A home equity loan and a cash-out refinance both allow eligible homeowners to access home equity, but they change the mortgage structure in different ways. This article focuses on cash-out refinancing rather than refinancing that only changes the existing loan’s rate or term.
A home equity loan usually leaves the existing first mortgage in place and creates a separate loan with its own payment. A cash-out refinance replaces the first mortgage with a larger new mortgage, uses part of the proceeds to pay off the old loan, and provides the remaining eligible amount in cash.
The better option depends on your existing mortgage, requested amount, available equity, new rate-and-cost combination, repayment term, closing expenses, and whether you prefer one mortgage payment or two.
Key Takeaways A home equity loan generally provides a lump sum and commonly has a fixed interest rate. When a first mortgage already exists, the home equity loan usually becomes a second mortgage. A cash-out refinance replaces the current first mortgage with a larger new mortgage. A home equity loan may preserve the terms of an existing first mortgage. A cash-out refinance may combine the current mortgage and additional borrowing into one loan payment. Home equity loans and cash-out refinances are secured by the property. Failure to repay either loan could lead to foreclosure. Qualification generally depends on credit, income, debts, property value, title, insurance, and available equity. Homeowners should compare APR, payment, closing costs, net proceeds, repayment period, and total interest—not only the amount available. Refinancing may restart or extend the mortgage repayment timeline. Most qualifying non-purchase mortgages secured by a principal residence provide a three-business-day right of rescission. Interest is not automatically tax deductible simply because the loan is secured by a home. Important Note: Home equity and refinancing requirements vary by lender, borrower, property, occupancy, lien position, state, and market conditions. Loan amounts, rates, APRs, fees, valuation methods, equity requirements, and underwriting results are not guaranteed.
What Is Home Equity? Home equity is the difference between the property’s current value and the total debt secured by the property.
A simplified formula is:
Property value − total debt secured by the property = estimated gross equity
Illustrative Equity Example Assume:
Estimated property value: $500,000 Current first mortgage balance: $300,000 Existing HELOC balance: $20,000 Estimated gross equity:
$500,000 − $300,000 − $20,000 = $180,000
The homeowner has approximately $180,000 in gross equity under this simplified calculation.
That does not mean the full $180,000 can be borrowed. The lender generally requires a portion of the equity to remain after the new loan is included.
Illustrative Example Disclosure: This example is for educational purposes only. Actual value, eligible equity, lien balances, closing costs, credit, income, property type, occupancy, and lender requirements determine the amount available.
What Is Borrowable Home Equity? Borrowable equity is the portion of gross equity that fits within the lender’s loan-to-value or combined loan-to-value requirements.
The lender may also approve less because of:
Qualifying income Monthly debts Credit history Property type Occupancy Loan-size restrictions Lien position Available mortgage program Required reserves Equity supports the collateral side of the application. The borrower must still demonstrate the ability to repay the proposed obligation.
What Is a Home Equity Loan? A home equity loan is a closed-end loan secured by the equity in a home.
The borrower generally receives the approved proceeds as one lump sum and repays the loan through scheduled installments. Home equity loans usually have fixed interest rates, although the exact terms depend on the lender and product.
When It Becomes a Second Mortgage If the property already secures a first mortgage, the home equity loan commonly becomes a second mortgage or junior lien.
The homeowner then generally has:
The existing first mortgage The new home equity loan Two separate scheduled payments “Second mortgage” refers to lien priority—not necessarily when the loan was obtained or the size of its payment. If the property is sold after a default, the first lien is generally paid before the junior lien.
What If the Home Is Paid Off? When no existing mortgage is secured by the property, a home equity loan may become the new first lien.
The transaction can still be described as a home equity loan because the homeowner is borrowing against the property’s equity.
What Is a Cash-Out Refinance? A cash-out refinance replaces the existing first mortgage with a larger new mortgage.
Part of the new loan pays off the current mortgage. After applicable closing costs, lien payoffs, and other required amounts, the remaining eligible proceeds are provided to the borrower.
A simplified structure is:
New mortgage − existing mortgage payoff − applicable costs and payoffs = estimated cash proceeds
Illustrative Cash-Out Example Assume:
New mortgage amount: $360,000 Existing mortgage payoff: $300,000 Closing costs and other required payoffs: $9,000 Estimated cash proceeds:
$360,000 − $300,000 − $9,000 = $51,000
The homeowner would receive approximately $51,000 under this simplified example.
Illustrative Example Disclosure: Actual proceeds depend on the approved loan amount, payoff statement, title, appraisal, credit, income, closing costs, prepaid expenses, escrow requirements, property, and underwriting.
Home Equity Loan vs. Cash-Out Refinance Feature
Home equity loan
Cash-out refinance
Existing first mortgage Usually remains in place Paid off and replaced Lien position Commonly a second lien Commonly becomes the new first lien Number of mortgage payments Usually two Usually one after old liens are paid Funds Lump sum Lump sum after payoff and costs Rate structure Commonly fixed Fixed or adjustable, depending on product Loan amount priced Additional equity loan Entire new first mortgage Existing mortgage terms Preserved Replaced Repayment term Separate term New term begins Closing costs Apply to the second loan Apply to the new first mortgage Equity calculation Commonly uses CLTV Commonly uses new first-mortgage LTV Main consideration Cost of adding a second loan Cost of replacing the entire first mortgage
Neither structure is automatically less expensive. The comparison depends on complete written terms.
The Most Important Difference: Preserve or Replace the First Mortgage The key decision is whether you want to keep your existing first mortgage.
A Home Equity Loan Preserves It A home equity loan may be worth reviewing when the current first mortgage has terms you would prefer not to replace.
The new borrowing applies only to the home equity loan amount. However, the homeowner must manage a separate payment, and second-lien pricing may differ from first-mortgage pricing.
A Cash-Out Refinance Replaces It A cash-out refinance changes the entire first-mortgage balance.
This may make sense when the homeowner wants:
One mortgage payment A different mortgage term A different loan program Removal of an existing borrower, when legally and financially permitted Consolidation of an existing first and second mortgage A larger amount of cash than another available product provides Replacing the entire first mortgage can also extend the amount of time required to repay the home. The CFPB cautions homeowners to consider both the new payment and the possibility of a longer repayment period.
Compare the Existing First Mortgage Carefully Before refinancing, document:
Current principal balance Current interest rate Remaining term Remaining scheduled payments Current mortgage insurance Prepayment provisions Escrow balance Current monthly payment Expected payoff amount Then compare the proposed new first mortgage with the existing loan.
A cash-out refinance may provide additional funds but also apply a new rate, fees, and repayment period to the amount you already owe.
If you are unsure whether replacing your current loan is worthwhile, read our guide: When Should I Refinance My Mortgage?
Monthly Payment Differences A home equity loan generally creates a second payment in addition to the current first mortgage.
Your combined housing debt becomes:
Existing first-mortgage payment + new home-equity-loan payment
A cash-out refinance generally creates one new first-mortgage payment after the existing loan is paid off.
However, one payment is not automatically less expensive than two. Compare:
Combined monthly payments Interest rates APRs Loan terms Mortgage insurance Total interest Closing costs Net cash received Illustrative Payment Comparison Assume the homeowner currently has:
First mortgage balance: $280,000 Remaining term: 22 years Desired cash: $50,000 Option A: Home Equity Loan The homeowner retains the $280,000 first mortgage and adds a separate $50,000 home equity loan.
Option B: Cash-Out Refinance The homeowner obtains a new first mortgage large enough to pay off the $280,000 balance, cover applicable costs, and provide approximately $50,000.
The correct comparison is not simply:
One payment vs. two payments It is:
Existing first mortgage plus new home equity loan Compared with the complete new cash-out refinance Illustrative Example Disclosure: No rates, payments, costs, or approvals are implied. A lender must prepare transaction-specific estimates using current borrower, property, and mortgage information.
Which Option Usually Has More Closing Costs? Both transactions may involve closing expenses.
Potential costs include:
Origination charges Discount points Property valuation Title search Title insurance Recording fees Settlement or attorney charges Credit report Flood determination Government charges Prepaid interest Escrow deposits A home equity loan applies to a smaller additional loan amount, but second-lien expenses and pricing vary.
A cash-out refinance replaces the entire first mortgage and can involve costs based on the new total mortgage amount.
A lender may advertise a structure with reduced upfront costs, but the cost can be reflected through a different rate, lender credit, loan balance, or early payoff requirement. The CFPB advises consumers to compare closing costs as well as interest rates and warns that “no closing cost” mortgages are not necessarily free.
Compare APR, Not Only the Interest Rate The interest rate determines how interest accrues on the loan balance.
APR incorporates the interest rate and certain finance charges to provide another comparison measure.
Review:
Interest rate APR Discount points Origination charges Lender credits Loan term Monthly payment Total interest Cash to close Net proceeds APR does not include every financial consequence, such as extending the loan term or using home equity for expenses that do not produce long-term value.
Loan Term Can Change the Result A cash-out refinance begins a new repayment schedule.
For example, replacing a mortgage with 20 years remaining with a new 30-year mortgage could reduce the required payment while extending repayment.
A home equity loan leaves the original first-mortgage schedule intact but creates a second repayment period.
Compare:
Question
Why it matters
How many years remain on the current mortgage? Shows the existing payoff timeline What is the new refinance term? Determines whether repayment is extended What is the home equity loan term? Determines the second payment and interest period Can additional principal be paid? May shorten payoff, subject to loan terms Is there a prepayment penalty? May affect early payoff or future refinancing
The smallest payment does not necessarily produce the smallest total cost.
How Much Equity Is Needed? There is no universal equity requirement for every home equity loan or cash-out refinance.
The lender may apply different limits based on:
Loan program Credit profile Property type Primary, second-home, or investment occupancy Number of units Loan amount Lien position Debt-to-income ratio LTV for a Cash-Out Refinance The loan-to-value ratio (LTV) helps lenders evaluate how much of the property's value is being financed. Home equity loans may also require a combined loan-to-value (CLTV) calculation.
Loan-to-value compares the new first mortgage with the property’s approved value:
New first mortgage ÷ property value = LTV
CLTV for a Home Equity Loan Combined loan-to-value includes all property-secured debt:
(First mortgage balance + proposed home equity loan + other applicable lien balances) ÷ property value × 100%= CLTV
Illustrative Comparison Assume:
Approved property value: $500,000 Current first mortgage: $300,000 Proposed home equity loan: $75,000 Illustrative CLTV:
($300,000 + $75,000) ÷ $500,000 = 75%
A cash-out refinance replacing both amounts with a $375,000 new first mortgage would also have a 75% LTV before applicable financed costs.
The transactions may have the same initial equity percentage but different rates, terms, fees, payments, and lien structures.
Illustrative Example Disclosure: A 75% LTV or CLTV does not establish eligibility. Actual limits vary by lender, program, borrower, property, and transaction.
Which Option Provides More Cash? The available amount depends on:
Approved property value Current first mortgage payoff Other liens Maximum permitted LTV or CLTV Closing costs Qualifying income Monthly debts Credit Property type Occupancy A cash-out refinance may support a different amount than a home equity loan, but neither option guarantees access to all available gross equity.
Borrowing the maximum permitted amount can also leave less equity available for future needs or a home sale.
Qualification Requirements Both options typically require the lender to review the borrower and property.
Lenders may also evaluate the borrower's debt-to-income ratio to determine whether the proposed monthly payments are manageable alongside existing debts.
Borrower Review The lender may evaluate:
Credit scores Mortgage-payment history Qualifying income Employment Monthly debts Cash reserves Bankruptcy or foreclosure history Current occupancy Loan purpose Property Review The lender may evaluate:
Property value Property type Condition Title Existing liens Homeowners insurance Flood insurance Taxes HOA or condominium information A large amount of equity does not replace the need to demonstrate repayment ability.
Property Valuation The lender needs an acceptable value to calculate LTV or CLTV.
Depending on the transaction, valuation may involve:
Full appraisal Desktop appraisal Exterior inspection Automated valuation model Property data report Another lender-approved method An online home estimate can help with early planning, but it does not establish the final value used for underwriting.
Home Equity Loan vs. Refinance for Home Improvements Either option may provide funds for renovations.
A home equity loan may fit when:
The project has a defined budget. Funds are needed in one lump sum. The existing first mortgage will remain. A separate fixed payment is manageable. A cash-out refinance may fit when:
The homeowner wants to replace the current first mortgage. One payment is preferred. The requested amount and transaction costs support refinancing. The new term fits the homeowner’s long-term plan. Compare the loan with renovation-specific mortgage products when the project is substantial or property condition affects eligibility.
Home Equity Loan vs. Refinance for Debt Consolidation Home equity can be used to pay other debts, subject to lender and program requirements.
A home equity loan for debt consolidation may allow homeowners to combine eligible debts into a separate installment loan secured by their property.
This can convert unsecured obligations into debt secured by the home.
Potential effects include:
Smaller combined monthly payments Different interest structures Longer repayment period Closing costs Reduced available equity Foreclosure risk if payments are not maintained The CFPB’s research notes that a cash-out refinance may make financial sense only when the cost of extracting equity—including interest and origination expenses—is smaller than the cost of keeping the existing mortgage and other debts.
Paying off cards with home equity does not prevent future card balances from returning. A realistic spending and repayment plan remains important.
Home Equity Loan vs. Refinance for a Large One-Time Expense A home equity loan may be easier to compare when the homeowner needs a clearly defined amount and wants to preserve the first mortgage.
A cash-out refinance may be considered when the homeowner also wants to restructure the first mortgage.
Possible uses include:
Major home repairs Education expenses Medical costs Debt consolidation Other planned expenses Because the home secures the debt, compare unsecured alternatives as well when the amount is limited or the expense does not create lasting value.
Can You Refinance When You Already Have a Home Equity Loan? Potentially.
When a second mortgage already exists, a new first-mortgage refinance must address the second lien.
The transaction may require one of the following:
Pay off the home equity loan through the refinance Pay it off with other funds Ask the second-lien lender to remain in subordinate position Restructure both debts through another approved transaction What Is Subordination? Subordination allows the existing home equity lender to keep its loan in second position while a new first mortgage replaces the old first mortgage.
The second-lien lender must generally approve the request.
Subordination can involve:
Application Processing fee Updated title review Property-value review Maximum CLTV requirement Waiting period Additional documentation Approval is not guaranteed, and the refinance timeline may be affected.
Can a Cash-Out Refinance Pay Off a Home Equity Loan? Potentially.
The new first mortgage may be structured to pay off:
Existing first mortgage Home equity loan HELOC Other eligible property liens Applicable transaction costs The new mortgage must satisfy its LTV, credit, income, property, and underwriting requirements.
Consolidating both loans into one mortgage does not automatically reduce the total borrowing cost. Compare the existing second-lien rate and remaining term with the proposed new first mortgage.
What Are Your Options for Refinancing a Home Equity Loan? Depending on eligibility and lender requirements, options may include:
Another home equity loan A HELOC A cash-out refinance A rate-and-term refinance that consolidates eligible liens Another property-secured loan Some options replace only the home equity loan, while others also replace the existing first mortgage.
The new lender evaluates current equity, credit, income, debts, title, property value, and lien position.
Refinancing the second loan alone may preserve the first mortgage, but it can create new costs and restart the second-loan term.
Home Equity Loan vs. HELOC vs. Cash-Out Refinance A HELOC is another home equity option.
Unlike a home equity loan’s lump sum, a HELOC is an open-end line that generally allows repeated borrowing during the available draw period.
Feature
Home equity loan
HELOC
Cash-out refinance
Funds Lump sum Draw as needed Lump sum Existing first mortgage Remains Remains Replaced Rate Commonly fixed Commonly variable Fixed or adjustable Reborrowing No May be available No Payments Separate installment Can change by balance and phase New first-mortgage payment May fit Defined one-time expense Staged or uncertain expenses Equity access plus first-mortgage replacement
A homeowner expecting expenses over several phases may prefer comparing a HELOC with the two closed-end options.
Tax Treatment of Interest Interest on a home equity loan or cash-out refinance is not automatically deductible.
According to IRS Publication 936 , interest on the portion of a cash-out refinance used to replace existing qualifying home acquisition debt may remain deductible, subject to applicable limits.
Interest on additional cash borrowed or on a home equity loan generally qualifies for the home mortgage interest deduction only if the money is used to buy, build, or substantially improve the home securing the loan. Using that money to pay credit cards or other personal expenses generally does not qualify.
You must itemize deductions and meet applicable IRS limits and requirements.
Keep records showing:
Amount borrowed How funds were used Contractor invoices Improvement receipts Loan statements Closing documents Consult a qualified tax professional regarding your transaction and current tax year.
Right of Rescission Most qualifying non-purchase consumer mortgages secured by a principal residence provide a right to cancel the transaction within three business days. The cancellation period generally begins after the last of these events: consummation of the loan, receipt of the required rescission notice, and receipt of the required material disclosures.
Home equity loans and refinances are common examples. For this purpose, Saturdays generally count as business days, while Sundays and federal legal holidays generally do not. Exceptions can apply based on the transaction, property, and loan purpose.
Approved funds are generally made available only after:
Closing Completion of signatures Satisfaction of funding conditions Expiration of an applicable rescission period Final funding authorization Do not commit the proceeds to a contractor or debt payoff until the lender confirms that funds are available.
Loan Estimate and Closing Disclosure Most covered closed-end refinances and home equity loans secured by real property use a Loan Estimate and Closing Disclosure.
The Loan Estimate helps compare proposed terms and costs. The Closing Disclosure provides final information before consummation.
Review:
Loan amount Interest rate APR Monthly payment Balloon payment Prepayment penalty Origination charges Discount points Lender credits Closing costs Cash to close Net proceeds Request written estimates for both options using the same property value and cash objective.
How to Compare Net Proceeds The approved mortgage amount does not equal the cash you receive.
Home Equity Loan Loan amount − closing costs − required payoffs = net proceeds
Cash-Out Refinance New first mortgage − current mortgage payoff − other lien payoffs − costs = net proceeds
Ask the lender to show:
Gross loan amount Every required payoff Costs paid in cash Costs deducted from proceeds Costs added to the balance Final estimated cash to borrower Break-Even Analysis A break-even calculation can help when one option reduces the total monthly payment.
A simplified formula is:
Eligible transaction costs ÷ estimated monthly payment reduction = approximate break-even period
Illustrative Example Assume:
Eligible refinance costs: $7,200 Estimated combined monthly reduction: $240 Approximate break-even period:
$7,200 ÷ $240 = 30 months
The homeowner would need to keep the new structure long enough for the estimated monthly reduction to offset the included costs.
Illustrative Example Disclosure: This simplified calculation does not include changes in principal, repayment term, total interest, tax treatment, opportunity cost, or future refinancing. Actual savings are not guaranteed.
A break-even calculation is less useful when the primary goal is obtaining cash rather than reducing a payment. In that case, compare total borrowing cost and repayment period.
When a Home Equity Loan May Fit A home equity loan may deserve closer review when:
The existing first mortgage has terms you want to preserve. You need one defined amount. A separate fixed payment fits the budget. You do not need to borrow repeatedly. Closing costs and net proceeds compare favorably. The combined LTV fits lender requirements. You understand the risk of adding a second lien. When a Cash-Out Refinance May Fit A cash-out refinance may deserve closer review when:
You want to replace the existing first mortgage. You prefer one mortgage payment. The proposed new rate, APR, term, and fees fit your goals. You want to consolidate an existing second mortgage. The available equity supports the requested amount. You plan to keep the new mortgage long enough to justify its costs. Extending or restarting the term is acceptable. When Neither Option May Fit Borrowing against home equity may not be appropriate when:
The payment would strain the household budget. Income is unstable. The homeowner expects to sell soon. Closing costs exceed the likely benefit. The expense can be covered without placing the home at risk. Borrowing would leave very little remaining equity. The plan depends on uncertain future refinancing. Debt consolidation is not accompanied by a sustainable repayment plan. Because the home secures both transactions, failure to make required payments can result in foreclosure.
Documents You May Need Personal and Income Documents Government-issued identification Recent pay stubs W-2 forms Tax returns when required Forms 1099 Self-employment records Retirement or benefit letters Property Documents Current mortgage statement Home equity or HELOC statement Homeowners insurance Property-tax information HOA information Trust documents Solar or improvement lien documents Financial Documents Bank statements Asset statements Monthly debt information Explanations for large deposits Current payoff statements Records for debts being paid at closing The lender may request updated documents before funding.
For a broader overview of commonly requested paperwork, review our mortgage application document checklist .
Comparison Checklist Existing Mortgage Record the current balance. Confirm the current rate. Check the remaining term. Request a payoff statement. Identify mortgage insurance. Review prepayment terms. New Loan Options Compare interest rate and APR. Compare monthly payments. Review loan terms. Calculate net proceeds. Review all closing costs. Confirm LTV or CLTV. Identify lien position. Review prepayment provisions. Long-Term Impact Compare total interest. Review the new payoff timeline. Calculate a break-even period when relevant. Confirm the remaining equity. Consider future sale or refinance plans. Evaluate foreclosure risk. How Loan Factory Helps Compare Home Equity and Refinancing Loan Factory is a technology-powered mortgage platform helping borrowers compare mortgage options through a broad wholesale lender network.
A useful review should compare the homeowner’s existing first mortgage with the complete proposed structure—not evaluate a new loan in isolation.
Depending on borrower eligibility and participating lender availability, a Loan Factory Loan Officer can help you:
Estimate current home equity Review existing mortgage and lien balances Calculate potential LTV and CLTV Compare a home equity loan, HELOC, and cash-out refinance Evaluate whether preserving the first mortgage may be useful Compare one-payment and two-payment structures Review rates, APRs, terms, fees, and net proceeds Estimate a relevant break-even period Review payoff and subordination requirements Identify income, asset, title, and property documents Organize requested documents securely through TERA Track available application and underwriting milestones Review home equity options , compare refinance options , or start an online application .
Call or text (660) 333-3333 for direct assistance. Loan Factory’s equity page presents both home equity loan and HELOC options, depending on borrower eligibility and participating lender availability.
Compare the Complete Structure Before Borrowing Choosing between a home equity loan and refinancing begins with one central question:
Should the existing first mortgage remain in place or be replaced?
A home equity loan may preserve the first mortgage while adding a separate fixed installment loan. A cash-out refinance may combine the existing mortgage and additional cash into a new first mortgage.
Before choosing, compare:
Existing first-mortgage terms New rate and APR One payment vs. two Closing costs Net proceeds Repayment period Total interest Equity remaining Future sale or refinance plans Risk to the home Compare your equity and refinance options , or call or text (660) 333-3333 to discuss how each structure may affect your mortgage and long-term goals.
Experience Note The equity calculations, LTV and CLTV examples, payment structures, cash-out examples, and break-even calculations in this article are educational illustrations based on common home equity and refinancing considerations.
They do not represent a specific Loan Factory borrower, appraisal, loan amount, interest rate, APR, payment, tax result, approval, closing, or funded transaction.
Actual requirements and outcomes vary by borrower, lender, property, occupancy, lien position, loan purpose, state, and market conditions.
Sources Read More About the Author Loan Factory Mortgage Education Team
Loan Factory is a technology-powered mortgage platform helping borrowers compare mortgage options through a broad wholesale lender network.
The Loan Factory Mortgage Education Team helps homeowners compare home equity loans, HELOCs, and cash-out refinances based on existing mortgage terms, property equity, LTV, CLTV, monthly payments, closing costs, net proceeds, and long-term borrowing objectives.
Disclaimer This content is for educational and informational purposes only and is not financial, tax, legal, credit, accounting, real estate, appraisal, title, insurance, investment, or housing-counseling advice. It is not a commitment to lend or a guarantee of equity, eligibility, approval, loan amount, rate, APR, payment, closing, savings, or funding.
Home equity loans and cash-out refinances are secured by real property. Failure to make required payments may result in foreclosure.
Rates, APRs, terms, fees, loan amounts, LTV and CLTV requirements, tax treatment, valuations, title requirements, disclosures, and underwriting standards may change and vary by borrower, lender, property, occupancy, lien position, state, and market conditions.
Consult qualified mortgage, tax, legal, and financial professionals regarding your circumstances.
Frequently Asked Questions 
