Refinance vs Home Equity Loan
You need cash or a better mortgage rate — should you refinance the first mortgage or take out a second loan against your equity? Both can work, but they have very different costs and trade-offs.
Quick Comparison
| Feature | Refinance (Cash-Out) | Home Equity Loan / HELOC |
|---|---|---|
| Replaces First Mortgage? | Yes | No (added as second) |
| Interest Rate | Usually lower | Higher (second-lien risk) |
| Closing Costs | 2-5% of loan amount | Lower (HELOC especially) |
| Best Use Case | Rate drop + cash out | Small cash needs, good first-mortgage rate |
| Term Reset? | Yes (starts new term) | No (first mortgage unchanged) |
| Combined Loan Limit | 80% of home value (single loan) | 80-85% across both loans |
What is a Refinance?
Refinancing replaces your existing mortgage with a new one. There are three main types:
- Rate-and-term refinance: New loan to get a better rate or different term. No cash out.
- Cash-out refinance: New loan larger than current balance. You receive the difference in cash.
- Streamline refinance: Simplified process for FHA, VA, or USDA loans with limited paperwork.
What is a Home Equity Loan?
A home equity loan (or HELOC) is a second mortgage that uses your home as collateral while leaving the first mortgage untouched. You get a lump sum (home equity loan) or a revolving line of credit (HELOC) on top of your existing mortgage.
- Pros: Keeps your existing low first-mortgage rate, lower closing costs (especially HELOC), flexible terms
- Cons: Higher rate than a first mortgage, two loan payments to manage, blended total cost may be higher
When to Refinance
A refinance makes sense when:
- Rates have dropped at least 0.5-1% below your current rate
- You want to switch from a 30-year to a 15-year (or vice versa)
- You need to pull out a large amount (more than $50,000)
- You want to convert an ARM to a fixed rate
- Your credit score has improved significantly since the original loan
The break-even math matters: divide your closing costs by the monthly savings to see how many months until you recoup the fees. Use our Refinance Calculator.
When to Use a Home Equity Loan or HELOC
A second mortgage makes sense when:
- Your first mortgage rate is already low and refinancing would raise it
- You only need a small amount ($10,000-$50,000)
- You want to keep the first mortgage's payment structure intact
- You want to avoid resetting your mortgage term to 30 years
- You need flexibility (HELOC) for ongoing or multi-phase projects
The Math That Decides
Here's a quick way to think about it:
- Refinance if: (rate drop × loan amount × years) > closing costs AND you need significant cash or want a new term.
- HELOC if: You want to preserve a low first-mortgage rate AND borrow less than ~$75,000.
- Home equity loan if: You want fixed payments AND a specific one-time amount.
Get specifics with our HELOC Calculator, Home Equity Calculator, and Refinance Calculator.
Frequently Asked Questions
Can I do both — refinance and take a HELOC?
Technically yes, but you'd have to qualify for both loans and stay within the combined loan-to-value limits. It's rarely the best move — usually one or the other works better.
Does a cash-out refinance reset my loan term?
Yes. If you had 20 years left on a 30-year mortgage and do a cash-out refi, you'll have 30 years again on the new loan. You can choose a shorter term to offset this.
Which has lower closing costs?
HELOCs typically have the lowest closing costs (sometimes zero). Home equity loans cost less than a full refinance. A cash-out refinance has the highest closing costs but usually the lowest rate.
Which is faster?
HELOCs close fastest (2-3 weeks). Home equity loans take 3-4 weeks. Cash-out refinances typically take 4-6 weeks because of the full underwriting process.