Home Equity Loan vs. Refi: What’s the Better Way to Access Cash?
- ICE Mortgage Technology
- Jan 24
- 3 min read
Updated: Jan 26
Whether you've been eyeing a kitchen remodel, thinking about consolidating high-interest debt, or planning for college tuition, sometimes life calls for extra cash. Thankfully, your home equity can help.
If you want the predictability of a fixed rate and steady payments, you may be able to tap your equity in the form of a home equity loan or a cash-out refinance. But which is the better option?
The truth is, there is no one-size-fits-all answer — just the right choice for your specific financial circumstances and goals. Let's break down how both options work and when one might be the better fit.
First, a few definitions:
Lien: Security for debt. A lien simply means the lender has a legal claim to your home until the loan is paid off.
First Lien/First Mortgage: Your primary mortgage. If the home is ever sold, this loan gets paid first. A cash-out refinance is considered a first lien because it replaces your original mortgage.
Second Lien/Second Mortgage: Any loan behind your main mortgage, second in line for repayment if the home is sold. A home equity loan is a common example of a second lien.
What Is a Cash-Out Refinance?
A cash-out refinance replaces your current mortgage with a larger one. The new loan is used to pay off your old mortgage, and you get the difference back in cash (hence, “cash-out” refinance).
A cash-out refinance may make sense if you:
Have a higher interest rate on your current mortgage and can qualify for a lower rate
Want to consolidate high-interest debts into a lower-rate mortgage
Need a large, one-time lump sum and prefer one loan with one monthly payment
Plan to stay in the home long enough to recoup closing costs
Bottom line: A cash‑out refi shines when you can improve your first‑mortgage rate, need a big payout, and want one fixed payment — even after accounting for higher closing costs.
What Is a Home Equity Loan?
A home equity loan gives you a fixed-rate lump sum as a second mortgage, ideal for homeowners who want stable monthly payments without affecting their primary mortgage rate.
A home equity loan may make more sense if you:
Already have a lower interest rate you don't want to lose
Need a smaller amount of cash
Are comfortable with two monthly mortgage payments
Want lower closing costs (typically less than a full refinance)
Bottom line: A fixed-rate home equity loan is ideal when you want a smaller, predictable lump sum while keeping your low first mortgage rate and minimizing upfront costs.
Heard of A HELOC?
Another second-lien option is a Home Equity Line of Credit (HELOC), which is a revolving line of credit secured by the equity in your home. HELOCs typically have variable rates and offer more flexibility for ongoing projects, allowing you to borrow only what you need, when you need it. If flexibility matters more than fixed payments, ask your Loan Officer about HELOCs.
Know the Risks and Requirements
When you borrow against your home, you’re using it as collateral. That means, if you can’t make payments, your home is at risk, so it’s important to borrow responsibly. Lenders also look at your Loan-to-Value ratio (LTV), which measures how much you owe compared to your home’s value. Why does this matter?
A lower LTV usually means better rates and more borrowing power.
Most lenders cap LTV at a certain percentage (often 80%-85%), which limits how much cash you can access.
Your Loan Officer can help you calculate your LTV and explain what it means for your options. Understanding these factors upfront ensures you choose a solution that fits your goals without stretching your finances.
Key Questions to Ask Before Deciding
What's your current mortgage rate vs. today's market rates?
How much cash do you actually need?
How long do you plan to stay in your home?
Are you comfortable using your home as collateral?
Both home equity loans and cash-out refis can help you unlock cash for big goals. The right choice depends on your situation, so talk to your Loan Officer to run the numbers and find the best fit for your needs.