“Should I do a cash‑out refinance or a home equity loan?”
I get this question constantly. And the answer isn’t simple—it depends on your existing mortgage rate, how much equity you have, and how long you plan to stay.
Let me tell you about two clients who faced the same situation and made different choices. Both were right. You’ll see why.
But first, let’s define the terms.
What’s a Cash‑Out Refinance?
A cash‑out refinance replaces your existing mortgage with a new, larger loan. You take the difference in cash. For example, if you owe $200,000 on a home worth $400,000, you might refinance into a $300,000 loan, pay off the old $200,000, and walk away with $100,000 (minus closing costs).
Your new loan has a new interest rate and term. You pay closing costs (2%‑5% of the loan amount). The new rate might be higher or lower than your old rate, depending on the market.
Cash‑out refi example: Current mortgage $200,000 at 3.5%. New loan $300,000 at 6.3%. You get $100,000 cash, but your rate jumps. Painful. That’s why timing matters.
What’s a Home Equity Loan?
A home equity loan (sometimes called a second mortgage) lets you borrow against your equity without touching your first mortgage. You keep your existing low rate. You take out a separate loan with its own rate and term. Rates for home equity loans are usually higher than first mortgage rates—around 7.5% to 9.5% in June 2026—because they’re second in line.
Home equity loan example: First mortgage $200,000 at 3.5%. Second mortgage $100,000 at 8.5%. Your blended rate is about 5.1%. Much better than refinancing the whole thing at 6.3%.
That’s the key advantage: you keep your low first mortgage rate.
Client #1: Rachel (Chose Cash‑Out Refinance)
Rachel was 52, a real estate agent. She owed $180,000 on a home worth $550,000. Her current rate was 5.5% with 15 years left. She needed $80,000 for a kitchen remodel and to pay off high‑interest credit cards.
We compared options:
Cash‑out refi: New loan $260,000 at 6.3% for 30 years. Payment: $1,610. Total interest: $320,000 over 30 years. She’d restart the clock from 15 years to 30 years—not ideal.
Home equity loan: Keep her first mortgage at $180,000 at 5.5% (payment $1,470, 15 years left). Add a second mortgage of $80,000 at 8.5% for 15 years (payment $790). Combined payment: $2,260. Higher per month, but she’d pay off both loans in 15 years.
Rachel chose the cash‑out refi because she wanted a lower monthly payment, even if it meant restarting the clock. She planned to sell the house in five years anyway, so the 30‑year term didn’t matter.
I wasn’t thrilled. She’d pay more in interest overall. But her cash flow was tight, and the lower payment gave her breathing room. Sometimes that’s the right call.
Client #2: David (Chose Home Equity Loan)
David was 44, an accountant. He owed $150,000 on a home worth $500,000. His current rate was 3.2% (a 2021 refinance). He had 24 years left. He needed $60,000 for his daughter’s wedding and some home repairs.
He was smart: he didn’t want to lose his 3.2% rate. A cash‑out refi would have given him a new rate of around 6.3% on the entire $210,000 loan. That would raise his payment from about $1,000 to $1,290. Ouch.
We found a credit union offering a home equity loan at 7.9% for $60,000 over 10 years. Payment: $725. His total combined payment would be $1,725, but he’d keep his 3.2% rate on the first mortgage.
David chose the home equity loan. He said, “I’m not giving up my 3.2% rate. That’s the best financial decision I’ve ever made.”
He was right. His blended rate was about 4.5%, far lower than the 6.3% cash‑out refi.
The Decision Matrix: Which One Is Right for You?
Here’s my rule of thumb after reviewing hundreds of equity access cases:
Choose a cash‑out refinance if:
- Your current mortgage rate is already high (over 5.5%)
- You plan to stay in the home for less than 5 years
- You want a single monthly payment
- You need a large amount of cash (over $100,000) and have enough equity
Choose a home equity loan if:
- Your current mortgage rate is low (under 4.5%)
- You want to keep your low first mortgage rate
- You don’t mind two payments
- You need a moderate amount of cash ($20,000‑$80,000)
- You plan to stay in the home for many years
Consider a HELOC (Home Equity Line of Credit) if: You need flexible access to cash over time—like for ongoing renovations or college tuition. HELOCs have variable rates (currently around 8%‑10%) and interest‑only payment options. They’re riskier but more flexible.
The Math Behind the Blended Rate
Here’s the formula: Blended Rate = (First Mortgage Balance × First Rate + Second Loan Balance × Second Rate) ÷ Total Debt
For David: ($150,000 × 3.2% + $60,000 × 7.9%) ÷ $210,000 = ($4,800 + $4,740) ÷ $210,000 = $9,540 ÷ $210,000 = 4.54%
That’s his true cost of borrowing. Much better than a 6.3% cash‑out refi.
For Rachel, her existing rate was 5.5%, so the blended rate of a home equity loan would have been ($180,000 × 5.5% + $80,000 × 8.5%) ÷ $260,000 = ($9,900 + $6,800) ÷ $260,000 = 6.42%. That’s almost the same as the cash‑out refi’s 6.3%. So the difference was negligible. In her case, the simplicity of one payment won.
The Tax Implications (Briefly)
Interest on a cash‑out refinance is tax‑deductible only if the cash is used for home improvements. Interest on a home equity loan is also deductible if used for home improvements. If you use the cash for debt consolidation or tuition, the interest is generally not deductible. Consult a tax professional. I’m just a mortgage guy.
The Closing Cost Difference
Cash‑out refinances usually have higher closing costs because they’re full mortgages—appraisal, title, origination, underwriting. Expect 2%‑5% of the loan amount.
Home equity loans have lower closing costs—often $500‑$1,500, sometimes zero if the lender covers them (with a slightly higher rate).
HELOCs often have no closing costs but may have annual fees ($50‑$100) and early termination penalties.
David paid $800 in closing costs for his home equity loan. Rachel paid $5,200 for her cash‑out refi. That’s a big difference.
Which Lenders Offer Home Equity Loans?
Credit unions are often the best. They offer competitive rates and lower fees. Big banks do too, but their rates are typically higher. Online lenders? Fewer options for home equity loans. Start with a local credit union.
I will keep posting updates on this. Check back soon.
P.S. Rachel sold her house two years later. Her cash‑out refi was a good choice because she didn’t keep the loan long enough to feel the pain of the higher rate. David still lives in his home, still has his 3.2% first mortgage, and paid off his home equity loan early. Both succeeded.
This article is for informational purposes. Tax laws and loan terms vary. Consult a CPA and a loan officer for personalized advice.
Michael Harrington