Cash-Out Refinance vs. HELOC vs. Home Equity Loan: Which Option Makes Sense?

If you have built equity in your home, there are several ways you may be able to access it without selling your property.

Three common options are a cash-out refinance, home equity line of credit (HELOC), and home equity loan.

Although all three can provide access to home equity, they work very differently. The right choice depends on factors including your existing mortgage, current interest rates, how much money you need, how you intend to use it, your preferred payment structure, available equity, qualification requirements, and how long you expect to keep the financing.

Cash-Out Refinance

A cash-out refinance replaces your existing mortgage with a new, larger mortgage. After paying off the existing loan and applicable costs, the remaining proceeds are generally available to the homeowner.

A cash-out refinance may be worth considering when replacing the existing first mortgage makes financial sense in addition to providing access to equity.

It may be useful for homeowners who:

• Want one mortgage rather than a first mortgage plus separate equity financing
• Need access to a substantial amount of equity
• Have an existing mortgage rate that makes refinancing the entire balance worth evaluating
• Prefer a single monthly mortgage payment

One of the most important considerations is the rate and terms of your existing first mortgage.

If you already have an attractive first-mortgage rate, replacing the entire balance with a new mortgage at a materially higher rate could increase the borrowing cost on money you had already financed at the lower rate.

In that situation, second-lien financing such as a HELOC or home equity loan may be worth comparing because it can allow the existing first mortgage to remain in place.

Home Equity Line of Credit (HELOC)

A HELOC is a revolving line of credit secured by your home.

Rather than receiving the entire available amount at once, a homeowner can generally borrow, repay, and potentially borrow again during the applicable draw period, subject to the terms of the HELOC.

A HELOC may be useful for:

• Home renovations completed in stages
• Expenses occurring over time
• Projects with uncertain final costs
• Homeowners who want to preserve their existing first mortgage
• Borrowers who value flexibility in when they access their available credit

Many HELOCs have variable interest rates, which means the interest rate and required payment may change over time. HELOC terms vary significantly by lender, so borrowers should understand the draw period, repayment period, rate structure, fees, minimum payments, and other applicable terms.

Home Equity Loan

A home equity loan is generally a closed-end loan secured by the equity in your home and is often structured as a second mortgage.

Unlike a HELOC, the borrower typically receives the loan proceeds as a lump sum and repays the balance over a specified term.

Depending on the lender and program, fixed-rate home equity loans may be available, providing a predictable principal-and-interest payment.

A home equity loan may be worth considering if you:

• Know approximately how much money you need
• Prefer receiving the funds at one time
• Want a predictable repayment schedule
• Prefer a fixed rate when available
• Want to preserve the terms of your existing first mortgage

So Which Option Is Better?

There is no universally superior way to access home equity.

A cash-out refinance may make sense when replacing the existing first mortgage works financially and the homeowner wants to consolidate the borrowing into one mortgage.

A HELOC may make sense when flexibility is important and funds will be needed at different times.

A home equity loan may make sense when the homeowner wants a lump sum, a defined repayment schedule, and the ability to leave the existing first mortgage in place.

But comparing monthly payments alone isn't enough.

A proper comparison should consider:

• The interest rate and remaining term of your existing mortgage
• The rate and APR of the proposed financing, when applicable
• Fixed versus variable rates
• Closing costs and fees
• Total amount borrowed
• Monthly payment
• Repayment period
• Expected time you will keep the financing
• How quickly the debt will be repaid
• The effect on your home equity

The Bottom Line

Home equity can be a valuable financial resource, but accessing it creates new debt secured by your home.

The question isn't simply, "Which option has the lowest payment?"

Ready Rate can help you compare available mortgage and home-equity financing options based on your individual situation.