Home Equity Loan vs Cash-Out Refinance: Which Is Better for You?
Last updated 03/12/2026 by
Andrew Latham
Edited by
Andrew Latham
Summary:
A home equity loan (HEL) adds a second, fixed-rate mortgage on top of your existing one, giving you a lump sum with predictable payments. A cash-out refinance replaces your first mortgage with a new (often larger) one and gives you cash at closing. If your current first-mortgage rate is low, a HEL usually preserves it. If today’s market rate is meaningfully lower than your existing rate—or you want a single payment—cash-out may be better.
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Quick Definitions
- Home Equity Loan (HEL): A fixed-rate second mortgage with a lump-sum payout and a set term (e.g., 5–20 years). Your original first mortgage stays in place.
- Cash-Out Refinance: Replaces your first mortgage with a new, larger one—pays off the old loan and hands you the difference in cash.
HEL vs Cash-Out: Side-by-Side
| Feature | Home Equity Loan (HEL) | Cash-Out Refinance |
|---|---|---|
| What happens to existing mortgage? | Stays in place (you add a second loan) | Replaced by a new first mortgage |
| Rate type | Usually fixed | Fixed or variable (ARM), first-mortgage pricing |
| Best when | Your current first-mortgage rate is better than market rates | Today’s rate is lower than your current first-mortgage rate |
| Closing costs | Typically lower than a full refinance | Generally higher (full first-mortgage closing costs) |
| Payment structure | Two payments (first + HEL) | One combined mortgage payment |
| Typical CLTV caps | ~80%–85% CLTV | ~80% LTV (varies by program/occupancy) |
| Timeline | Often faster | Usually longer (full underwriting + closing) |
Related: Closing Costs on Home Equity Loans
Which Is Cheaper? It Depends on Rates & Fees
If your current first-mortgage rate is low: A HEL lets you keep it. Even if the HEL’s rate is higher than a cash-out rate, you’re applying it to a smaller balance (only the cash you need), which can be cheaper overall.
If today’s rates are lower than your existing mortgage: A cash-out refi can reduce the rate on your entire balance and give you cash. The bigger base (whole mortgage) can magnify savings—just weigh higher closing costs and a potentially longer term.
Break-Even Considerations
- Cash-Out: Higher upfront costs (appraisal, title, lender, escrow) paid to reset your first mortgage. Worth it if the rate drop on your total balance + cash-out savings exceed costs within the time you’ll keep the loan.
- HEL: Lower typical fees; you pay a (usually) higher rate than prime first-mortgage pricing, but only on the new amount. Good for shorter horizons or smaller cash needs.
Scenarios
Scenario 1: Low First-Mortgage Rate
You have 3.25% on $300,000 and need $60,000. Today’s cash-out rate is 6.75%. A HEL at 8.50% on just $60,000 may be smarter than resetting the entire $300,000 at 6.75%.
Scenario 2: High First-Mortgage Rate
You have 7.00% on $300,000 and need $60,000. A cash-out at 6.25% on $360,000 could lower your whole rate and consolidate to a single payment—despite higher closing costs.
Eligibility & Limits
- HEL: Common caps around 80%–85% CLTV; fixed payments help DTI planning.
- Cash-Out: Many programs cap at ~80% LTV on primary residences; lower caps for second homes/investments.
Related: How Much Equity Do You Need?
When HEL Wins
- Your existing first-mortgage rate is hard to beat.
- You need funds quickly and want predictable fixed payments.
- You prefer lower closing costs and to keep your current first mortgage intact.
When Cash-Out Wins
- Market rates are lower than your current mortgage rate.
- You want one payment and possibly a longer term to manage monthly cash flow.
- You’re comfortable with higher closing costs for potentially larger total savings.
Pros & Cons Summary
Decision Checklist
- Is today’s market rate lower than your current first-mortgage rate?
- How long will you keep the home/loan (break-even horizon)?
- Do you need funds quickly (timing constraints)?
- Are you comfortable with two payments, or do you prefer one?
- What are the exact total closing costs for each option?
Bottom Line
Choose a HEL when you want to preserve a low first-mortgage rate and borrow a defined amount quickly with lower typical fees. Opt for a cash-out refinance when market rates are lower than your current mortgage and you prefer one consolidated payment—even if it means higher upfront costs.
Related Home Equity Loan Articles
- Home Equity Loan Interest Rates – How lenders set rates and what’s average.
- Closing Costs on Home Equity Loans – Typical totals and how to save.
- How to Qualify for a Home Equity Loan – Credit, DTI, equity, and documentation.
- How Much Home Equity Do You Need for a Loan? – CLTV targets and examples.
- Steps in the Home Equity Loan Process – From application to funding.
Key Takeaways
- HEL preserves your existing first-mortgage rate; cash-out resets it.
- If your current rate is low, a HEL often costs less overall—especially for smaller cash needs.
- If market rates beat your current rate, a cash-out can lower your total rate and simplify to one payment.
- Always compare exact fees, rates, and timeline to find your break-even point.
Looking for the right lender? Compare the best home equity loan companies on
SuperMoney. See personalized offers, review rates and terms, and find a loan that fits your financial goals—all without affecting your credit score.
SuperMoney. See personalized offers, review rates and terms, and find a loan that fits your financial goals—all without affecting your credit score.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.
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