Refinance vs Home Equity Loan: What Is Right for You?

If you’ve been making mortgage payments for several years, you may have more equity—outright ownership in your home—than you realize. For example, in the fourth quarter of 2025, the average mortgaged borrower had $295,000 in home equity, according to The Mortgage Reports.

There are various options for tapping into that equity, such as a cash-out refinance, a home equity loan or a home equity line of credit (HELOC). If you’re wondering which option is the best choice, that depends on your goals and your current mortgage rate.

Every situation is different. The best option for you depends on your current mortgage rate, how much equity you have and what you plan to do with the funds. Lenders also have their own requirements for credit scores, equity minimums and loan limits, so the specifics can vary. This guide covers the general differences to help you think through the decision.

Keep in mind that all three options use your home as collateral. That means if you are unable to make payments, you could risk foreclosure. Borrow only what you need and have a clear plan for repayment before moving forward.

What Is a Cash-Out Refinance?

When you get a cash-out refinance, you replace your entire existing mortgage with a new, larger mortgage and take the difference in cash. For example, if you currently have $200,000 remaining on your mortgage and you want to take $100,000 of your equity in cash, you would open a new mortgage for $300,000. The new mortgage would pay off your existing $200,000 mortgage, you would take the extra $100,000 in cash, and you’d start making payments on the new mortgage of $300,000.

Because a cash-out refinance results in a whole new mortgage loan, the new interest rate replaces your old one. It can be a smart move if rates have dropped since you got your mortgage loan, but it may be costly if mortgage rates have risen since you bought your home. And since a cash-out refinance is a whole new mortgage loan, borrowers typically must pay closing costs equal to 2% to 5% of the loan amount.

What Is a Home Equity Loan?

With a home equity loan, you borrow a lump sum of cash against the equity in your home, keeping your current mortgage and adding a second mortgage layered on top of the existing one. While you’ll continue paying your existing mortgage payments, you’ll also start repaying the home equity loan at a fixed interest rate.

Unlike a refinance, which replaces your original mortgage loan, your existing mortgage stays intact with a home equity loan. Closing costs for a home equity loan are typically lower than a cash-out refinance, but you will need to make two monthly payments, one for your existing mortgage and one for the new loan, until the home equity loan is repaid.

What Is a HELOC?

A home equity line of credit (HELOC) is another option for tapping into the equity in your home, but rather than a lump sum, it provides you a revolving credit line up to a specific limit secured by your home.

Typically, a HELOC offers a variable interest rate. During the draw period, such as 10 years, you can borrow cash from the line, repay, and borrow again. During the draw period, you make monthly interest payments based only on the amount currently borrowed.

When the draw period ends, you enter the repayment period — typically 10 to 20 years — during which you can no longer draw funds and must begin repaying both principal and interest. Your monthly payment will generally increase during this phase, so it is important to plan for the transition.

What Are the Requirements to Qualify?

Each of these options uses your home as collateral, so lenders typically require a meaningful amount of equity before you can borrow against it. In most cases, you will need to retain at least 15% to 20% equity in your home after taking out the new loan or line of credit. Lenders also look at your credit score, income and existing debt. A stronger credit score — generally 620 or above, with better rates available at higher scores — and a manageable debt-to-income ratio will improve your chances of approval and help you secure a competitive rate.

To understand how much you may be able to borrow, start with your home’s current estimated value and subtract your remaining mortgage balance — that is your home equity. From there, your lender can help you calculate how much of that equity is accessible based on their loan-to-value (LTV) limits.

Cash-Out Refinance vs. Home Equity Loan: Key Differences

While both offer the opportunity to cash out on your home equity, there are several differences between a cash-out refinance and a home equity loan. If you want to save money, it’s important to consider your current mortgage rate. If it is significantly below today’s market average, the smart move may be to preserve it with a home equity loan rather than replacing it with a new mortgage loan at a potentially higher rate.

Equity Vehicle	Cash-Out Refinance	Home Equity Loan	HELOC
Impact on existing mortgage	Replaces existing mortgage	New loan, does not affect existing mortgage	New line of credit, does not affect existing mortgage
Rate type	Fixed or Variable	Fixed	Variable
Closing costs	Higher, 2% to 5% of the value of the new mortgage loan	Lower, usually 1% to 5% of the home equity loan amount (not the total mortgage balance)	Lowest, usually 1% to 3% of the HELOC amount (not the total mortgage balance)
Funding format	One single, combined monthly payment	Two separate monthly payments (existing mortgage + home equity loan)	Two separate monthly payments (existing mortgage + HELOC)
Ideal use case	When your current mortgage rate is at or above today’s market rate	When your current mortgage rate is below today’s market average	When you need ongoing access to funds over time rather than a lump sum

When Does a Cash-Out Refinance Make More Sense?

A cash-out refinance may be the best choice under these circumstances:

• Your existing rate is at or above today’s market rate.
• You want to simplify to a single monthly payment.
• You need a large lump sum and want to roll it into your primary loan.

When Does a Home Equity Loan Make More Sense?

A home equity loan can be the best choice when:

• You have a low existing mortgage rate you want to protect.
• You need a one-time lump sum for defined expenses such as a renovation, tuition, or medical bill.
• You prefer fixed payments on the new loan only.

When Does a HELOC Make More Sense?

The right choice may be a HELOC under these circumstances:

• You need ongoing access to funds over time, not a one-time lump sum.
• You want the flexibility to borrow, repay, and borrow again.
• You want to pay the lowest closing costs of the three options.
  

What Are the Costs of Each Option?

Tapping into home equity includes two types of costs, closing costs and interest costs. Closing costs are usually a percentage of the total loan amount. Because a cash-out refinance involves a new replacement loan for your current mortgage, it typically carries the highest closing costs. Home equity loans and HELOCs are smaller loans, so closing costs are lower.

Depending on how you use the funds, you may be able to deduct the interest on a home equity loan or HELOC from your federal taxes — but only if the money is used to buy, build or substantially improve the home that secures the loan. Cash-out refinance interest follows standard mortgage interest deduction rules. Tax situations vary, so it’s a good idea to talk with a qualified tax professional before making a decision based on potential deductions.

The interest cost will depend on current market rates, as well as the interest rate you’re paying on your current mortgage loan. While cash-out refinancing may have higher upfront costs, it may also lower your overall cost if it includes a meaningful rate drop.

Which Option Is Right for You?

If you’re trying to determine the right option for cashing out some of your home equity, consider these questions to help you make the right decision.

1. Is the interest rate on your existing mortgage higher than the current market rate? (If so, you may want to consider a cash-out refinance to access cash and a lower interest rate.)
2. Are you looking for a lump sum of cash, or ongoing access to cash? (A cash-out refinance or home equity loan offer the former, while a HELOC offers the latter.)
3. Do you want to make just one mortgage payment each month, or are you OK with making two separate payments? (A cash-out refinance simplifies your mortgage and home equity into one payment, while a home equity loan or HELOC requires you to make a second monthly payment.)

When you’re ready to move forward, consider connecting with an RBC U.S. Mortgage loan officer at City National Bank to learn more about how we can help.