Cash-out refinance vs. home equity loan

As a homeowner, one important financial tool you’ll build over time is home equity. You can access your home equity in a few ways to help finance other projects or purchases. Two methods to tap into your equity include a cash-out refinance and a home equity loan.

Both options have pros and cons, which can help you decide if a home equity loan or a cash-out refinance is the right choice. We’ll outline how these loans work, their main differences, and how they benefit your financial goals before accessing your home equity.

Key takeaways:

• A cash-out refinance gives you cash from your home equity by replacing your existing mortgage with a new, larger loan.
• A home equity loan lets you borrow equity from your home by giving you a second mortgage that you repay.
• Both options allow you to use home equity funds to cover expenses or large purchases.   

What is a cash-out refinance?

A cash-out refinance is a type of mortgage option that gives you cash from the equity you’ve built over the years in exchange for a new, larger loan. You replace your existing mortgage with a new one, meaning you’ll likely have a new rate, terms, and monthly payment. It’s a good idea to consider the costs and compare terms to your current loan before refinancing.

Borrowers can usually get a cash-out refinance if they’ve had their mortgage loan long enough to build equity in the home. Many homeowners choose cash-out refinancing when their home value increases, and they want to borrow money for home improvements or other projects.

How a cash-out refinance works

Getting a cash-out refinance starts with applying for a new mortgage loan. You’ll usually need a larger loan than your current mortgage balance to receive cash back when the loan closes. This new mortgage replaces your existing mortgage as your primary home loan, and you’ll only make payments on the new loan going forward.

Your home’s value, home equity, credit history, and other financial factors influence the maximum you can borrow. You’ll also pay closing costs and any other fees associated with the new mortgage loan.

The funds from a cash-out refinance are tax-free and can be used any way you like. Most homeowners use the money for renovations or home improvements, but you can use it for other expenses as well.

To get an idea of how you can calculate your cash-out refinance amount, let’s look at an example. Say your home is worth $400,000, and you still owe $200,000 on your mortgage. You decide to refinance your home with a $250,000 loan to get $50,000 in cash back, minus closing costs and fees.

You’ll then begin paying back your new $250,000 mortgage. Monthly payments will likely increase, since the new loan is larger. To get an idea of what this could look like for your home, you can use the Rocket Mortgage refinance calculator to estimate your new monthly payments.

How much equity can you cash out of your home?

Homeowners typically can’t get a loan for the entire value of their home. Many loans require you to leave at least 20% equity in your home. Keep in mind that requirements vary by lender, loan program, and your finances.

For conventional and Federal Housing Administration (FHA) loans, you must leave 20% equity in your home after the cash-out refinance. Veterans Affairs (VA) loans² are an exception, with loans supported up to 100% of the property’s value, though some lenders cap this amount.

What is a home equity loan?

Home equity loans allow you to borrow the equity in your home, similar to a cash-out refinance, but are a second mortgage. It’s secured by your home and is a separate payment in addition to your first mortgage. Due to increased lender risk, second mortgages typically have higher interest rates than primary mortgages.

Rocket Mortgage now offers Home Equity Loans for primary and secondary homes.³

How a home equity loan works

As mentioned above, a home equity loan is separate from your original mortgage, so your first loan terms stay the same. Once the home equity loan closes, you’ll receive a lump sum payment from your lender. You’ll begin to repay this lump sum in monthly installments, usually at a fixed rate, so you’ll have two monthly payments.

It’s different from a home equity line of credit (HELOC), which typically allows you to withdraw funds several times. Payments can vary based on your balance. Rocket Mortgage does not currently offer HELOCs.

Loan restrictions

When you take out a home equity loan or cash-out refinance, you’re typically limited on how much you can borrow. Most loans allow you to borrow up to a specific amount based on your home’s value, income, and other outstanding loans, like credit cards.

The maximum you can borrow depends on how much equity you have compared to what you still owe on your mortgage. You can measure this using your loan-to-value ratio (LTV). To calculate your LTV, divide the total loan amount by the property’s value. The result is a percentage that shows how much of the home value you could borrow, with the remaining percentage representing your home equity after taking on the new loan.

Debt-to-income ratio (DTI) is another important metric to help determine your borrowing limits. To calculate your DTI, divide the total monthly debt payments by your monthly income. Most lenders like to see a DTI below a certain percentage to ensure borrowers can afford to repay new loans.

Home equity vs. cash-out refinance: Which one makes sense for you?

To help you compare, below are some key differences between a cash-out refinance and home equity loan:

Let’s delve deeper into the differences and similarities between cash-out refinances and home equity loans.

Similarities between cash-out refinances and home equity loans

Cash-out refinances and home equity loans have similarities that make them appealing options. Both allow you to borrow based on your home’s value, giving you cash to use for home improvements or financial needs.

Here are some key similarities:

• You get your money quickly. You’ll walk away with a lump-sum cash payment roughly 3 business days after closing. Note, this waiting period allows borrowers to exercise their right of rescission, which lets them cancel if they change their mind.
• Your home is the security for the loan. The property serves as collateral for a refinance or home equity loan. Since the loans are secured, you’ll likely receive a lower interest rate than you would with unsecured loans, like a credit card.
• Generally, you can’t access 100% of your home’s equity. Most lenders and loans require borrowers to leave some equity in the home.

What are the differences between home equity loans and refinances?

While home equity loans and cash-out refinances share similarities, they also have differences that can help you decide which one best fits your needs.

Let’s look at two core distinctions:

• Cash-out refinances are primary loans, while home equity loans are secondary loans. A cash-out refinance pays off your existing mortgage and replaces it with a new one. A home equity loan is a separate loan, considered a second mortgage.
• A cash-out refinance typically has a better interest rate, since it’s a primary loan and is paid first in the case of foreclosure or bankruptcy. Second mortgages typically have higher interest rates.

When a home equity loan makes sense

Home equity loans can be a good choice for borrowers looking to cover renovations or big purchases, while keeping their current mortgage.

Here are some other reasons it may work for you:

• It allows you to keep the current interest rate on your original loan.
• You need a large sum of money all at once, good for one-time or fixed expenses.
• Closing costs for a home equity loan are typically lower than refinancing.

If you’re unsure how much cash you need, consider looking into a HELOC. It’s a good idea to assess whether a HELOC or cash-out refinance makes more sense based on your financial goals.

When a cash-out refinance makes sense

A cash-out refinance may be the right option if your home value has increased, or you’ve built enough equity in your home.

Let’s look at some additional reasons it could work for you:

• Cash-out refinancing may be a lower-cost option to borrow money, as interest rates are typically lower.
• It can be a good way to cover major expenses while paying less interest than a personal loan.
• You could get a better interest rate by refinancing than keeping your original mortgage.

Remember, with either cash-out refinance loans or home equity loans, it’s still possible for your home to go into foreclosure if you don’t keep up with payments.

FAQ

We’ll answer some frequently asked questions about home equity loans versus cash-out refinances.

Can you refinance your home equity loan?

Yes, qualified homeowners can refinance their home equity loan. Refinancing can be a good option when interest rates are lower than when you took out the original loan, or you want to switch from an adjustable-rate to a fixed-rate loan.

Is a home equity loan cheaper than a refinance?

It depends on the difference in rates and amount you’ll pay in closing costs. Home equity loans and home equity lines of credit usually have lower closing costs than cash-out refinances. However, cash-out refinances often have lower interest rates compared to home equity loans and HELOCs.

What are the alternatives to a HELOC or cash-out refinance?

Alternatives to a HELOC or cash-out refinance include taking out a personal loan or credit card with a low interest rate. You won’t have to pay closing costs associated with cash-out refinances, home equity loans, and HELOCs.

Will I lose my home equity when I refinance?

No, you won’t lose equity when you refinance your home, though it may decrease. Your home equity fluctuates based on how much of your mortgage you’ve paid off and the impact of market shifts on your home’s value. Tapping into your home equity to make improvements or fund renovation projects can increase your home’s value and, with it, your equity.

The bottom line: What you choose depends on your goals

A cash-out refinance and a home equity loan can both give you access to your home equity, and each option has pros and cons. Choosing a cash-out refinance can be good if you want a lump sum, are open to a new interest rate, and can afford closing costs. A home equity loan can be a good idea if you want to keep your mortgage interest rate and still get quick access to cash with a second mortgage.

If you’re ready to begin, you can start an application online to see how much you can access with a cash-out refinance.

¹Mortgage rates could change daily. Actual payment will vary based on your individual situation and current rates. We are using a credit score of XXX. Maximum debt obligations cannot exceed XX% of your gross monthly income. We are assuming that the closing costs will be deducated from the cash-out proceeds. We are assuming that if you have an escrow account today, it will stay the same and the setup of the new escrow account will be deducted for the cash-out proceeds. Any funds in the current escrow account will be refunded within 31 days of funding the new loan. Cash-out availability will be based on 80% loan-to-value (LTV). Please remember that we don't have all your information. Therefore, the rate and payment results you see may not reflect your actual situation.

²Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency. 

³Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 11/19/25 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Ameriprise products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher‑priced loans in the State of New York are subject to additional regulatory requirements. Additional restrictions apply. This is not a commitment to lend.

Refinancing may increase finance charges over the life of the loan.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.