Refinance or home equity loan: How to choose

Your home equity is a treasure chest, filled with untapped value waiting to be unlocked. But as with any treasure, you need to gain access before you can start using the wealth. A cash-out refinance and home equity loan are two popular ways homeowners choose to do so.

Which one is right for you? Both options let you borrow against the equity you've built, but they work in different ways and come with different benefits and risks. In this guide, we'll break down how each option works and what to consider before choosing. 

Refinance vs. home equity loan

Cash-out refinance 

A cash-out refinance replaces your existing mortgage with a new, larger loan. The difference between your current loan balance and the new loan amount is then given to you as a lump sum of cash, which you can use however you like.

Since your new loan offers a new interest rate and repayment term, it could lower or increase your monthly payment, depending on market conditions. 

Pros:

• Access to a large amount of cash.
• Potential to lower your interest rate (if rates are favorable).
• Opportunity to adjust your mortgage terms (ARM to fixed, 30-year to 15-year, or whatever else you choose). 

Cons:

• Higher loan balance and possibly higher monthly payments.
• Risk of foreclosure if you can’t keep up with payments.
• Closing costs can be significant. 

Home equity loan 

A home equity loan is a second mortgage that gives you a single lump sum payout in exchange for fixed monthly payments over a 5 to 30-year term. Interest rates are fixed and better than personal loans or credit cards—but typically less favorable than a refi rate.

Unlike a refinance, it doesn’t replace your existing mortgage—it adds another loan on top of it.

Pros:

• Keep your original mortgage rate and terms
• Fixed payments for predictable budgeting
• Can be a good option if you have a low-rate first mortgage

Cons:

• Two monthly payments (mortgage + home equity loan)
• Higher interest rate than a first mortgage in some cases
• Your home is still collateral — you risk foreclosure if you default

Refinance or home equity loan: How to decide

Although both allow you to tap into your equity, their distinctive features can make all the difference in your financing journey. 

Check out a free cash-out refi vs home equity loan calculator.

Key features

• Replaces your existing mortgage: A cash-out refinance will provide a new mortgage, rate, and terms. A home equity loan will not impact your mortgage. 
• Interest rate: The interest rates on a cash-out refinance tend to be lower than home equity loan rates.
• Monthly payments: Repayment on a refinance is consolidated into your monthly mortgage payment. Alternatively, a home equity loan creates an additional monthly obligation. 
• Closing costs: The upfront cost of refinancing is more expensive than taking out a home equity loan.
• Funding timeline: You can typically fund in six to eight weeks with a refinance, whereas a home equity loan is two to four weeks.

When a cash-out refinance makes sense 

• You can lower your mortgage rate significantly.
• You want to consolidate your payments into one loan.
• You plan to stay in your home long enough to recoup the closing costs.
• You’re okay with resetting the clock on your mortgage term.

When a home equity loan makes sense

• You have a low interest rate on your first mortgage and want to keep it.
• You want a predictable, fixed monthly payment.
• You need the funds quickly and want a simpler process.
• You’re borrowing a smaller amount.

Alternatives to consider

If you're still uncertain whether a refinance or home equity loan will help you accomplish what you need to, it's worth exploring alternative options. 

HELOC

Best for: Ongoing expenses

Tackling a project without a set budget? A home equity line of credit (HELOC) gives you access to a revolving credit line, much like a credit card, backed by the equity in your home. HELOCs typically have variable interest rates and come with a draw period (usually 5 to 10 years) followed by a repayment period (10 to 20 years).

A credit score of 680, sufficient income, and 15% to 20% equity are needed to qualify. 

Home equity investment

Best for: No monthly payments

Dreaming of tapping into your equity without monthly payments? Home equity investments (HEIs) provide a lump sum payout in exchange for a share of the home’s future appreciation. There are no monthly payments over a 30-year term. Instead, you can pay back the investment whenever you decide to sell the home, refinance, or use another source of funds. 

HEI providers look for a credit score above 500 and sufficient equity—there are no income requirements. 

Personal loan

Best for: Quick funding

Personal loans provide a single lump sum payout in exchange for fixed monthly payments over a 1 to 7-year term. While interest rates may be higher than home equity loans, the application process is often faster and cheaper upfront. Therefore, if you need funds to cover a smaller, one-time expense and can handle the monthly payments, it may be a more affordable option.

Requirements vary by lender, but a borrower's income and credit score are evaluated. 

The bottom line

When looking to leverage your home equity, a refinance and home equity loan can help you accomplish what you need to. However, given their distinctive features, the best option depends on your financial goals, mortgage situation, and how long you plan to stay in your home.

Remember, there's no one-size-fits-all solution to financing. Be sure to consider the pros and cons of each, and explore all your options. 

Ready to tap into your equity without monthly payments? Visit home.point.com to prequalify with no impact on your credit. 

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