Home Equity Loan vs. HELOC vs. Cash-Out Refinance: How to Compare

For many people, your home is your biggest asset. And if you’ve built up equity, you have three main ways to borrow against it: a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance.

Each works differently, and the right one depends on how much you need, how you plan to use it, and whether you want a lump sum or flexible access to funds over time.

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

Home equity loan

A home equity loan gives you one lump sum, usually with a fixed interest rate and a fixed payment.

• Payout: One lump sum at closing
• Rate: Typically fixed for the life of the loan
• Term: Typically 5 to 30 years, depending on lender
• Equity required: Lenders typically cap your combined loan-to-value (CLTV), meaning your mortgage plus the new loan against what your home is worth, at 80% to 85%. Some allow up to 90% with strong credit and income, but less equity means less cushion if values fall.
• Closing costs: May apply. Some lenders reduce or waive them if you meet certain conditions, but it usually comes with a higher rate or fee if you pay the loan off early. Ask for both quotes.

With a home equity loan, your payment stays the same every month, which makes it easier to budget. It’s often called a second mortgage, since it sits behind your primary mortgage.

HELOC

A home equity line of credit (HELOC) works more like a credit card. You get a credit limit you can draw from as you need it.

• Payout: A credit limit you can draw from, repay, and draw from again during the draw period
• Rate: Usually variable, so your payment can change as rates move
• Term: A draw period (often around 10 years), followed by a repayment period (often 10 to 20 years)
• Equity required: Many lenders cap your mortgage balance plus your HELOC credit limit at about 80% to 85% of your home’s value, which means keeping at 15% to 20% equity, though some lenders allow more
• Closing costs: May apply, but many lenders reduce or waive them if you meet certain conditions, but it usually comes with a higher rate or prepayment penalty. Ask for quotes both ways.
• Payment shift: Once the repayment period starts, you can no longer draw new funds and begin paying down principal and interest

A HELOC’s rate can change at any time, and your payment usually jumps when the repayment period starts. Before you sign, ask the lender what your payment would be in the repayment period.

Cash-out refinance

A cash-out refinance swaps your mortgage for a bigger one. After your old balance is paid off, the leftover money, minus closing costs and fees, goes to you.

• Payout: A lump sum in cash, pulled directly from your home’s equity
• Rate: A new rate on your entire mortgage balance, not just the amount you’re borrowing
• Term: Resets your mortgage term, typically 15 to 30 years
• Equity required: For conventional and FHA loans, your new mortgage typically can’t exceed 80% of your home’s value. VA rules allow up to 100% of your home’s value, though lenders can set a lower cap.
• Closing costs: Tend to run higher than a home equity loan or HELOC, since you’re taking out a whole new mortgage

With this option, you end up with one monthly payment instead of a mortgage plus a second loan. That can make it easier to manage, but you may have a bigger monthly payment, more interest over time, or both.

Read more >> How to Calculate Home Equity

How to choose between a home equity loan, HELOC, and cash-out refinance

The right option comes down to how you’ll use the money and how you want to pay it back.

• Consider a home equity loan if you need a lump sum with predictable payments. This fits one-time costs, like a kitchen remodel or a major home repair, where a fixed payment makes budgeting easier.
• Consider a HELOC if you need flexible access to funds over time. This fits ongoing projects, like a multiphase renovation, or costs you can’t predict yet, like unexpected home repairs.
• Consider a cash-out refinance if you want to replace your entire mortgage and take out cash at the same time. This can make sense if today’s mortgage rates are lower than what you’re currently paying.
• Consider a personal loan if you’d rather not put your home on the line. It isn’t secured by your home, but rates usually run higher.

Here’s a quick comparison of all three:

Read more >> Cash-Out Refinance vs. Home Equity Loan: What's the Difference?

‍Give yourself a gut check first. Do you need one lump sum, ongoing access to money over time, or a whole new mortgage with a lower rate? Your answer can help point to the right option before you even look at rates.

Credit score requirements for each option

A home equity loan and a HELOC generally require stronger credit. That’s because they’re second liens, so the lender’s claim sits behind your primary mortgage. It means if you default, your primary mortgage gets paid first.

A cash-out refinance tends to be more forgiving on approval, because your new loan replaces the old mortgage and the lender holds the first lien. But more forgiving doesn’t mean cheaper. Fannie Mae charges more for lower scores and for taking cash out, and FHA adds mortgage insurance. Because the rate covers your whole mortgage, your score affects more of your debt here than with the two other options. Your new loan replaces the old mortgage, so the lender is first in line to get paid if something goes wrong.

At a glance: Home equity loan vs. HELOC vs. cash-out refi

Keep in mind that your credit score matters for all three options, but it’s not the only factor lenders weigh. Your income, amount of home equity, and existing debt all play a role too.

Read more >> Can You Get a Home Equity Loan with Bad Credit?

Risks to consider before borrowing against your home

All three options use your home as collateral, so missing payments could put your home at risk of foreclosure.

• Foreclosure risk. Your home secures the debt, so a series of missed payments can lead to foreclosure.
• Rate risk. A HELOC’s or mortgage’s variable rate can rise with the market, increasing your payment even if you haven’t borrowed more.
• Longer debt exposure. A cash-out refinance can add years back onto your mortgage, which may mean more total interest paid.
• Less of a cushion. Tapping equity now leaves you with less to fall back on if you need to sell or refinance again later.

You do get some protection, however. Federal law gives you three business days after closing on a home equity loan, HELOC, or refinance on your primary home to cancel for any reason, according to the CFPB.

If you refinance with your current lender, the right to cancel covers only the new money above what you already owe. Your lender has to give you a written notice of your right to cancel, so check it for the deadline.

‍Free help before you sign. A HUD-approved housing counselor will review the numbers with you at no cost: 800-569-4287, or find one near you. You don’t need to be in trouble to call.

Two cases call for a lawyer instead: you’re paying off credit cards with the money, which moves unsecured debt onto your house, or you’re already behind on the mortgage. In both, falling behind on payments could eventually lead to foreclosure. A lawyer can explain how that works in your state and what options you have. If cost is a concern, your local legal aid office may help for free if you qualify. Search by state at LawHelp.org.

How to prepare your credit before applying

Since your credit score affects both your approval odds and your rate, it’s worth strengthening it before you apply.

1. Check your credit reports for errors. Get them free every week at AnnualCreditReport.com, and dispute anything inaccurate with the bureau for free before you apply, since it could drag down your score.
2. Pay down revolving balances. Lowering your credit card balances relative to your limits can help your score in the weeks before you apply.
3. Build a longer on-time payment history. The more months of positive payments on your credit report, the stronger your application looks.
4. Hold off on opening new credit. Each new account can ding your score short-term and shortens your average account age, both of which can work against you right before you apply.
5. Don’t close old accounts. Closing a card lowers your total available credit, which can push your utilization up. And years later, once the account drops off your report, your credit history can look shorter.

Read more >> How to Build Home Equity Faster

Bottom line

If your current mortgage rate is lower than today's rates, a HELOC or home equity loan lets you keep it. A cash-out refinance makes more sense when you can lower the rate on your whole mortgage at the same time.

Whichever you choose, getting approved with fair credit isn’t the same as getting a good rate. On a cash-out refinance, that rate covers everything you owe.

If you’re a few months from applying, Kikoff’s Credit Account reports your on-time payments to Equifax, Experian, and TransUnion. There’s no credit check to sign up, and plans start at $5 a month.