Which Way Should I Tap My Home Equity?
Answer eight quick questions to see how a home equity loan (HELOAN), a home equity line of credit (HELOC), and a cash-out refinance compare for your situation. This is a starting point, not an approval.
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This is a general starting point. Lenders look at your whole situation, so a lender can tell you what you actually qualify for.
The three options at a glance
| Home equity loan (HELOAN) | HELOC | Cash-out refinance | |
|---|---|---|---|
| What it is | A second mortgage paid out as a lump sum | A second mortgage set up as a credit line | A new, larger mortgage that replaces your current one |
| How you get the money | One lump sum at closing | You draw from a credit line as needed | The difference comes to you as cash at closing |
| Interest rate | Usually fixed | Usually variable | Fixed or adjustable, and it applies to your whole balance |
| Your current mortgage | Stays as it is | Stays as it is | Paid off and replaced |
| Upfront costs | Often closing costs | Often lower upfront costs, sometimes annual fees | Closing costs, often a few percent of the new loan |
| How much you can borrow | Often up to about 80% to 85% of your home's value across all loans | Often up to about 80% to 85% of your home's value across all loans | Often up to about 80% of your home's value |
| Often a good fit when | You need a set amount at once and want a fixed payment | You need money over time or are not sure how much | Your current rate is not lower than today's rates, or paying off debt frees up cash flow you can send to principal. Also often more available at lower credit scores |
What is a cash-out refinance?
A cash-out refinance replaces your current mortgage with a new, larger one. The new loan pays off the old one, and you keep the difference as cash. Unlike a home equity loan or HELOC, it is not a second mortgage. It becomes your only mortgage, and its rate applies to your entire balance, not just the cash you take out. That is why the key question is how your current rate compares with today's rates.
A note on paying off debt
Using home equity to pay off credit cards or other debt can lower your interest rate and your monthly payment. It also turns debt that is not tied to your home into debt that is. If the old balances build back up, you could owe more and put your home at risk. Plan to keep those accounts at zero, and compare the total cost of each option, not just the payment.
A cash-out refinance can still make sense even when its rate is higher than your current one. If paying off high-rate debt frees up a lot of monthly cash flow, sending that money to your mortgage principal can more than make up the difference. It is also sometimes the only option available when your credit score is under about 650. Many lenders offer cash-out refinances down to about a 580 score, and some go as low as 500, usually at a higher cost. Run the numbers with the refi vs. second mortgage calculator.
Questions to ask a lender
- What are all the fees for each option, including closing costs and any annual fees?
- Is the rate fixed or variable, and how much can it change?
- How much can I borrow compared with my home's value?
- If I refinance, how much would my rate and payment change on my whole mortgage?
- Is there a penalty for paying the loan off early?
Want numbers? See how much you could borrow with the equity calculator, and compare a refinance with a second mortgage in dollars using the refi vs. second mortgage calculator. Already have quotes? Compare them with the offer comparison tool. For the details on the two second-mortgage options, read the guide to HELOC vs. home equity loan (HELOAN). A lender can give you actual numbers for your situation, and it is worth getting quotes from more than one.