Home Equity Loan vs Cash-Out Refinance

Looking to pay down debt? Use your home’s equity—the difference between what you owe on your mortgage and the value of the property.  A home equity loan will allow you to borrow against the equity you’ve built in your home to make repairs or consolidate your debt. And, since it’s secured by your mortgage, you’re guaranteed a lower rate. Typically, there are two options:

    • Cash-out refinance
    • Home equity loan

How does a cash-out refinance work?

Unlike most refinances that replaces your existing mortgage with a new one for the same amount, a cash-out refinance replaces your existing mortgage with a new one for a larger amount. The additional amount you finance—the equity you’ve built in your home—goes to you in tax-free cash that you can spend on anything you choose.

For example, say you owe $80,000 on a house that is worth $200,000 and you need $50,000 to do some remodeling. You could refinance for $130,000 (the $80,000 you owe + $50,000 you want) to walk away with $50,000 in cash and a new interest rate for the full amount.¹

How does a home equity loan work?

A home equity loan is essentially a second mortgage. Instead of refinancing your existing mortgage for a larger amount and a single payment, you’ll finance a second loan with repayment terms ranging from 5 to 15 years just for the amount of the equity.

So, rather than refinancing $130,000 per the example above, you’ll only have to finance the difference $50,000.

What is the best choice for me: a home equity loan or a cash out refinance?

If you want a:

  • Shorter repayment term & lower rate
    OR
  • One loan, one payment
    We recommend: cash-out refinance
  • Low fixed-rates
    OR
  • Tax break
    Recommendation: home equity loan

How do I choose?

Both options use your homes equity as a way to finance any repairs or pay down debt and offer the potential for lower rates. What it boils down to is whether or not you want one monthly payment or two.

If you’re not sure which option to go for, schedule a no cost, no obligation consultation with one of our home loan experts.


¹We cannot and do not guarantee payment examples applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes.

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