Home equity loan vs. cash-out refinance
Senior Content Writer
This article compares options that may be available in the market. JPMorgan Chase Bank, N.A., does not currently offer home equity loans. Product availability varies by lender—speak with a Home Lending Advisor about options available to you.
Quick insights
- A cash-out refinance replaces your existing mortgage with a new loan, while a home equity loan typically acts as a second loan on top of your current mortgage.
- Depending on your needs and current mortgage terms, a home equity loan may be preferable because it won’t change those terms.
- Both options may provide the money you need at interest rates that may work for your budget, but your home is still used as the collateral.
If you’ve built equity in your home, you may eventually wonder how you can use it to get cash. Then, you might weigh the options of refinancing your mortgage and borrowing against your equity. Both may work for your needs, but these options work very differently. The right choice for you will depend on your current mortgage rate, needs and goals, among other things. Learning the difference between a cash-out refinance and home equity loan may help you feel more confident. You can also discuss your situation and other possibilities with a Home Lending Advisor.
What is cash-out refinance?
A cash-out refinance allows homeowners to replace their current mortgage with a larger mortgage and receive the difference in cash. Instead of keeping your original mortgage, the refinance creates a new loan with updated terms, including the interest rate and repayment schedule. The mortgage provider pays off your existing mortgage, and any remaining funds are distributed to you at closing.
How does a cash-out refinance work?
Let’s say:
- Your home is worth $500,000.
- You still owe $250,000 on your mortgage.
- A mortgage lender allows you to borrow up to 80% of the value of your home.
- Max total borrowing allowed (80% of $500,000): 0.8 x $500,000 = $400,000.
- Minus what you still owe: $400,000 – $250,000 = $150,000.
In this scenario, you may borrow up to $150,000. You typically receive this as cash (minus any lender fees and closing costs). Your new total mortgage debt becomes $400,000 (plus any financed closing costs).
This is for illustration only. Actual maximum borrowing and terms depend on lender guidelines, loan program requirements, underwriting, property type/occupancy and your credit/income.
Are funds tax-free in a cash-out refinance?
Generally, yes. Cash-out refinance proceeds are not considered taxable income because the money is borrowed rather than earned. However, tax situations can vary depending on how the funds are used and your individual circumstances. For example, some homeowners may potentially qualify for mortgage interest deductions if the money is used for eligible home improvements.
Speaking with a qualified tax professional could help clarify how current tax rules apply to your unique situation.
How much equity can you cash out of your home?
A common limit many mortgage lenders allow homeowners to borrow is up to 80% of their home’s appraised value. Some loan programs and lenders could have lower or higher limits than 80% based on the borrower and property type. The amount of equity you may be able to access depends on factors like the value of your home, remaining mortgage balance, credit profile and lender requirements.
What is a home equity loan?
A home equity loan allows homeowners to borrow against the equity they’ve already built without replacing their existing mortgage. Unlike a cash-out refinance, a home equity loan is typically a separate loan with its own payment schedule, interest rate and repayment term. Because of this structure, homeowners usually make two mortgage-related payments:
- Their original mortgage payment
- The new home equity loan payment
How does a home equity loan work?
Most home equity loans come with fixed interest rates and fixed monthly payments, which may appeal to borrowers who prefer predictable costs.
Example: Your home is worth $500,000 and you owe $250,000. You want $50,000 to remodel a kitchen. You keep your existing $250,000 mortgage as-is and take out a $50,000 home equity loan. You now have two monthly payments: one for the mortgage and one for the home equity loan.
This is different from a home equity line of credit (HELOC), which works more like a credit card. Instead of receiving all the money upfront, you can borrow from the credit line as needed during a set period.
How lenders may evaluate eligibility
Requirements can vary by lender, but when you apply, you’re often evaluated based on certain factors, including:
- Loan-to-value ratio (LTV)
- Debt-to-income ratio (DTI)
- Credit history and score
- Income consistency
- Property type and occupancy status (for example, primary, secondary or investment property)
Many lenders prefer borrowers to maintain at least 15% to 20% equity in the home after the loan is issued. Some loan programs could also include restrictions on investment properties, condos or multi-unit homes.
Home equity loan vs. cash-out refinance
Both financing options allow homeowners to tap into their home equity, but the loan structure, repayment setup and long-term impact can look different.
What happens to your current mortgage?
- Home equity loan: Your existing mortgage stays in place.
- Cash-out refinance: Your current mortgage is replaced with a new loan.
Monthly payments
- Home equity loan: Usually two separate payments.
- Cash-out refinance: Usually one new mortgage payment.
Interest rates
- Home equity loan: Often fixed rate (often carries higher interest rates because it is a riskier secondary lien).
- Cash-out refinance: Fixed or adjustable rate depending on the loan.
How are funds received?
- Home equity loan: Lump sum at closing.
- Cash-out refinance: Lump sum at closing.
Repayment terms
- Home equity loan: Separate repayment schedule from first mortgage.
- Cash-out refinance: New mortgage term begins, often 15 to 30 years.
Closing costs
- Home equity loan: May be lower than refinance costs (if lenders waive fees or charge less for title and appraisal fees).
- Cash-out refinance: Could be higher because it replaces the mortgage, requires new title searches, appraisals and origination fees.
Good when you
- Home equity loan: Want to keep your current mortgage rate.
- Cash-out refinance: Want to refinance and borrow at the same time.
Equity requirements
- Home equity loan: Often requires at least 15% to 20% remaining equity.
- Cash-out refinance: Mortgage lenders commonly cap borrowing around 80% LTV.
Common uses
- Home equity loan: Home repairs, tuition, emergency expenses.
- Cash-out refinance: Debt consolidation, large renovations, mortgage restructuring.
Similarities between home equity loan and cash-out refinance
Even though each loan structure differs, these financing options also share several similarities.
- Both use your home as collateral. Because the loan is secured by your property, providers may offer lower interest rates compared to unsecured borrowing options like personal loans or credit cards.
- Both require equity in the home. In many cases, homeowners need sufficient equity before qualifying. Mortgage lenders often set maximum combined loan-to-value limits.
- Both may involve closing costs. Depending on the mortgage provider and loan structure, borrowers could encounter origination fees, appraisal costs, title fees, recording fees and mortgage underwriting charges.
- Both may affect long-term borrowing costs. Borrowing against home equity could possibly increase total interest paid over time, especially if repayment stretches across many years.
Some homeowners may prioritize keeping their low first mortgage rate, while others could benefit from replacing their current loan entirely through a refinance.
Differences between home equity loan and cash-out refinance
The biggest difference between a home equity loan and a cash-out refinance is what happens to your current mortgage. A home equity loan may allow you to keep that low mortgage rate while borrowing additional funds separately. A cash-out refinance replaces your existing mortgage with a new loan based on current market rates.
Imagine two homeowners:
Scenario 1: Keeping a low mortgage rate
Homeowner A locked in a 3% mortgage rate several years ago. Today’s rates are higher, but she needs funds for a kitchen renovation. A home equity loan might potentially make more sense because she could keep her lower first mortgage intact instead of replacing it with a higher-rate refinance.
Scenario 2: Refinancing into a better structure
Homeowner B currently has a higher mortgage rate than what loan providers are offering today. He also wants to consolidate debt and simplify payments. In this case, a cash-out refinance could allow this individual to replace their existing mortgage while also accessing equity at a more favorable overall rate.
Remember, a home equity loan is an “add-on” loan, not a full replacement. The fees might be mainly lender, title and recording on a smaller amount. It’s just the amount you want to borrow. A cash-out refi is a full “new first mortgage” that has to pay off the old one, redo a lot of paperwork and settlement steps, and often collects money upfront for interest, taxes and insurance escrow.
When does a cash-out refinance make sense?
A cash-out refinance may be worth exploring when:
- Current mortgage rates are lower than your existing rate.
- You want to combine multiple debts into one payment.
- You prefer a single monthly mortgage payment.
- You need a larger lump sum.
- You want to reset or extend your mortgage term.
- You plan to stay in the home long enough to offset closing costs.
When does a home equity loan make sense?
A home equity loan may fit homeowners who:
- Already have a low mortgage interest rate.
- Need a predictable fixed payment.
- Want to avoid refinancing their first mortgage.
- Need funds for a one-time expense.
- Prefer a shorter repayment timeline.
- Only need to borrow a small amount.
In summary
When comparing a home equity loan vs. cash-out refinancing, a big distinction is whether you keep your existing mortgage. A home equity loan borrows against your equity while leaving your mortgage alone. A cash-out refinance replaces your current mortgage loan with a new, larger one, while you get cash from your available equity.
The right option may depend on your current mortgage interest rate, how much equity you’ve built, your monthly budget, your needs and how long you plan to stay in the home. Besides comparing lenders, costs and repayment structures, speaking with a professional can be helpful.
