Home equity loan or cash-out refinance: which one should I use?
If your current mortgage rate is lower than today's rates, a home equity loan usually costs less, because it leaves your first mortgage untouched and only adds a loan on the amount you actually need. A cash-out refinance replaces your entire mortgage at today's rate, which mainly makes sense when current rates are at or below your existing rate, or when you want everything folded into one payment.
The deciding factor is almost always the rate on the mortgage you already have. Protecting a low first-mortgage rate is the whole game right now.
What is a home equity loan?
A home equity loan is a second mortgage. It sits behind your existing first mortgage and gives you a lump sum at a fixed rate, repaid on its own schedule. Your original mortgage does not change at all. You simply add a second, smaller loan on top.
What is a cash-out refinance?
A cash-out refinance replaces your existing mortgage with a new, larger one and hands you the difference in cash. If you owe $400,000 and refinance into a $480,000 loan, you walk away with $80,000, and your entire balance now carries the new loan's rate and term.
Why does my current mortgage rate decide this?
Because a cash-out refinance re-prices your whole balance, not just the new money. Millions of homeowners locked first mortgages in the 3 percent range and today's 30-year fixed averages 6.49 percent as of July 9, 2026. Refinancing a $400,000 balance from 3 percent up to today's rate to pull out $80,000 means paying the higher rate on the full $400,000, not just the $80,000 you wanted. A home equity loan avoids that by leaving the cheap first mortgage alone.
Here is how the math plays out
Illustrative comparison. Verified as of July 13, 2026. Your numbers will differ. Starting point: $400,000 owed at 3.5 percent, home worth $700,000, need $80,000 in cash.
Home equity loan route: keep the $400,000 first mortgage at 3.5 percent, roughly $1,796 per month, and add an $80,000 home equity loan near the current 7.36 percent average over 20 years, roughly $636 per month. Combined, about $2,432 per month.
Cash-out refinance route: replace everything with a $480,000 loan at 6.49 percent over 30 years, roughly $3,034 per month.
In this example the home equity loan costs about $600 less per month, because it protects the 3.5 percent rate on the original balance. These are estimates for illustration, and actual pricing depends on your credit, equity, and the lender.
When does a cash-out refinance still make sense?
When today's rate is at or below your current rate, refinancing everything can win, since there is no penalty for re-pricing the balance. It can also make sense when you want a single payment instead of two, when you are pulling a very large amount, or when consolidating a high-rate first mortgage and other debt into one lower payment nets out ahead. As Emmett Clark, licensed in 18 states with access to more than 240 wholesale lenders, I run both paths side by side before recommending one, because the answer flips entirely based on your existing rate.
What about closing costs?
A cash-out refinance generally carries closing costs similar to any full mortgage, since it is a new first mortgage. A home equity loan usually has lower closing costs, because it is a smaller second loan. Weigh those upfront costs against the monthly difference over how long you plan to keep the home.
How do I decide?
Compare your current first-mortgage rate to today's rate. If yours is clearly lower, lean toward a home equity loan or a line and keep the cheap money. If yours is at or above today's rate, or you need one simple payment, run the cash-out refinance numbers seriously. Then compare the total cost over the years you expect to stay, not just the monthly payment.
To size up how much you can pull either way, start with how to calculate your home equity. If you have already decided to keep your first mortgage in place, compare the two second-mortgage options in HELOC versus home equity loan, and model payments on the mortgage calculators.
Frequently Asked Questions
Which has lower closing costs?
A home equity loan usually does, because it is a smaller second mortgage. A cash-out refinance replaces your whole loan, so its closing costs tend to track those of a full mortgage.
Will a cash-out refinance raise my monthly payment?
It often does when today's rate is above your current rate, because the higher rate applies to your entire balance, not only the cash you pulled out.
Can I do a cash-out refinance if my rate is already low?
You can, but it may not be wise, since refinancing re-prices your full balance at today's rate and you would give up the low rate you already hold.
How much equity do I need for either one?
Most lenders want you to keep some equity after borrowing, commonly limiting total loans to about 80 to 85 percent of the home's value, though some programs allow more.
Which is faster to close?
A home equity loan can sometimes close faster because it is a smaller second lien, but timelines vary by lender, loan size, and whether a full appraisal is required.
Emmett Clark
Licensed Mortgage Loan Officer · NMLS #233747 · 20+ Years Experience
This article has been reviewed for accuracy by Emmett Clark, a licensed mortgage professional serving homebuyers across 18 states including California, Texas, Florida, Arizona, and Colorado. Last updated: July 13, 2026.
About Emmett NMLS #233747
Emmett Clark (NMLS #233747) is a licensed mortgage professional with 20+ years of experience helping families achieve their homeownership dreams. Licensed in 18 states nationwide, Emmett specializes in finding the right mortgage solution for each client's unique situation. Powered by Loan Factory, Emmett provides access to competitive rates and a wide variety of loan programs including conventional, FHA, VA, and down payment assistance programs.
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