In 2025, more homeowners than ever are exploring ways to tap into the growing value of their homes. With home prices having surged in recent years, many families now have hundreds of thousands of dollars in untapped equity. A financial cushion that can help cover big expenses like renovations, college tuition, debt consolidation, or unexpected medical bills. But when it comes time to turn that equity into usable cash, homeowners often face a crucial choice: should you opt for a cash-out refinance or take out a home equity loan?
Both strategies put the value of your home to work for you. But how they do it and how they affect your long-term finances are very different. Understanding these differences can help you choose the option that truly fits your goals and safeguards your financial health.
What Is a Cash-Out Refinance?
A cash-out refinance means replacing your current mortgage with a new, larger one. The new loan pays off what you still owe on your home, and you receive the difference in cash at closing.
For example, imagine your home is worth $400,000 and you owe $200,000 on your existing mortgage. If you do a cash-out refinance for $300,000, you get $100,000 in cash to use as you wish, and your new mortgage balance becomes $300,000.
This option appeals to many homeowners because mortgage interest rates are often lower than rates on credit cards or personal loans. Plus, by combining your existing mortgage and the extra cash into a single loan, you have just one monthly mortgage payment to manage.
However, a cash-out refinance comes with important trade-offs. You’re not just adding a new loan, you’re restarting your entire mortgage. This means new closing costs, new loan terms, and possibly extending the time it will take to pay off your home in full.
In 2025, as interest rates remain moderately higher than the rock-bottom rates of the early pandemic years. Many homeowners with ultra-low rates hesitate to refinance their whole mortgage just to get cash out. Doing so could mean giving up a great rate for a higher one, which might cancel out some of the savings.
What Is a Home Equity Loan?
A home equity loan, on the other hand, lets you borrow against your home’s equity without changing your existing mortgage. It works like a second mortgage: you keep your primary mortgage exactly as it is and add a separate, fixed-term loan that is secured by your home’s value.
This lump-sum loan typically has a fixed interest rate and a fixed repayment schedule, for example, five, ten, or fifteen years. You pay back both your original mortgage and the home equity loan at the same time, through two separate monthly payments.
For homeowners who already have a low interest rate on their main mortgage, a home equity loan can be a smart way to access cash without disturbing that favorable rate. Home equity loan rates are usually higher than first mortgage rates but lower than unsecured personal loans or credit cards.
The downside is that you’re adding n. If your budget is already tight, managing two loans can feel stressful. Also, because your home serves as collateral, falling behind on payments could ultimately lead to foreclosure.
Cash-Out Refinance vs. Home Equity Loan: What’s the Difference?
Both options use your home’s value as collateral, but they operate differently in ways that matter to your budget and long-term goals.
When you choose a cash-out refinance, you:
- Replace your current mortgage with a brand-new mortgage.
- Roll your existing balance and the cash you want together into one new loan.
- Potentially reset your loan term, which might increase the total interest paid over time if you extend the repayment period.
- Typically enjoy slightly lower interest rates than home equity loans because first mortgages are considered less risky for lenders.
- Pay closing costs, which can be similar to your original mortgage closing costs, often 2% to 5% of the total loan amount.
When you choose a home equity loan, you:
- Keep your existing mortgage unchanged.
- Add a second loan on top of your primary mortgage.
- Take a lump sum and repay it over a fixed term, usually with a fixed rate.
- Typically pay lower closing costs than a full refinance, though you may still face origination fees or appraisal fees.
- Make two monthly payments: one for your main mortgage and one for the home equity loan.
How to Choose: Key Questions to Ask Yourself
Deciding whether a cash-out refinance or a home equity loan is better for you depends on your current loan terms, financial goals, and how long you plan to stay in your home.
Start by asking yourself:
1. What is my current mortgage rate?
If you locked in a historically low rate (say, 3% or below) during the 2020–2021 period, refinancing your entire loan at today’s higher rates might not make sense just to access cash. In that case, a home equity loan could be the smarter choice.
2. How much money do I need?
If you’re planning a large-scale renovation or want to consolidate significant debt, a cash-out refinance might allow you to borrow more at a lower rate than a home equity loan.
3. Can I afford an additional monthly payment?
A home equity loan means adding another bill every month. Make sure your income can comfortably cover both payments, even if interest rates rise or your circumstances change.
4. How long do I plan to stay in my home?
If you’re planning to move in a few years, the upfront costs of a cash-out refinance might not be worth it. So a home equity loan with lower fees could be more cost-effective for short-term needs.
5. Am I comfortable with the risks?
Both options put your home on the line. If you default, you risk foreclosure. Never borrow more than you truly need, and always have a plan to repay the debt on time.
Real-World Examples: Which Is Better in Different Scenarios?
Scenario 1:
Jennifer bought her house in 2020 with a 30-year mortgage at 2.8%. She wants to update her kitchen and bathrooms and needs about $40,000. Because her original rate is so low and rates in 2025 are higher, she doesn’t want to refinance her whole mortgage. For her, a home equity loan makes sense; she keeps her original low rate and adds a predictable second loan.
Scenario 2:
David bought his home ten years ago with a 5.5% mortgage. Today, mortgage rates are around 5% for well-qualified borrowers. David wants to renovate his basement and pay off $20,000 in high-interest credit card debt. By doing a cash-out refinance, he can get a slightly better rate and combine the debt into one mortgage payment, simplifying his finances.
These examples show that the better option depends heavily on your existing rate, how much you need, and your long-term plans.
For homeowners exploring ways to unlock their home’s value in 2025, both cash-out refinancing and home equity loans can be practical tools. The right choice depends on your current mortgage rate, how much cash you need, how long you’ll stay in your home, and how comfortable you are with adding debt.
The smartest step is to compare detailed loan estimates from multiple trusted mortgage lenders, run the numbers carefully, and talk to a qualified financial advisor if you’re unsure. With the right strategy, you can put your home equity to work without putting your financial security at risk.
FAQs
Is interest from a cash-out refinance ttax-deductible
In the US, the interest may be deductible if the funds are used to buy, build, or substantially improve your primary home. Always check with a tax advisor.
Will a home equity loan hurt my credit score?
Applying for a new loan creates a hard inquiry on your credit, which can cause a small, temporary dip. Over time, paying on time helps your score recover.
Which is faster: a cash-out refinance or a home equity loan?
Home equity loans generally close faster than cash-out refinances because there is less paperwork and fewer conditions.
What happens if my home loses value after I borrow?
Both options increase your total debt secured by your home. If property values drop significantly, you could owe more than your home is worth, which is called being “underwater.”
Can I use the money from either option for anything I want?
Generally, yes, but using the funds for home improvements can help with tax deductions and potentially increase your property’s value.
