Home Equity Loans and HELOCs vs Cash-Out Refinance

Home equity loans, home equity lines of credit (HELOCs), and cash-out refinances are all borrowing options that allow you to access the equity you’ve built in your home. By tapping into home equity — the difference between your home’s current value and the amount still owed on the mortgage — you can secure funds to meet your financial goals, consolidating debt, completing home renovations, or covering a significant expense.

While these three types of loans do have similarities, there are key differences in how each one works. Understanding the differences in a home equity loan vs. HELOC vs. cash-out refi can help you better determine which option is right for you.

Defining Home Equity Loan, HELOC, and Cash-Out Refinance

To start, it’s important to know the basic definitions of home equity loans, HELOCs, and cash-out refinances.

Home Equity Loan

A home equity loan is an installment loan that lets you borrow a lump sum that you’ll then repay through regular monthly payments over a set term with a fixed interest rate. Generally, lenders will allow you to borrow up to 85% of your home’s equity.

This loan is separate from your existing mortgage. As such, you’ll usually make payments on this loan in addition to your monthly mortgage payments. To better understand what kind of payment may be due each month, consider using a home equity loan calculator.

HELOC

A HELOC is a revolving line of credit secured by your home that works somewhat like a credit card. For example, if you’re approved for a $50,000 HELOC, you can borrow what you need during the draw period, up to your credit limit, and generally pay interest only on the amount used. As you repay what you’ve borrowed, those funds become available to use again.

HELOCs typically have variable rates. During the repayment period, you can no longer borrow and must repay the outstanding principal plus interest, which may increase your monthly payments.

Cash-Out Refinance

A cash-out refinance lets you access your home equity by replacing your existing mortgage with a new mortgage for more than you currently owe. You receive the difference as cash at closing.

For example, if your home is worth $500,000 and you owe $300,000 on your current mortgage, you may be able to refinance into a larger mortgage and receive a portion of your available equity as cash.

Unlike a home equity loan or HELOC, a cash-out refinance replaces your existing mortgage rather than adding a second mortgage. This can make it an ideal option for homeowners who want to access their equity while restructuring their existing mortgage.

Recommended: First-Time Homebuyer Guide

Home Equity Loans and HELOCs vs. Cash-Out Refinance

Here’s a look at how SoFi’s home equity loan vs. HELOC vs. cash-out refinance stacks up when it comes to everything from borrowing limit to interest rate to fees:

	Home Equity Loan	HELOC	Cash-Out Refinance
Borrowing Limit	85% of borrower’s equity	Up to 85% of borrower’s equity	80% of borrower’s equity for most loans
Interest Rate	Fixed rate	Variable rate	May be fixed or variable
Type of Credit	Installment loan: Borrowers get a specific amount of money all at once that they then repay in regular installments throughout the loan’s term (generally up to 30 years).	Revolving credit: Borrowers receive a line of credit for a specified amount and have a draw period followed by a repayment period (10-30 years).	Installment loan: Borrowers receive a lump sum payment from the excess funds of their new mortgage, which has a new rate and repayment terms (generally 15-30 years).
Fees	Closing costs (typically 2% to 5% of the loan amount)	Closing costs (typically 1% to 5% of the loan amount), as well as other possible costs, depending on the lender.	Closing costs (typically 2% to 6% of the loan amount)
When It Might Make Sense to Borrow	Home equity loans can make sense for borrowers who want predictable monthly payments or who want to consolidate higher-interest debt or for large purchases.	HELOCs can be useful for situations where a borrower may want to access funds for ongoing needs over a specified period of time, or for borrowers funding a project, such as a renovation, where the cost is not yet clear.	Cash-out refinances may make sense for homeowners who want to access a larger amount of home equity while replacing their existing mortgage to consolidate debt or fund a home improvement project.

Borrowing Limit

With a home equity loan or HELOC, lenders generally allow you to borrow up to 85% of your home’s equity. Cash-out refinances, meanwhile, have a slightly lower borrowing limit — up to 80% of your equity. The exception is a Veterans Affairs (VA) cash-out refi. This lets you borrow up to 100% per VA rules, although some lenders may impose a lower ceiling.

Interest Rate

With a HELOC, the interest rate is usually adjustable. This means the interest rate can rise, and if it does, the monthly payment can increase. Home equity loans, meanwhile, generally have a fixed interest rate, meaning the interest rate remains unchanged for the life of the loan. This allows for more predictable monthly payment amounts.

A cash-out refinance can have either a fixed rate or an adjustable rate. If you opt for an adjustable rate, you may be able to access more equity overall.

Loan Structure

Both home equity loans and cash-out refinances are installment loans, where you receive a lump sum that you’ll then pay back in regular installments. A HELOC, meanwhile, is a revolving line of credit. This allows you to take out and pay back as much as you need at any given time during the draw period.

Fees

With a home equity loan, HELOC, or cash-out refinance, you may pay closing costs. The amount you pay varies by lender, loan amount and property.

When Does It Make Sense to Use a Home Equity Loan, HELOC or Cash-Out Refinance

The right way to access your home equity depends on how much you want to borrow, how you want to access the funds and whether you want to replace your existing mortgage.

A home equity loan may make sense if you want a lump sum with predictable monthly payments and a fixed interest rate. It can be useful for a specific, known expense such as a major home improvement project or debt consolidation.

A HELOC may make sense if you want flexible, ongoing access to your home equity. Because you can draw funds as needed rather than receiving the full amount upfront, a HELOC can be useful when you’re funding a project with costs that may change over time.

A cash-out refinance may make sense if you want to access a larger portion of your home equity while replacing your existing mortgage with a new loan. It can be an option for homeowners looking to fund major expenses, such as a home improvement or debt consolidation.

Which Option Is Right for You?

The right way to access your home equity depends on your goals, how you want to access the funds and whether you want to replace your existing mortgage. Each option has different features and costs.

When a Home Equity Loan Makes Sense

A home equity loan may be a good fit if:

•   You want a lump sum with predictable payments. Home equity loans generally have fixed interest rates and regular monthly payments, which can make budgeting easier.

•   You want to keep your existing mortgage. A home equity loan lets you borrow against your available equity without refinancing, so your current mortgage rate and terms remain unchanged.

When a HELOC May Make Sense

A HELOC may be a good fit if:

•   You want flexible access to your home equity. You can borrow as needed during the draw period, up to your credit limit, instead of taking the full amount upfront.

•   Your expenses may vary over time. A HELOC can be useful for ongoing or phased expenses, such as a home renovation, when the total cost isn’t known upfront.

•   You’re comfortable with a variable interest rate. HELOC rates are generally variable, so your payment may change as interest rates change.

•   You want to keep your existing mortgage. A HELOC lets you access your equity without refinancing your current mortgage.

Recommended: The Different Types of Home Equity Lending

When a Cash-Out Refinance May Make Sense

A cash-out refinance may be a good fit if:

•   You want to access a larger amount of your home equity. A cash-out refinance replaces your existing mortgage with a new, larger mortgage with a portion of your equity delivered as cash.

•   You want to access your equity while restructuring your mortgage. Because the existing mortgage is replaced, a cash-out refinance may may sense when the overall terms of the new mortgage align with your financial goals.

•   You want just one monthly payment: Because a cash-out refinance replaces your existing mortgage, you won’t be adding a second monthly mortgage payment. This means you’ll have only one monthly payment to stay on top of.

•   You have a lower credit score but still want to tap your home equity: In general, it’s easier to qualify for a cash-out refinance vs. HELOC or home equity loan since it’s replacing your primary mortgage.

Recommended: HELOC Repayment Calculator

The Takeaway

Cash-out refinances, HELOCs and home equity loans can help homeowners access the equity they’ve built in their homes, but they work differently. A cash-out refinance replaces your existing mortgage with a new loan and provides cash from your available equity, while a home equity loan or HELOC generally adds a second mortgage. The right option depends on how much you want to borrow, how you want to access the funds and whether replacing your existing mortgage makes sense for your financial goals.

Ready to see how much home equity you may be able to access? Explore cash-out refinance, HELOC and home equity loan options with SoFi and find out what you may qualify for in just a few minutes.Personalized one-on-one support from a dedicated Mortgage Loan Officer is available.

FAQ

Can you take out a home equity loan or HELOC and cash-out refinance?

If you qualify, you can get both a home equity loan or home equity line of credit and a cash-out refinance. Qualified borrowers can use their cash-out refinance to help repay their outstanding home equity loan or HELOC.

Can you borrow more with a HELOC or home equity loan than a cash-out refinance?

Ultimately, the amount you can borrow will depend on factors including your home’s value, existing mortgage balance, available home equity, credit profile, income and lender requirements. . The maximum amount may also vary by loan type and lender, so compare your options based on how much you want to borrow and how you want to access the funds.

Are HELOCs, home equity loans or cash-out refinance tax deductible?

Interest on your cash-out refinance or home equity line of credit can be tax-deductible so long as you use the funds for capital home improvements. This includes projects such as remodeling and renovating.

What is the difference between a home equity loan, HELOC and cash-out refinance?

A home equity loan provides a lump sum that you repay in regular installments, typically at a fixed interest rate. A HELOC is a revolving line of credit that lets you borrow as needed and typically has a variable interest rate. Both allow you to access your home equity while keeping your existing mortgage. A cash-out refinance replaces your existing mortgage with a new, larger mortgage and pays you the difference in cash at closing.

Can you refinance a home equity loan?

Yes, you can refinance a home equity loan into a new home equity loan, convert it into a HELOC, or roll it into your primary mortgage through a cash-out refinance. This is typically done to secure a lower interest rate, change the loan terms, or consolidate debt.

What is the difference between a HELOC vs home equity loan?

A HELOC is a revolving line of credit. You can take out money as you need it, up to your approved limit, during the draw period. You may be able to make interest-only payments on the amount you withdraw during that time, typically 10 years. A home equity loan is another type of second mortgage that uses your home as collateral, but in this case, the funds are disbursed all at once and repayment starts immediately. It is usually a fixed-rate loan of five to 30 years, and monthly payments remain the same until the loan is paid off.

What Is a Cash-Out Refinance?

A cash-out refinance replaces your existing mortgage with a new, larger mortgage and allows you to receive the difference between the two as cash.

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