The hidden cost of cash-out refinancing
If your current first-mortgage rate is below today's market rate (very common for 2020-2021 borrowers at 3-4%), a cash-out refi forces you to give up that good rate. The "savings" on the cash-out portion are usually swamped by what you'd pay on the rest of the loan being re-priced at today's higher rate.
Quick rule of thumb: if your current first-mortgage rate is more than 1% below today's cash-out refi rate, take the home equity loan. The math almost always wins.
The honest verdict logic
- ✅ Home equity loan: your current first-mortgage rate is meaningfully below today's market AND you want fixed-rate certainty.
- ✅ Cash-out refi: your current rate is above today's market — refi captures both benefits at once.
- ⚠️ HELOC instead: short payback timeline (under 5 years) and you're comfortable with rate risk.
Related calculators
- HELOC vs cash-out refinance — if a variable-rate revolving line of credit fits the situation better than a fixed-rate lump sum.
- Mortgage refinance break-even — if you're considering a vanilla rate-and-term refi alongside the cash-out option.
- Refinance to remove PMI — if dropping PMI is part of the cash-out decision.
FAQ
How is a home equity loan different from a HELOC?
Home equity loan: fixed rate, lump-sum disbursement, fully amortizing — like a second mortgage. HELOC: variable rate, revolving credit line you draw from as needed. Home equity loans are predictable; HELOCs are flexible but riskier on rate.
When does the home equity loan beat cash-out refi?
Almost always when your current first-mortgage rate is below today's market rate. Cash-out refi re-rates your entire first mortgage at today's higher rates — that hidden cost usually wipes out any savings on the cash portion.
What about closing costs?
Home equity loan closing costs typically $0-$1,500. Cash-out refi closing costs typically 2-5% of the new total loan amount — often $5,000-$15,000. That difference funds a lot of interest.
Is a home equity loan's interest tax-deductible?
Only if the proceeds are used to buy, build, or substantially improve the home that secures the loan. TCJA 2017 eliminated deductibility for personal-use cash-outs (credit card payoff, college, vacations). Verify with a CPA.
What's a typical home equity loan rate vs cash-out refi rate?
Home equity loans typically price 0.5-1.5% higher than a first-position cash-out refi rate, because they sit in second-lien position. But the rate gap matters less than whether you're disturbing a low-rate first mortgage.
Why would I ever pick cash-out refi then?
When your current first-mortgage rate is above today's market AND you want to consolidate to one payment. Or when you need a larger amount than a typical home equity loan will support.