How a Cash-Out Refinance Works
A cash-out refinance replaces your current first mortgage with a new mortgage that is larger than the balance you owe. The lender pays off the old first mortgage, and you receive the remaining difference in cash. Because it is a refinance, the new loan becomes your primary mortgage and is secured by your home.
This structure means you are not adding a separate second payment. Instead, you are changing the terms of your main mortgage. The new loan may have a different interest rate, repayment period, and total cost than the one it replaces. You may extend the time you owe on the home, which can increase the total interest paid over the life of the loan even if the new rate is lower.
Cash-out refinances are governed by mortgage disclosure rules. Under the Truth in Lending Act and Regulation Z, the lender must provide disclosures such as the Loan Estimate and Closing Disclosure, including the annual percentage rate, before you sign. The CFPB mortgage tools explain these documents and the closing process.
How a Home Equity Loan Works
A home equity loan is a separate loan secured by your home, often called a second mortgage. You borrow a set amount and repay it on its own schedule, while your original first mortgage stays in place. The lender places a second lien on the property behind the first mortgage.
Because the first mortgage is untouched, your existing rate and remaining term do not change. The home equity loan has its own interest rate, monthly payment, and closing costs. It may be fixed-rate or variable depending on the product, and repayment terms can be shorter than a first mortgage.
Lenders evaluate how much equity you have and how much total debt would be secured by the home. The property value minus the balances of all mortgages represents your equity, though lenders also review credit, income, and debts. A home equity loan may have a higher rate than a first mortgage because it sits in second lien position, which means the first lender is repaid first in foreclosure. Review the CFPB home buying and ownership resources and our guide to home equity loan requirements before applying.
Cash-Out Refinance vs Home Equity Loan: Side-by-Side
The table below compares the core structural differences. It describes general features, not a recommendation or a promise about terms.
| Feature | Cash-out refinance | Home equity loan |
|---|---|---|
| Effect on first mortgage | Replaces it with a new first mortgage | Leaves it in place |
| Lien position | New first lien | Second lien |
| Number of mortgage payments | One main mortgage payment | First mortgage plus home equity loan payment |
| Rate structure | Depends on the new first mortgage; may be fixed or adjustable | Often fixed, but variable products exist |
| Closing costs | Usually includes first-mortgage closing costs | Usually includes second-loan closing costs |
| Effect on existing low-rate first mortgage | It is paid off and replaced | It remains unchanged |
| Foreclosure risk | Home secures the new first mortgage | Home secures both loans |
For related structures, compare second mortgage vs home equity loan and HELOC vs personal loan.
Costs, APR, and Disclosures to Compare
Costs matter because both options can be expensive even when they provide cash. A cash-out refinance may include application fees, appraisal, title search, title insurance, origination charges, recording fees, and prepaid interest or escrow items. A home equity loan may also include application, appraisal, title, and recording fees, though the exact mix varies by lender and location.
Do not compare only the interest rate. Compare the annual percentage rate, which reflects the cost of credit expressed as a yearly rate, along with the total finance charge and the loan term. Under Regulation Z, creditors must disclose the APR and other key terms before you become obligated. The CFPB Ask CFPB library answers common questions about mortgage disclosures and loan costs.
Ask whether either loan has a prepayment penalty, a variable rate, a balloon payment, or a mandatory escrow account. Also consider how long you plan to keep the home. If you may sell soon, upfront closing costs may matter more than a slightly lower rate. Our rate vs APR home loan guide explains why the advertised rate and the APR can tell different stories.
Risk, Equity, and Your Existing Mortgage
Both a cash-out refinance and a home equity loan are secured by your home. If you cannot repay, the lender can foreclose, so the decision affects more than your monthly budget. A cash-out refinance can increase the principal balance and replace a first mortgage that might have favorable terms. It may also reset the repayment clock, meaning you could pay interest for more years.
A home equity loan adds a second lien and a second payment. If your income drops or expenses rise, managing two mortgage payments can be harder than managing one. Falling home values can also reduce your equity, and if the combined loan balances exceed the home value, selling may not cover what you owe. The CFPB owning a home resources discuss equity, affordability, and foreclosure prevention.
Review your equity position carefully. Your equity is the home value minus all mortgage balances. A lender will also consider credit history, income, debts, and the property. The U.S. Department of Housing and Urban Development provides homebuyer and homeowner education, including counseling options that can help you review a decision before you apply.
Which Option Fits Different Goals
The better fit depends on your goals, your current first mortgage, and how much risk you can absorb.
- Choose a cash-out refinance if you want one mortgage payment, you are willing to replace your current first mortgage, and the new loan terms make sense after comparing costs and the full repayment period.
- Consider a home equity loan if your current first mortgage has terms you want to keep, you prefer a separate loan with its own repayment schedule, and you can manage an additional monthly payment.
- Be cautious with either option if you are borrowing for discretionary spending, your income is unstable, or you would have little equity left after the loan.
- Think about timing if you may move soon, because closing costs may not be recovered before a sale.
Neither option is automatically better. A cash-out refinance may be simpler for someone who also wants to change their first mortgage, while a home equity loan may preserve a first mortgage the homeowner wants to keep. Review our pros and cons of a home equity loan and how to get a HELOC for related borrowing choices.
How to Evaluate Both Options Before You Apply
Use a deliberate process before you submit applications, because each application can affect your credit and your options.
- Confirm your equity and payoff balances. Gather statements for every mortgage and check recent property value information. Do not rely on an estimate if the lender will require an appraisal.
- Define the purpose and repayment plan. Write down why you need the cash and how you will repay it. A clear purpose helps you avoid borrowing more than necessary.
- Compare offers on the same terms. Ask for a Loan Estimate or a detailed written quote. Compare APR, monthly payment, total closing costs, loan term, rate type, and prepayment rules. The CFPB mortgage tools can help you organize offers.
- Review your credit reports. Errors can affect approval and pricing. You can request reports through AnnualCreditReport.com, the official site authorized by federal law.
- Check the final disclosures. Before closing, compare the Closing Disclosure with the Loan Estimate. If numbers changed, ask why. Under Regulation Z, certain disclosures must be delivered before consummation.
- Run the payment through a calculator. Use our home equity loan calculator to test how different terms affect the payment, then decide whether the payment fits your budget.
The CFPB also advises consumers to shop and compare before signing. If you are unsure, speak with a HUD-approved housing counselor or a qualified tax professional about your specific situation.