You need cash, but your home is your biggest asset. A home equity loan and a cash-out refinance both let you tap that equity—but they work differently, cost differently, and suit different situations. Here's how to pick the right one for your financial reality.
The Core Difference
A home equity loan is a second mortgage on top of your existing one. You borrow a lump sum against your home's equity and repay it on a separate schedule, typically in 5–15 years.
A cash-out refinance replaces your current mortgage entirely. You refinance for more than you owe, pocket the difference in cash, and start a new loan term—usually 15 or 30 years.
Think of it this way: equity loan = add-on; refinance = swap-out.
Cost Comparison
Closing costs and fees differ significantly:
- Home equity loans typically run $1,500–$3,500 in closing costs (about 1–2% of the loan amount). Faster approval and lower overhead means cheaper entry.
- Cash-out refinances can cost $3,000–$6,000 or more (2–5% of the new loan amount) because you're replacing an entire mortgage. You'll pay appraisal, title insurance, underwriting, and often origination fees again.
Interest rates also diverge. Home equity loans currently sit around 8–10% APR, while refinance rates track closely to your primary mortgage rate—usually 6–7.5% today. If you have a low original mortgage rate, refinancing might push you into a higher rate, which eats into savings.
Timeline and Speed
Need cash fast? Home equity loans typically close in 2–3 weeks. Many lenders streamline the process because you're not replacing an existing loan.
Cash-out refinances take longer—4–6 weeks minimum. The full mortgage underwriting process kicks in, complete with appraisal delays and title work.
Monthly Payment Impact
A home equity loan adds a separate monthly payment to your current mortgage. If you owe $300,000 on your primary mortgage and borrow $50,000 via equity loan at 9% for 10 years, you're looking at roughly $530 extra per month on top of your existing payment.
A cash-out refinance rolls everything into one payment. That same $50,000 borrowed via refinance at 6.5% over 30 years adds roughly $320 per month—but you're also refinancing the $300,000, which resets your amortization clock.
Tax Deductibility
Interest on home equity loans and HELOCs is not deductible unless you use the borrowed money to buy, build, or improve the home. Using $50,000 from an equity loan to pay off credit cards? You can't deduct that interest.
Same rule applies to cash-out refinances. The interest isn't deductible unless the funds improve the property.
When to Choose Each
Pick a home equity loan if:
- Your current mortgage rate is 4–5% (refinancing up to 6–7% isn't worth it)
- You need funds in 3 weeks or less
- You only need $25,000–$75,000 (small-to-medium amounts)
- You want to keep your original loan terms intact
- You're risk-averse about resetting your mortgage timeline
Pick a cash-out refinance if:
- You need $100,000+ and can justify the closing costs
- Your current rate is 6%+ and rates have dropped 1%+ since you locked in
- You want one simple payment instead of juggling two mortgages
- You can commit to a 15–30 year repayment timeline
- You're planning to stay in the home 7+ years (timeline to break even on fees)
Real Example
You own a home worth $350,000 with a $250,000 mortgage at 4.2%. You need $60,000.
Home equity loan route: Borrow $60,000 at 9% for 10 years. Cost: $2,000 in fees. New payment: ~$635/month. Your original 4.2% mortgage stays put.
Refinance route: Refinance the $250,000 at 6.5% for 30 years, pocket $60,000. Cost: $5,500 in fees. Net payment change: roughly +$300/month (accounting for your old payment). Break-even: about 18 months.
If rates drop further or you stay longer, refinancing wins. If you value simplicity and speed, the equity loan is cleaner.
Finding the Right Lender
Compare offerings from banks, credit unions, and online lenders—rates and fees vary by $1,000+ for identical borrowers. Mercoly makes it simple to compare home equity loans and HELOCs from trusted providers in one place, so you're not calling ten lenders individually.
Frequently Asked Questions
Q: Can I get a home equity loan if my credit is below 620? Most lenders require 620+ credit scores for equity loans. FHA-backed options exist but cost more and move slower.
Q: What happens to my home equity loan if I sell my house? The lender gets paid off from your sale proceeds before you receive funds. You can't just walk away—it's a lien on the property.
Q: Is a HELOC better than a home equity loan? HELOCs function like credit cards—you draw what you need, pay interest only on what you use. Better if you need funds sporadically; home equity loans are better for one lump sum.
Start by checking your home's current value, your mortgage balance, and today's rates in your area—then run the math for your specific situation.