Mortgages
Cash-Out Refinance vs Home Equity Loan 2026
Updated July 14, 2026
A cash-out refinance replaces your existing mortgage with a larger one — you get the difference in cash but now have a new rate on your entire loan balance. A home equity loan adds a second mortgage while keeping your first mortgage intact. If your current rate is low, a home equity loan preserves it. If rates are lower than your current mortgage, a cash-out refi makes more sense. If you'd rather draw funds as needed instead of taking a lump sum, see how a revolving HELOC stacks up against both options.
Head-to-head, line by line
| Spec | Cash-Out Refinance | Home Equity Loan (Second Mortgage) |
|---|---|---|
| Starting APR | Current 30-yr fixed rate (~6.5–7.5% May 2026) | ◈ 8–12% fixed (second lien) |
| Max amount | 80% for conventional; 85% FHA | ◈ Up to 85% CLTV |
| Max LTV | 80% for conventional; 85% FHA | Up to 85% CLTV |
| Closing costs | 2–5% of new loan amount | Lower than cash-out refi |
| Result | One loan at new rate | Two loans, first rate preserved |
◈ marks the stronger option for that row.
Cash-Out Refinance
Pros
- +One loan, one payment — simplicity if consolidating first + second mortgage
- +Potentially lower rate if your current mortgage rate is above market
- +Access to full equity in one transaction — no second mortgage
- +Fixed rate available on the cash-out amount
Trade-offs
- –Replaces your entire mortgage at current rate — if your existing rate is low (2–3%), this is extremely expensive
- –Full closing costs on the entire new balance (not just the incremental cash-out)
- –If you only need a small amount of cash relative to your loan balance, closing costs rarely pencil out
Home Equity Loan (Second Mortgage)
Pros
- +Preserves your existing mortgage rate — critical if you have a 2–4% first mortgage from 2020–2022
- +Lower closing costs than cash-out refi (closing costs on second loan only)
- +Fixed rate and predictable payment on the new second mortgage
- +Right when you need a defined amount and don't want to refinance your full balance
Trade-offs
- –Two loans, two payments — added complexity
- –Higher rate than a first mortgage (second-lien risk premium)
- –Combined LTV limit may restrict how much equity you can access
- –Interest may not be tax-deductible unless used for home improvement (consult IRS Publication 936 at irs.gov)
Which should you pick?
Pick Cash-Out Refinance if:Homeowners whose current mortgage rate is at or above current market rates, who want to simplify to one loan at a lower rate while accessing equity.
Pick Home Equity Loan (Second Mortgage) if:Homeowners with a low existing mortgage rate who want to access equity without giving up their first mortgage rate.
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Frequently asked
Cash-Out Refinance vs Home Equity Loan (Second Mortgage) — common questions
What is the main difference between a cash-out refinance and a home equity loan?+
A cash-out refinance replaces your entire existing mortgage with a new, larger mortgage — you receive the difference in cash. A home equity loan is a separate second mortgage that sits on top of your existing mortgage without touching it. Cash-out refi makes sense when you can get a meaningfully lower rate on the new first mortgage. A home equity loan makes sense when your existing first mortgage rate is already low and you don't want to give it up. Source: CFPB guidance on home equity at consumerfinance.gov.
Which has lower closing costs — a cash-out refinance or home equity loan?+
Home equity loans generally have lower closing costs because you're taking out a smaller second loan rather than replacing the entire first mortgage. Cash-out refi closing costs (typically 2–5% of the total new loan balance) can easily exceed $8,000–$15,000 on a large mortgage. Home equity loan costs are calculated on the smaller second-loan amount — see typical HELOC costs and fees for how the revolving-line alternative compares on price. The CFPB's mortgage closing cost guidance at consumerfinance.gov has a full breakdown of typical charges.
Which is better if I have a low rate on my current mortgage?+
A home equity loan preserves your existing first mortgage and its rate. If you locked in a 3–4% rate and the current refinance rate is 6–7%, a cash-out refi would force you to replace the low-rate first mortgage. A home equity loan lets you keep that rate on the first mortgage while accessing equity through a separate second loan at current rates — typically the better structural choice when your first mortgage rate is materially below current market rates.
How much equity do I need to qualify for a home equity loan or cash-out refinance?+
Most lenders require you to retain at least 15–20% equity after the transaction — meaning you can typically borrow up to 80–85% combined loan-to-value (CLTV). For a home worth $500,000, that allows accessing up to $400,000–$425,000 in combined mortgage debt. Individual lender limits vary; some allow up to 90% CLTV for well-qualified borrowers. The credit-score bar is separate from the equity requirement — see minimum credit score for a HELOC for how lenders weigh the two together on the revolving-credit alternative. Source: CFPB at consumerfinance.gov and FDIC consumer guidance at fdic.gov.
Independent editorial comparison. ClearValue Lending is not the issuer of any product compared here; affiliate links may pay a referral commission at no cost to you — selection is independent of compensation.
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