You’ve got equity and a plan—now the question is cash‑out refinance vs. home equity loan. Both unlock equity, both use your home as collateral, and both carry closing costs. The right pick comes down to your current first‑mortgage rate, how long you’ll keep the loan, and how predictable you want the payment to be.
The quick snapshot
- Cash‑out refinance: Replaces your existing first mortgage with a new, larger one. One payment, usually a lower rate than second‑lien options, but you restart the mortgage clock and pay full refinance closing costs.
- Home equity loan (second mortgage): Adds a separate, fixed‑rate loan on top of your current mortgage. Keeps your great first‑mortgage rate intact, gives predictable payments, and often has lower total fees than a full refi—though the rate can be higher than first‑lien pricing.
How each works
Cash‑out refinance
You take a new first mortgage large enough to pay off your existing loan plus cash to you. Terms commonly run 15–30 years. Because it’s the primary lien, pricing can be more favorable—but you’re resetting amortization, which increases total interest if you stretch the term.
Home equity loan
You receive a lump sum at a fixed rate and repay over a set term (often 5–20 years). Your current first mortgage stays as‑is. This is ideal when you’ve locked a stellar first‑mortgage rate you don’t want to touch.
Cost and payment differences
Factor | Cash‑Out Refi | Home Equity Loan
|
Position | First lien | Second lien
|
Typical rate | Often lower than second liens | Often higher than first‑lien pricing, but fixed
|
Closing costs | Higher: full refinance fees | Generally lower; smaller package
|
Payment | One combined mortgage payment | Two payments (first mortgage + new fixed loan)
|
Term impact | Resets mortgage amortization | Leaves existing mortgage term untouched
|
Best for | Large cash needs, consolidating to one payment | Keeping a low first‑mortgage rate; defined lump‑sum needs
|
Eligibility and limits
Both options look at credit score, debt‑to‑income (DTI), income stability, and property type/occupancy. Lenders cap borrowing by loan‑to‑value (LTV) for cash‑out and combined LTV (CLTV) for second liens. Common caps land around 80% CLTV, though overlays vary by lender and property.
When a cash‑out refinance can win
- Your current first‑mortgage rate is high, and today’s rate is meaningfully lower.
- You want one payment and a longer term to reduce monthly outflow.
- You’re pulling a large amount of cash and want first‑lien pricing.
- You plan to stay long enough to hit a break‑even on closing costs.
Watch out for: stretching to a 30‑year term just to “lower the payment.” You might pay more interest over time than a shorter second‑lien alternative.
When a home equity loan is the smarter move
- You already have a low first‑mortgage rate you don’t want to lose.
- You need a defined lump sum (e.g., major remodel, tuition, debt payoff) and want fixed, predictable payments.
- You prefer shorter amortization (5–15 years) to clear the debt faster.
- You want to minimize upfront costs compared with a full refinance.
Watch out for: payment stacking—make sure the second payment plus your current mortgage still fits comfortably under conservative budget assumptions.
How to do the math (without melting your spreadsheet)
- Total cost of credit. Compare APR to APR, not just headline rates.
- Break‑even point. Divide total closing costs by the monthly savings (or cost difference) to see how long it takes to break even.
- Term comparison. If a refi resets to 30 years, also model a same‑payoff scenario (e.g., make extra principal payments) so you’re comparing apples to apples.
- Stress test. If income dips or expenses rise, which structure keeps you safest?
For borrowers exploring different lending options, platforms like Tiger Loans offer a range of solutions tailored to various financial needs and can help you compare structures, fees, and timelines side by side.
Tax treatment (the short version)
Interest on either loan may be deductible only if funds are used to buy, build, or substantially improve the home securing the loan. Using equity for debt consolidation or general expenses typically doesn’t qualify. Speak to a tax professional before you assume any deduction.
Risks and pitfalls to price in
- Your home is collateral. Missed payments risk foreclosure—budget conservatively.
- Refi reset. A cash‑out can increase lifetime interest if you extend the term.
- Fee drag. High closing costs can erase the benefit of a slightly lower rate.
- Prepayment penalties or recapture clauses. Rare, but check your note and disclosures.
- Market swings. High CLTV leaves less cushion if values soften.
Consider these alternatives
- HELOC: Revolving line with variable rate; borrow as needed and, in some plans, lock portions at fixed rates.
- Personal loan: Unsecured and faster, but smaller amounts and higher rates.
- For eligible borrowers: You may also qualify for VA Loans that offer favorable terms compared with many conventional options and could reduce the need for a second lien.
Bottom line
- If your current mortgage rate is excellent, protect it and consider a home equity loan for fixed, predictable payments.
- If you can materially lower your first‑mortgage rate and want one payment, a cash‑out refinance may win—provided the break‑even makes sense.
- Run the numbers both ways, stress‑test your budget, and pick the structure that still works when life—and interest rates—get loud.
