Cash-Out Refinance vs Home Equity Loan or HELOC: How to Choose

As home values rise across the U.S., many homeowners are gaining substantial equity. This opens the door to borrowing options for renovations, debt consolidation, major life events, or investments. A common question for homeowners in this position is: should I do a cash-out refinance or a home equity loan or HELOC?

The right choice depends on several key factors, including your current mortgage rate, how much cash you need, and whether you qualify for favorable second mortgage terms.

A cash-out refinance replaces your existing mortgage with a larger one, often at a new interest rate. In contrast, home equity loans and HELOCs let you borrow against your equity without changing your current mortgage. Each option has its own pros, cons, and ideal use cases.

In this guide, we’ll break down the key differences, explain the benefits of each, and help you decide which option best fits your financial goals.

What Is a Cash-Out Refinance?

A cash-out refinance replaces your current mortgage with a new, larger one. You receive the difference between the two loans in cash. The new mortgage will have a new interest rate, new term, and possibly different loan features.

Homeowners often use this cash to consolidate debt, renovate their homes, cover education expenses, or eliminate private mortgage insurance (PMI).

VA and FHA Cash-Out Options

The Department of Veterans Affairs (VA) allows eligible borrowers to refinance up to 100% of their home’s value through a VA cash-out refinance. This option is particularly valuable for veterans who want to convert equity into liquid funds.

Similarly, the Federal Housing Administration (FHA) offers a cash-out refinance with a maximum loan-to-value (LTV) of 80%. While the LTV limit is lower, FHA underwriting may be more flexible for borrowers with lower credit scores or higher debt levels.

What Are Home Equity Loans and HELOCs?

A home equity loan is a lump-sum loan with a fixed interest rate and repayment term. You repay it over a set period with fixed monthly payments, which makes budgeting easier.

A HELOC (home equity line of credit) works more like a credit card. It offers a revolving credit limit based on your equity, allowing you to draw funds as needed. HELOCs typically have variable interest rates and an interest-only draw period followed by a repayment phase.

Both products are second liens which means they don’t replace your existing mortgage. This allows you to access equity without changing your first mortgage terms and can be especially useful for homeowners with an already low fixed interest rate.

Learn more about how to get equity out of your home without refinancing.

Key Differences at a Glance

When a Cash-Out Refinance Might Make More Sense

Existing Mortgage Factors

If your current mortgage has a high interest rate, short remaining term, or ongoing PMI/MIP payments, a cash-out refinance could be the more strategic choice. Refinancing may lower your overall interest burden, lengthen the term for smaller monthly payments, or help you eliminate mortgage insurance.

For instance, FHA borrowers with ongoing mortgage insurance premiums may benefit from refinancing into a conventional loan if they now qualify. Similarly, VA borrowers can access up to 100% LTV, offering greater liquidity than most second lien products.

Borrower Profile

Cash-out refinancing may also be more suitable for borrowers with:

• Higher debt-to-income (DTI) ratios
• Lower credit scores
• Limited equity
• Difficulty qualifying for second liens due to stricter underwriting

Government-backed programs like VA and FHA often have more flexible guidelines compared to conventional second-lien options. If your credit or DTI doesn’t meet second-lien requirements, a cash-out refi may provide a viable alternative.

When a Home Equity Loan or HELOC Is a Better Fit

You Have a Low First Mortgage Rate

If you locked in a low rate during recent years, you may not want to change your current mortgage. Adding a second lien preserves your existing terms and prevents the cost of refinancing.

You Only Need a Smaller Amount of Cash

Home equity loans and HELOCs are ideal for smaller funding needs. Whether you’re planning a kitchen remodel, consolidating credit card debt, or funding a business opportunity, these products can provide access to funds with lower closing costs and faster processing times.

You Want Predictability or Flexibility

• Home equity loans offer fixed-rate certainty. You’ll know exactly what you owe every month.
• HELOCs give you draw flexibility. You only pay interest on what you use during the draw period.

Compare HELOC vs home equity loan options here.

Qualifying Differences

Lender Types and Overlays

Traditional banks tend to be more conservative with second-lien loans. They may impose stricter income, credit, and reserve requirements.

Mortgage brokers, credit unions, and non-delegated lenders often have access to alternative programs and more flexible underwriting. If one lender says no, another may say yes.

Find out more about getting a HELOC or home equity loan with bad credit.

Credit Score and DTI Considerations

Cash-out refinances typically allow:

• DTIs up to 50% with conventional and possibly higher on FHA and VA
• Credit scores as low as 580 (FHA/VA) and potentially lower with strong compensating factors

Second liens generally require:

• Credit scores above 680*
• DTIs under 45%*
• Stronger financial profiles

Understanding your full credit and income picture is essential before deciding which product suits your needs.

*Mortgage and home equity guidelines vary by lender, loan program, and borrower profile. Always consult a licensed mortgage professional to review your specific situation. For example, Agave Home Loans offers home equity options for credit scores as low as 620 and debt-to-income ratios up to 50%, depending on the product.

Decision Factors: How to Choose

Consider the following decision points to guide your choice:

• Is your current mortgage rate significantly lower than today’s market rate?
  • If yes, a second lien may be better.
• Do you need more than 85% of your home’s value?
  • Consider a VA cash-out refi.
• Is your credit score below 680 or your DTI above 45%?
  • A cash-out refi may offer more flexibility.
• Do you want one monthly payment or two?
  • A refi combines everything into one. Second liens add a new payment.
• Do you prefer a lump sum or draw-as-needed access?
  • Choose a home equity loan for fixed needs. Pick a HELOC for variable expenses.
• Are you eligible for VA or FHA programs?
  • Take advantage of their unique benefits if available.
• Do you need to borrow a large amount compared to your existing first mortgage?
  • If you’re tapping a significant portion of your equity, a second mortgage might come with a higher interest rate. When combined with your current first mortgage, this could result in a higher overall effective rate than using a single cash-out refinance.

Conclusion

Choosing between a cash-out refinance, home equity loan, or HELOC depends on your current mortgage terms, credit profile, funding needs, and long-term goals. Each option serves a unique financial purpose.

If you’re unsure which path to take, speaking with a qualified mortgage professional is the best next step. They can help you explore offers from multiple lenders and find the most cost-effective solution for accessing your home equity.