity
Pros and cons
When deciding between a cash-out refinance and a home equity loan, it helps to see the main pros and cons of each.
Cash-out refinance pros and cons
Pros
- May offer lower interest rates than home equity loans
- Can extend your loan term and lower monthly payments
- Combines your mortgage and cash-out amount into one simple payment
Cons
- May have higher closing costs
- Extending your loan term could increase total interest paid
- The process is usually more time-consuming and needs more paperwork
Home equity loan pros and cons
Pros
- Lets you keep your current mortgage unchanged
- May have lower upfront costs than a full refinance
- Fixed rates and predictable payments make budgeting easier
Cons
- Usually has higher interest rates than first-lien mortgages
- You’ll have two separate payments: your mortgage and the home equity loan
- Loan amounts may be limited by your home equity
Home equity loan vs. HELOC: What’s the difference?
Both home equity loans and home equity lines of credit (HELOCs) let you convert your equity into a loan. The main differences are in when you receive the funds and how you pay them back.
A home equity loan is paid out in a lump sum, while a HELOC provides access to a revolving line of credit.
With a HELOC, you can borrow at any time during the draw period, which might be five to 15 years. During the draw period, you only make interest payments (though you can pay off principal and get funds back on your credit line). Once the draw period ends and the repayment starts, you begin making payments that include principal. The repayment period lasts 10 to 20 years.
HELOCs offer more flexibility than home equity loans because you only pay interest on the amount of money you draw. However, HELOCs have an adjustable interest rate, which can make payments unpredictable; home equity loans have a fixed interest rate, along with fixed monthly payments. (There are also fixed-rate HELOCs, which are like a hybrid of a HELOC and home equity loan.)
FAQ
Is a cash-out refinance or home equity loan cheaper?
Both a cash-out refi and home equity loan come with closing costs, but a home equity loan might have lower fees since you will be borrowing a smaller amount versus taking out a whole new mortgage.
What are alternatives to a home equity loan or cash-out refinance?
Tapping into your equity is not the only way to borrow money. Depending on your financial needs and credit score, you can also take out a personal loan or open a new credit card. Additionally, home equity sharing agreements are increasing in popularity and can allow you to use your home equity without needing to meet strict credit requirements.
Do you lose equity when you refinance?
If you do a cash-out refinance, then you will be borrowing against your equity, which will decrease how much of the home you own “outright.” However, if you do a refinance to a lower rate, this can ultimately help you build equity faster since more of your monthly payment will go toward principal rather than interest.
How do cash-out refinance and home equity loans affect my credit score?
Both a cash-out refinance and a home equity loan usually involve a hard inquiry on your credit report, which can lower your score a little at first.
Paying off your old mortgage and starting a new one (in a cash-out refinance) can affect your credit mix and account age. If you use the money to pay off other debts, your score may improve over time.
Home equity loans also add a new account to your credit, which can lower your average account age. If you handle payments well, your score can go up, but taking on more debt can increase your credit utilization and lower your score temporarily. Always make payments on time to protect and improve your credit.
Bottom line
When you need to borrow money for your next home repair project or other financial goal, consider your home’s equity. Both a cash-out refinance and a home equity loan can help you utilize built-up equity for any financing need. How much you can borrow depends on how much equity you have and your creditworthiness.
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- IRS, “Publication 936 (2024), Home Mortgage Interest Deduction.” Accessed Sept. 12, 2025.
- Consumer Financial Protection Bureau, “What is the difference between a Home Equity Loan and a Home Equity Line of Credit?” Accessed Sept. 12, 2025.
