Cash Out Refinance vs Home Equity Loan FAQ

Question 1

What is the main difference between a cash-out refinance and home equity loan?

Accepted Answer

A cash-out refinance replaces your existing mortgage with a new, larger loan and gives you the difference in cash. A home equity loan is a separate second mortgage that keeps your original mortgage intact. According to the CFPB, the best choice depends on your current mortgage rate and how much equity you need to access.

Question 2

Which has lower interest rates: cash-out refinance or home equity loan?

Accepted Answer

Cash-out refinances typically have lower interest rates because they are first-lien mortgages. Home equity loans carry higher rates because they are in second position behind your primary mortgage. However, if your current mortgage rate is very low, a home equity loan may cost less overall since you keep that low rate.

Question 3

How much equity can I access with each option?

Accepted Answer

With a conventional cash-out refinance, most lenders allow up to 80% loan-to-value (LTV). VA loans allow up to 90% and FHA up to 85%. Home equity loans typically allow a combined loan-to-value (CLTV) of 80-85%, meaning your first and second mortgage combined cannot exceed this threshold.

Question 4

Are closing costs higher for cash-out refinance or home equity loan?

Accepted Answer

Cash-out refinances typically have higher closing costs (2-5% of the total loan amount) because you are refinancing your entire mortgage. Home equity loans often have lower closing costs, and some lenders offer no-closing-cost options. However, these may have higher interest rates.

Question 5

Can I deduct the interest on these loans from my taxes?

Accepted Answer

Interest on both cash-out refinances and home equity loans may be tax deductible if the funds are used to buy, build, or substantially improve your home. The Tax Cuts and Jobs Act of 2017 limits the mortgage interest deduction to $750,000 of qualified debt. Consult a tax professional for your specific situation.

Question 6

What credit score do I need for a cash-out refinance vs home equity loan?

Accepted Answer

Cash-out refinances typically require a minimum credit score of 620 for conventional loans, though 680+ gets better rates. Home equity loans often require 660-680 minimum. Both options offer better rates for scores above 740. Your debt-to-income ratio and home equity also factor into approval.

Question 7

How long does it take to close each type of loan?

Accepted Answer

Cash-out refinances typically take 30-45 days because they involve a full mortgage underwriting process. Home equity loans can close in 2-4 weeks since they have simpler documentation requirements. Timeline also depends on your lender and local market conditions.

Question 8

When should I choose a cash-out refinance over a home equity loan?

Accepted Answer

Choose a cash-out refinance when current rates are lower than your existing mortgage rate, when you want one consolidated payment, or when you need to access a larger amount of equity. It can also be beneficial if you want to change other loan terms, such as shortening your loan term.

Question 9

When is a home equity loan better than cash-out refinance?

Accepted Answer

A home equity loan is often better when you have a low interest rate on your current mortgage that you want to keep, when you need a smaller amount of equity, or when you want to close faster with potentially lower closing costs. It keeps your existing mortgage unchanged.

Question 10

What is the difference between a home equity loan and HELOC?

Accepted Answer

A home equity loan provides a lump sum with fixed payments over a set term (5-30 years). A HELOC is a revolving line of credit with variable rates where you draw funds as needed during a draw period (usually 10 years), then repay during a repayment period. HELOCs offer more flexibility but less payment predictability.

Feature	Cash-Out Refinance	Home Equity Loan
How It Works	Replaces your existing mortgage with a larger loan; receive difference as cash	Separate loan using home equity as collateral; keeps existing mortgage intact
Interest Rate Type	Fixed rate (most common) or adjustable	Fixed rate throughout the loan term
Typical Interest Rate	Primary mortgage rates (generally lower)	Higher than first mortgage (second lien position)
Closing Costs	2-5% of loan amount ($6,000-$15,000 on $300K)	2-5% or lower; some lenders offer no closing costs
Impact on Existing Mortgage	Replaces current mortgage entirely	No impact; existing mortgage remains unchanged
Monthly Payments	One payment (larger loan amount)	Two payments (original mortgage + new loan)
Loan-to-Value (LTV) Limits	Up to 80% LTV (conventional); 90% VA; 85% FHA	Up to 80-85% combined LTV (CLTV)
Tax Deductibility	Interest may be deductible if used for home improvements	Interest may be deductible if used for home improvements
Best For	When you can get a lower rate than current mortgage	When you have a low rate on your current mortgage
Funding Time	30-45 days (full refinance process)	2-4 weeks (simpler underwriting)

Feature	HELOC	Home Equity Loan	Cash-Out Refi
How You Get Funds	Draw as needed (like a credit card)	Lump sum at closing	Lump sum at closing
Interest Rate	Variable (fluctuates with market)	Fixed	Fixed or adjustable
Monthly Payment	Varies; interest-only during draw	Fixed amount	Fixed (usually)
Best For	Ongoing expenses, flexibility	One-time large expense	Lower rates, large amounts
Keeps Current Mortgage	Yes	Yes	No (replaces it)

Cash Out Refinance vs Home Equity Loan: Which Is Right for You?

Side-by-Side Comparison

How Cash-Out Refinance Works

Example: Cash-Out Refinance

Advantages

Disadvantages

How Home Equity Loans Work

Example: Home Equity Loan

Advantages

Disadvantages

HELOC vs Home Equity Loan vs Cash-Out Refinance

When to Choose Each Option

Choose Cash-Out Refinance When:

Choose Home Equity Loan When:

Important Consideration for California Homeowners

Common Uses for Home Equity

Home Improvements

Debt Consolidation

Education Expenses

Emergency Reserve

Frequently Asked Questions

Not Sure Which Option Is Right for You?

Licensing and Disclosure

Licensing & Regulatory Information

Related Resources

Sources