Quick answer

A cash-out refinance replaces your current mortgage with a larger mortgage and delivers the excess to you in cash. A home equity loan (sometimes called a fixed-rate second mortgage) is an additional loan on top of your existing mortgage that uses your home as collateral. Both let you access equity, but they differ in interest rates, closing costs, loan structure, tax treatment, and how they affect your long-term mortgage timeline.

How each product works (step-by-step)

  • Cash-out refinance

  • You apply to refinance your existing first mortgage for a higher principal balance.

  • The lender pays off your old mortgage and issues a single new mortgage for the larger amount.

  • You receive the cash difference minus closing costs and any payoff amounts.

  • Your mortgage rate, term, and monthly payment may change depending on the new loan.

  • Home equity loan

  • You keep your existing first mortgage unchanged.

  • You apply for a separate loan secured by your home’s equity, usually with a fixed rate and fixed monthly payment.

  • You receive a lump sum at closing and make two payments (or a combined payment) each month: the first mortgage and the home equity loan.

Key differences explained

  • Rate and monthly payment: Cash-out refinances generally offer first-mortgage rates, which are typically lower than second-mortgage rates. Home equity loans usually carry higher fixed interest rates because they are junior to the first mortgage.
  • Loan term and amortization: A cash-out refinance effectively resets the amortization of your mortgage (for example, moving from 10 years left back to a new 30-year schedule if you choose). A home equity loan lets you add a shorter, separate term without changing the remaining term on your first mortgage.
  • Closing costs: Cash-out refinances normally have higher closing costs (appraisal, title, origination, recording fees) similar to an original mortgage. Home equity loans often show lower closing costs, though fees vary by lender.
  • Tax treatment: Interest on either loan may be tax-deductible only if used to buy, build, or substantially improve the residence that secures the loan; other uses (like paying off credit cards) typically do not qualify under the Tax Cuts and Jobs Act rules. Consult IRS guidance for specifics (see IRS Publication 936 and www.irs.gov).
  • Loan-to-value (LTV) limits: Lenders often limit combined LTV (first mortgage plus second lien) to a percentage (commonly 80%–90%), which affects how much you can borrow.

(For more on refinancing costs and tax considerations see our guide on refinancing mortgages.)

Pros and cons — clear checklist

  • Cash-out refinance

  • Pros: Lower first-mortgage rates, single monthly payment, may be cheaper per-dollar borrowed for large sums, can simplify payments.

  • Cons: Higher closing costs, resets mortgage clock (may extend years to repay unless you shorten the term), puts the entire mortgage balance at risk if you default.

  • Home equity loan

  • Pros: Faster closing in many cases, predictable fixed rate and term for the second loan, keeps original mortgage term intact, usually lower upfront fees.

  • Cons: Higher interest rate than a refinance, creates a second-lien position (higher risk to lender), you’ll manage two loans unless combined payment arranged.

Real-world examples and math

Example A — Cash-out refinance

  • Home value: $400,000
  • Remaining first mortgage: $160,000
  • Refinance to 75% LTV = $300,000 loan
  • Cash to borrower before costs = $300,000 – $160,000 = $140,000
  • If new 30-year rate = 6.00% (example), monthly payment will reflect the full $300,000 amortized over the chosen term.

Example B — Home equity loan

  • Home value: $400,000
  • Remaining first mortgage: $160,000
  • Borrower takes a $100,000 home equity loan (second lien) at 8.00% for 15 years
  • Borrower now has: first mortgage payments + separate $100,000 loan payment. Interest cost per year and overall interest paid will likely be higher than a cash-out amount borrowed at a first-mortgage rate.

Break-even considerations

  • Compare total borrowing cost (interest + closing costs) over the period you expect to hold the funds.
  • Cash-out refinancing may be more economical for large sums and when you can secure a lower rate that offsets closing costs. A home equity loan can be cheaper for smaller loans or when you do not want to extend the mortgage term.

Eligibility and underwriting differences

  • Credit score, debt-to-income ratio, and verified income matter for both products. Lenders typically prefer credit scores of 620+ for home equity loans and 640+ for cash-out refinances, but competitive rates and approvals are more likely above 700.
  • Combined loan-to-value (CLTV) limits vary by lender and loan type. Many conventional lenders limit CLTV to 80% for cash-out refis or second liens, but some programs allow higher ratios with mortgage insurance.
  • Documentation: Cash-out refinances usually require full mortgage underwriting (income, asset verification, title search, appraisal). Home equity loans may have streamlined underwriting at some banks, though appraisals and title work are still common.

Timing and speed

  • Typical timeline: a home equity loan or HELOC can close in a few weeks; a full cash-out refinance can take 30–45 days or longer depending on appraisal and title issues.
  • If you need cash quickly for a short-term project, a home equity loan or HELOC often gets funds to you sooner.

Tax and regulatory notes (2025)

  • Interest deduction: Under current federal tax rules, mortgage interest on debt used to buy, build, or substantially improve your primary or second home may be deductible (see IRS guidance). Interest on home equity debt used for other purposes is disallowed for many taxpayers under rules from the Tax Cuts and Jobs Act. Confirm current rules with IRS Publication 936 and a tax advisor (www.irs.gov).
  • Consumer protections: The Consumer Financial Protection Bureau and state laws regulate disclosures and terms for mortgage and home-equity products—shop lenders and compare the Loan Estimate and Truth-in-Lending disclosures (cfpb.gov).

Risks and common mistakes I see in practice

  • Reborrowing and lifestyle drift: Homeowners treat tapped equity like free cash and re-borrow repeatedly without a repayment plan. This can erode home equity and increase default risk.
  • Ignoring the mortgage clock: Refinancing back to a 30-year term to lower payments may increase lifetime interest and delay your path to being mortgage-free.
  • Underestimating closing costs: Cash-out refis have higher upfront costs that can wipe out expected savings if you keep the loan for only a short time.
  • Using home equity to cover recurring expenses: Using mortgage-backed loans for short-term consumption (vacation, living expenses) rather than investments or home improvements often worsens financial health.

Decision framework — which to choose?

  1. Define the purpose: home improvement vs debt consolidation vs large one-time expense.
  2. Size the need: if you need a large lump sum (often >$50k) and can get a lower first-mortgage rate, a cash-out refinance may be better.
  3. Term preference: if you don’t want to extend your mortgage amortization, consider a home equity loan with a separate fixed term.
  4. Run the numbers: include closing costs, interest rate differences, term change, and expected retention period. Calculate break-even months.
  5. Shop and compare: get Loan Estimates from multiple lenders and compare APR, fees, and prepayment penalties.

Alternatives and related products

  • Home Equity Line of Credit (HELOC) for flexible access to funds (see our HEL0C vs home equity loan guide).
  • Rate-and-term refinance if your primary goal is a lower rate without tapping cash.
  • Personal loan for small amounts to avoid using home as collateral.

For deeper reading on tapping equity and tax/cost tradeoffs, see our article on refinancing mortgages to tap home equity (Refinancing Mortgages to Tap Home Equity: Pros, Costs and Tax Considerations) and our comparison of HELOC vs home equity loan (HELOC vs Home Equity Loan: Which Is Right for Your Project?).

(Internal links: Refinancing guide: https://finhelp.io/glossary/refinancing-mortgages-to-tap-home-equity-pros-costs-and-tax-considerations/; HELOC comparison: https://finhelp.io/glossary/heloc-vs-home-equity-loan-which-fits-your-project/)

Practical checklist before you apply

  • Verify current loan payoff and remaining term.
  • Estimate CLTV after the cash-out and ensure it meets lender limits.
  • Request Loan Estimates from at least three lenders.
  • Ask about prepayment penalties and whether you can make extra principal payments.
  • Check whether the intended use of funds impacts interest deductibility and consult a tax pro.

Final advice from my experience

In my 15 years working with homeowners, I’ve found cash-out refinances work best when a borrower needs a large amount, wants a single payment, and can obtain a lower first-mortgage rate that offsets closing costs. Home equity loans are often the smarter choice for smaller projects or when homeowners want predictable, short-to-mid-term repayment without disturbing their existing mortgage term. Either way, do the math before you sign.

Sources and further reading

Professional disclaimer

This article is educational and does not constitute personalized financial, legal, or tax advice. Terms and tax rules change; consult a qualified mortgage professional and a tax advisor to evaluate your specific situation.