Quick Answer

A cash-out refinance replaces your entire mortgage with a new, larger one — you get the difference in cash. A home equity loan or HELOC is a second mortgage that leaves your original mortgage intact. Cash-out refinance is best when you can lower your overall rate; home equity products are better when your current mortgage rate is already low.

Key Takeaways

  • Cash-out refinance resets your mortgage clock — you start a new 15-30 year term
  • If current rates are higher than your mortgage rate, a home equity loan is usually cheaper
  • Cash-out refinances have higher closing costs (similar to a full mortgage)
  • Home equity loans/HELOCs keep your existing low-rate mortgage intact
  • All three options use your home as collateral

Understanding Your Three Options

Option 1: Cash-Out Refinance

Replace your current mortgage with a new, larger one. You receive the difference between the new loan amount and your old balance as cash.

Example: You owe $200,000 on a home worth $400,000. You refinance into a $280,000 loan and receive $80,000 in cash (minus closing costs).

Option 2: Home Equity Loan

Take out a separate, second mortgage with fixed rate and term. Your original mortgage stays unchanged.

Example: You keep your $200,000 mortgage at 3.5% and take a $80,000 home equity loan at 8.5%.

Option 3: HELOC

Open a revolving line of credit secured by your home. Draw funds as needed during the draw period.

Example: You keep your $200,000 mortgage and open a $100,000 HELOC, drawing $80,000 as needed.

When Cash-Out Refinance Wins

  1. You can lower your rate: If your current mortgage is at 6% and you can refinance at 5%, the savings on your entire balance may offset closing costs
  2. You want one payment: Instead of managing two loans, you have a single monthly payment
  3. You need a large amount: Cash-out refinances often allow higher LTV ratios
  4. Simplifying debt: Consolidating your mortgage and equity extraction into one loan

When Home Equity Loan/HELOC Wins

  1. You have a low mortgage rate: If your current rate is 3%, replacing it with an 8% mortgage makes no sense
  2. You need less than $50,000: Closing costs on a refinance may not justify a small cash-out
  3. You want to preserve your mortgage timeline: Keep the years you’ve already paid
  4. Flexible access (HELOC): You need funds over time, not all at once

Cost Comparison Example

Your situation: $200,000 mortgage at 3.5%, home worth $400,000, need $60,000.

FactorCash-Out RefiHEL (2nd)HELOC
New Rate6.5% on $260K3.5% on $200K + 8.5% on $60K3.5% on $200K + 8% on $60K
Monthly Payment$1,643$898 + $744 = $1,642$898 + $400 (draw)
Closing Costs$5,000-8,000$1,500-3,000$0-500
Total Interest (10yr)~$103,000~$73,000~$65,000-90,000

In this scenario, keeping the low-rate mortgage and using a home equity product saves significantly.

FAQ

Can I do a cash-out refinance later? Yes, but rates may be different. Consider locking in today’s rates if they’re favorable.

What’s the maximum I can borrow? Cash-out refinances typically allow up to 80% LTV. Home equity loans/HELOCs may go to 85-90% combined LTV.

Does a cash-out refinance restart my mortgage? Yes, you start a new term. If you had 20 years left on a 30-year mortgage, you’d restart at year 0.

Are closing costs tax deductible? Generally no, but they may be added to your cost basis when you sell the home.