Cash-out refinance vs. home equity loans: How it works ​ 

If you are a homeowner looking to tap into your home equity to fund any larger expenses you may have, you may want to consider a cash-out refinance or home equity loan. 

These loans offer you an upfront lump-sum amount based on your home equity. Home equity is the difference between your home’s current value and the amount you have left on your mortgage, or the amount of your home you own outright. 

Below we have broken down what a cash-out refinance or home equity loan is and how they work to help you better understand which option is best for you. 

If you are ready to apply for a cash-out refinance or home equity loan, you can begin your application online today. 

What is a cash-out refinance? 

Mortgage refinances are an option for any homeowner looking to change their loan: shorten or extend the loan length, change loan types or take advantage of lower interest rates. A cash-out refinance allows for all these options while offering you additional funds based on your home equity. 

How a cash-out refinance works 

If your home value has increased or if you have built up equity in your property, a cash-out refinance will replace your original home loan. It does this by offering you a new mortgage with a higher loan amount that will essentially be used to pay off your current mortgage and return the difference to you in cash. 

Because a cash-out refinance replaces your mortgage, you will only have one home loan to make payments on.  

Cash-out refinance requirements 

When applying for a cash-out refinance, you will have to meet a lender’s requirements. Some of the requirements you will have to meet are: 

• Minimum credit score of 620 

• At least 20% equity in your home 

• A new home appraisal or appraisal waiver 

Requirements for a cash-out refinance can vary based on your lender and loan type. 

Pros and cons of a cash-out refinance 

Similar to any loan, there are some benefits and drawbacks that a borrower might see when choosing to refinance a mortgage through a cash-out refinance. Let’s take a look at a few pros and cons of a cash-out refinance. 

Pros 

• A lump-sum amount that could be used for any expenses. 

• Interest paid could be tax-deductible if itemized and used on home improvements. 

• Typically offers interest rates lower than personal loans or credit cards. 

Cons 

• You will reduce the equity you own in your home. 

• There are closing costs you will need to pay before you get access to your funds. 

• Your home is used as collateral for your loan. 

What is a home equity loan? 

Similar to a cash-out refinance, a home equity loan will offer you funds based on the amount of equity you have in your home. The difference is that instead of replacing your mortgage with a new one, a home equity loan will be a second mortgage if you already have a home loan. 

How a home equity loan works 

Like a cash-out refinance, home equity loans will give you a lump-sum amount based on the equity you have in a home. However, unlike a cash-out refinance, a home equity loan does not replace your mortgage but is usually a second mortgage. 

Because home equity loans are typically second mortgages, you will have to repay it alongside your primary mortgage if you have one. 

Home equity loan requirements 

When applying for a home equity loan, you will have to meet a lender’s requirements. Some of the requirements you will have to meet are: 

• Minimum credit score of 620 

• At least 15% equity in your home, some lenders will accept 10% 

• Debt-to-income (DTI) ratio of, at most, 43% 

Requirements for a home equity loan can vary based on your lender. 

Pros and cons of a home equity loan 

Similar to any loan, there are benefits and drawbacks that a borrower might see with their home equity loan.  

Pros 

• Typically have lower interest rates than other loan types or credit cards. 

• Upfront lump-sum is beneficial when paying off larger expenses. 

• Potential for tax deductions* on interest paid. 

Cons 

• If your home’s value drops, you may end up owing more than your property is worth. 

• The equity you have in your home will drop some. 

• Failure to make payments could result in you losing your home. 

Cash-out refinance vs. home equity loan 

While both a cash-out refinance and home equity loan offer borrowers a lump-sum amount based on the amount they own in their homes, there are some key differences that set them apart.  

Loan structure and how funds are distributed 

Your cash-out refinance is structured as a first home loan, while your home equity loan will be structured as a second mortgage. 

The funds you receive from either a cash-out refinance or home equity loan will be released as a lump-sum shortly after closing and can be used as you see fit or for any expenses you may have. 

Interest rates and payment terms 

Both loans typically come with a fixed-rate interest, so you don’t have to worry about the amount of interest you pay during the life of your loan ever changing. 

While both loans will be paid back monthly, for a home equity loan, you will have to repay your loan amount and interest on top of an original home loan, if you already have a mortgage. 

Effect on your existing mortgage 

With a cash-out refinance, your existing mortgage will be replaced with a new mortgage that has different terms as well as a larger amount. 

If you choose a home equity loan, it will be in addition to your existing mortgage, so you will have to take care of your home equity loan and payments on top of any existing mortgage. 

Closing costs and fees 

Whether you decide that a cash-out refinance or home equity loan is the right choice for you, you will have to pay closing costs and fees when you finalize your loan. 

You can expect to pay, in closing costs and fees, from 2% to 5% of your loan amount for either a cash-out refinance or home equity loan. 

How to apply: Get started today 

You can apply for a home equity loan or cash-out refinance with an online application today. 

An online application will connect you with a Loan Officer who can talk to you about the differences between a cash-out refinance and a home equity loan to better help you understand which is the better option for you. 

Ready to apply? Start your online application now! 

*Owning does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation. 

Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Refinancing your mortgage may increase costs over the term of your loan. Restrictions may apply.  

All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Owning does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error-free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Owning. Owning its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.