Refinance vs. Home Equity Loan: Which Is Better?
If you need to access your home equity or lower your rate, you have two main options: a cash-out refinance or a home equity loan (or HELOC). After 17 years helping homeowners across the country weigh this exact decision, I can tell you the right answer depends almost entirely on what your current first-mortgage rate is. Let me explain.
Cash-Out Refinance
A cash-out refinance replaces your entire mortgage with a new, larger loan. You get the difference in cash.
Pros:
- One loan, one payment
- May get a lower rate on your entire mortgage
- Fixed rate available for the life of the loan
- Potentially tax-deductible interest if used for home improvements
Cons:
- Closing costs on the entire loan amount
- Resets your mortgage term
- Takes longer to process than a home equity loan
Home Equity Loan or HELOC
A home equity loan is a second loan on top of your existing mortgage. A HELOC (Home Equity Line of Credit) works like a credit card secured by your home.
Pros:
- Your existing mortgage stays in place
- Lower closing costs (on a smaller loan amount)
- Faster to close
- HELOC gives you flexible access to funds as needed
Cons:
- Two payments to manage
- Home equity loan or HELOC rates may be higher than first mortgage rates
- HELOCs have variable rates that can increase
When to Choose a Cash-Out Refinance
- You can also lower your first mortgage rate at the same time
- You want one payment instead of two
- You want a fixed rate on the entire amount
- The cash-out amount is large relative to your current loan
When to Choose a Home Equity Loan or HELOC
- Your current mortgage rate is already very low and you do not want to lose it
- You only need a smaller amount of cash
- You want faster access to funds
- You want the flexibility of a HELOC credit line
How to Decide
Look at your current mortgage rate first. If you can lower it by refinancing while also getting cash out, the refinance often makes more sense. If your current rate is already great and you just need some extra cash, a home equity loan or HELOC may be the simpler path.
Check your rate at Lendtrain to compare your refinance options. Run the refinance break-even point math to make sure the cash-out numbers work.
Rate quotes are estimates based on the credit score you enter. Actual rates may differ based on verified credit, income, and property details. Lendtrain (NMLS# 1844873) is a licensed mortgage broker. Equal Housing Opportunity.