Cash-out refinance vs HELOC vs home equity loan: the comparison
Here is the at-a-glance view across the three products. HELOC and home equity loan terms (rates, draw periods, and combined loan-to-value limits) are set by each lender and vary, so those cells describe the posture rather than a quote. General characteristics, not an offer.
| Product | Lien position | Rate type | How funds arrive | Keeps your first mortgage | Typical use | Key tradeoff |
|---|---|---|---|---|---|---|
| Cash-out refinance | Replaces your first mortgage with a new, larger one | Usually fixed (adjustable available) | Lump sum at closing | No, it replaces it | A large one-time need; resetting the whole mortgage | Resets your first mortgage and term; cash-out rates run a bit higher than rate-and-term |
| HELOC | Second lien behind your first mortgage | Usually variable | A revolving line you draw as needed | Yes | Flexible or ongoing needs; drawing over time | Variable rate, so the payment can rise; secured by your home |
| Home equity loan | Second lien behind your first mortgage | Usually fixed | Lump sum | Yes | A fixed one-time need while keeping a low first-mortgage rate | A second monthly payment on top of your first mortgage; secured by your home |
Closing costs apply to each in different ways; the true cost of homeownership guide covers how those costs fit your bigger picture.
Cash-out refinance vs HELOC: which should you use?
It comes down to whether you want to keep your current mortgage. A cash-out refinance replaces your first mortgage with a new, larger one and hands you the difference as a lump sum, which fits a large one-time need, especially when it does not push your first-mortgage rate up much. A HELOC keeps your existing mortgage and adds a revolving second-lien line you draw from as needed, usually at a variable rate, which fits flexible or ongoing needs. If your current rate is low, a HELOC often protects it while still tapping equity.
Cash-out refinance vs home equity loan: what is the difference?
Both hand you a lump sum, but a home equity loan is a fixed-rate second lien that leaves your first mortgage alone, while a cash-out refinance replaces the first mortgage entirely. If your first-mortgage rate is low, a home equity loan keeps it and adds a separate fixed payment. If you would refinance anyway, or you want a single loan instead of two, cash-out can be simpler. The core tradeoff is two payments versus one larger one.
How much can I cash out?
It depends on your loan type and your equity, measured as loan-to-value (LTV). Conventional cash-out generally reaches up to 80% of the home's value on a primary residence (Fannie Mae and Freddie Mac Selling Guides). FHA cash-out caps at 80% of the adjusted value (HUD Handbook 4000.1). VA cash-out can reach up to 100% of the reasonable value (VA Circular 26-19-05), though most lenders cap lower as an overlay. A HELOC or home equity loan is limited instead by each lender's combined-LTV rule. The program-specific mechanics live on my conventional, FHA, and VA cash-out guides.
Do you lose equity in a cash-out refinance?
You convert equity to cash, you do not lose it. Cash-out moves part of your home equity from the house into your pocket as a loan, so your equity drops by the amount you take and your mortgage balance rises by that much plus closing costs. The home's value does not change; what changes is how much of it you have borrowed against. It is a trade, not a loss, and the balance is secured by your home, so the equity you keep is your cushion.
Are cash-out funds taxable, and how does it affect taxes?
Cash-out proceeds are loan proceeds, not income, so they are not taxable. Whether the interest is tax-deductible is a separate question that depends on how you use the money and on IRS rules (see IRS Publication 936). That part is not something I decide. This is general education, and you should confirm your own situation with a tax professional. I am a mortgage loan officer, not a tax advisor.
Can I cash out refinance a paid-off home?
Yes. If you own your home free and clear, a cash-out refinance places a new first mortgage on it and gives you the proceeds, up to your program's LTV limit. Because there is no existing loan to pay off, the full new loan minus closing costs is available to you, within that cap. A HELOC or home equity loan can also tap a paid-off home as a new lien if you would rather not place a first mortgage.
Should I use cash-out to consolidate debt?
It is a common use, and it cuts both ways. Folding high-rate credit cards into a mortgage can lower your blended interest rate and your monthly outlay. But it converts unsecured debt into debt secured by your home, can stretch the payoff over a much longer term (which can raise total interest even at a lower rate), and adds closing costs. Weigh it honestly against the alternatives rather than treating it as free money. My debt consolidation guide lays out the full tradeoffs, the secured-debt caution, and the other options.
Can I cash out a rental or investment property?
You can, but the terms are tighter. Cash-out on a non-owner-occupied property generally allows a lower LTV than a primary residence and prices higher, because lenders treat investment property as higher risk. FHA and VA cash-out are primary-residence only; conventional and other investor programs handle investment cash-out. My investment property guide covers the cash-out and BRRRR approach and its limits.