Cash-out refinance vs. home equity loan

They say your home is where your heart is. And after recent growth in the real estate market, it’s also where you may find a significant asset.

Both cash-out refinancing and home equity loans use your house as collateral in exchange for a cash infusion. But which one is best for you depends on how much equity you have and what interest rate you qualify for.

How do cash-out refinancing and home equity loans compare?

Cash-out refinancing takes your current home loan and refinances it into a larger mortgage, providing you with a cash amount equivalent to the increase in your mortgage amount. You can choose from a fixed or adjustable rate as well as numerous other terms. The result is an entirely new loan agreement with a different term, interest rate and repayment schedule.

In contrast, a home equity loan taps into your home’s equity to create a new loan that’s in addition to your current mortgage. If approved, you’re paying two loans each month. This option typically comes with a fixed interest rate but offers a range of repayment terms.

Choose a cash-out refinance if:

You’re eligible for a lower interest rate than you have on your current mortgage. For example, if you took out a mortgage with a 6% interest rate but are now eligible for a 4% interest rate on a new cash-out refinance mortgage, you can save money on interest in the long run.

Avoid this loan type if:

You can’t afford the closing costs. Cash-out refinancing generally has much higher fees and closing costs than home equity loans. And while some lenders will let you roll those costs into the loan, that means you’ll end up paying interest on the fees.

Refinancing your mortgage to consolidate debt

Choose a home equity loan if:

You have a lot of equity built up in your home and you’re not eligible for a lower interest rate. Home equity loans generally require more equity to qualify, and you may need a better credit score. But if interest rates have gone up since you took out your original mortgage, a home equity loan will generally be a better financial move.

Avoid this loan type if:

You have trouble keeping track of multiple bills. You’ll need to pay back two mortgages, and you could lose your home if you default on either one.

Compare home equity lenders

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Name	Product	Loan products offered	State availability	Min. credit score
Axos Bank (NMLS #524995)		Conventional, Jumbo, FHA, VA, Home Equity/HELOC, Refinance	Available in all states	620	Purchase, refinance, and home equity options available with lender fees as low as $0 (restrictions apply).	See rates More Info		loading Fetching your data...
SoFi (NMLS #1121636)		Conventional, Home equity, Refinance	Not available in: AK, HI, MO, NH, NM, NY, SD, WV	620	No hidden fees, multiple loan terms, and member discounts available.	See rates More Info		loading Fetching your data...
Figure (NMLS #1717824)		HELOC	Not available in: DE, HI, KY, MD, NY, SC, TX, UT, WV	620	Speedy prequalification, minimal fees and a wide range of loans and terms with this HELOC lender.	See rates More Info		loading Fetching your data...
LendingTree (NMLS #1136)		HELOC, Home Equity loans	Available in all states	620	Connect with vetted lenders quickly through this free online marketplace.	See rates More Info		loading Fetching your data...
Hometap equity partners		Home equity investment	Only available in: AZ, CA, FL, MA, MD, MI, MN, NC, NJ, NY, OR, VA	600	Sell a portion of your home's equity for cash without monthly payments or hurting your credit score.	See rates More Info		loading Fetching your data...

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Bottom line

Any decision that involves a significant amount of money and repayment responsibility can be stressful. However, by comparing the benefits and risks of cash-out refinancing and home equity loans, you’re better positioned to narrow down the best loan to leverage your home’s equity.

Frequently asked questions

• Will my credit score affect a cash-out refinance or home equity loan approval?

  Yes. Even if you’ve built up enough home equity for cash-out refinancing, you’ll need to meet your potential lender’s credit and debt-to-income requirements. Many lenders look for scores of 650 or higher. Ask about your lender’s eligibility requirements before applying for a loan.

• Is a home appraisal required for a cash-out refinance or home equity loan?

  Yes, a home appraisal is required for both. An appraisal establishes your home’s value. From there, your lender can tell you the percentage of that value you’re allowed to borrow against. Plus, they can verify how much collateral you’re putting up in exchange for these funds.

  If you’ve paid for an appraisal recently, your lender may allow you to use it, rather than require you to pay for a new one.

• Can you get a cash-out refinance on an FHA loan or VA loan?

  Yes, it’s possible to do a cash-out refinance on either type of loan. For an FHA loan, you can cash out up to 85% of your home’s current value, while a VA loan cash-out refinance lets you take up to 100% of your home’s current value. Also, an FHA cash-out refinance typically doesn’t require as much documentation as a traditional cash-out refinance.