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Home equity loans and cash-out refinances are two ways to access the value that has accumulated in your home. Both loans have important similarities and differences. In a nutshell, if you already have a mortgage, a home equity loan will become a second mortgage, while a cash-out refinance replaces your current mortgage with a new term, interest rate and monthly payment.

This article will give you the lowdown on exactly how each of these loans work and what you need to know to make the most of your home equity.

How home equity loans and cash-out refis are similar:

  • Both usually have fixed interest rates
  • Both typically require an after-transaction loan-to-value ratio of 90% or less to qualify
  • Both offer lump-sum payouts

How home equity loans and cash-out refis differ:

  • Adjustable rates are possible with cash-out refis
  • Cash-out refis are one loan as opposed to an additional mortgage and usually have lower interest rates
  • Home equity loan lenders typically pay all or most of the closing costs

Why You Might Use A Home Equity Loan or Cash-Out Refinance

You spent a ton of money to get your home and that makes it a huge investment opportunity. Every time you make a payment, you gain equity in your home. Your equity grows even faster in an environment where home values are rising, as they are now.

Home equity loans and cash-out refinances allow you to access that value, or your home equity, to unlock the true investment potential of your home. They can be used to pay off home improvements, augment a college fund, consolidate debt or give your retirement fund a boost.

If you recently purchased your home, you may not have a lot of equity to work with. However, if you’ve owned your home for five or more years and make your payments on time, you’ll likely have equity.

To find out how much equity you have, calculate the difference between what your home’s value is and how much you still owe on the mortgage. If that number is positive, you’re a candidate for a cash-out refinance or a home equity loan.

To find out which option may be best for you, learn more about the pros and cons of each below.

Home Equity Loans

A home equity loan, like a first mortgage, allows you to borrow a specific sum for a set term at a fixed or variable rate. Because of this, a home equity loan is, in reality, a second mortgage. You can use a home equity loan to refinance your first mortgage, a current home equity loan or a home equity line of credit. If you’ve built up equity, refinancing with a home equity loan could help when rates are high.

Home Equity Loan Pros

While there may be limits set by lenders or investors regarding how much of your existing equity you can take a loan against, you have the option to go with a fixed payment. That way, your payment never changes and you know what you’re getting.

Home equity loans also give you the flexibility to hold onto the existing rate and term of your primary mortgage if you’re happy with it. Some would rather have the flexibility of paying on a separate loan rather than touch their primary mortgage.

If you’re looking to purchase a home, there is the option to take out a primary mortgage and then use a secondary mortgage to bring your total equity down to 80% and avoid paying for mortgage insurance. This may sometimes be cheaper than the mortgage insurance policy. Be aware that if you’re going to do this, your lender may require you to make a slightly higher down payment (e.g. 10% or more) in order to have the option to take a second mortgage.

Home Equity Loan Cons

Since home equity loans are a second mortgage, you’re going to pay a higher rate than you would if it were your first mortgage because lenders assume you’re going to make payments on your primary mortgage first.

Your home equity loan lender gets a lien on your house, but the primary lender’s lien takes precedence. In exchange for the additional risk, the lender on the second mortgage will charge you more.

Additionally, home equity loans taken out to do things other than build, buy or improve your home don’t feature tax-deductible interest after the 2017 tax year.

The last downside is that you have two mortgage payments to worry about. It can complicate things.

Quicken Loans doesn’t offer home equity loans at this time.

Home Equity Loans at-a-glance:

  • You can borrow 80 – 89% of your home’s value (between a first and second mortgage)
  • 15-year payback
  • The loan isn’t taxable, but you may be able to deduct interest
  • It’s a second mortgage, which will come with a higher rate than your primary mortgage

Cash-Out Refinance

Like home equity loans, a cash-out refinance utilizes your existing home equity and converts it into money you can use. The difference? A cash-out refinance is an entirely new primary mortgage with cash back — not a second mortgage.

With any option, the more equity you have, the more you can take and convert to cash. The exact amount will depend on the type of loan you’re using and other factors, like your credit score. With a cash-out refinance, lenders typically limit the amount to
80% – 90% of the home’s value, leaving 10% – 20% equity.

Cash-Out Refinance Pros

A cash-out refinance features many of the benefits of home equity loans, but with a couple of key advantages.

The first big advantage is you’ll only have one mortgage against your house. That means there’s less risk for the lender and you’ll get a better rate than you would if it were a second mortgage. This is also why a cash-out refi is typically easier to qualify for as it gives lenders first payback priority.

Another upside? Low interest rates, which is good when trying to accomplish any financial goal. And, you’ll only need to budget for one mortgage payment.

Cash-out refinances are often the best way to consolidate debt because they’re based on your primary mortgage, so you’re getting the lowest possible mortgage rate for your financial profile. Mortgage rates recently have been in the high 4% to low 5% range for a 30-year fixed.

The average credit card interest rate is currently in the high teens.

By taking cash out to pay off high-interest debt like credit card balances, you can potentially save yourself a lot of money when compared to paying off the balances incrementally over time.

Cash-Out Refinance Cons

As previously discussed, if you want to take advantage of a cash-out refinance, you usually have to leave a minimum amount of equity within the home. Because of this, it’s very important to make sure that you can take out enough home value to accomplish your goal. If you don’t have enough equity to get the job done, you might take a look at alternatives like a second mortgage or personal loan.

Although the lowest rates for taking cash out are available to those who refinance their primary property, you may wish to take a second mortgage if you really like your primary mortgage rate and don’t want your payment to change.

Cash-out refinance at-a-glance:

  • You can borrow 80 – 90% of your home’s value
  • Easy to qualify for
  • Low interest
  • 15 – 30 year payback
  • The loan isn’t taxed, but you may be able to deduct interest
  • The interest rate would be lower than a home equity loan because it’s your primary mortgage.
  • You only have one mortgage payment.

Which One Is Right for Me?

Is the best option for you a home equity loan or cash-out refinance? The answer depends on your personal situation, and we absolutely recommend speaking with a financial advisor. In the meantime, here are some key points to consider.

The type of loan that’s best for you depends on several factors:

  • How much equity you have
  • Your mortgage interest rate
  • How much you’d like to borrow
  • Your ideal repayment timeline
  • If you want a fixed or flexible term

A home equity loan might be good if:

  • You want to access your home’s value without affecting your primary mortgage
  • You’re using a second mortgage to avoid paying for mortgage insurance
  • You’re using it in place of or in combination with a cash-out refinance in order to access more of your home’s value
  • Today’s rates are higher than your existing mortgage’s rate


A cash-out refinance is best if:

  • You have plenty of equity to accomplish your goal and you want the lowest rate
  • You’re attracted to the low rate for debt consolidation purposes, home improvement or fortifying investments
  • You would like to keep a single mortgage payment

If you’re ready to get started with a cash-out refi, you can apply online or give us a call at (800) 785-4788. If you still have questions, you can leave us a note in the comments below.

If you don’t want to tap into your home equity or don’t have enough built up to accomplish your financial goals, a personal loan could be a good option that might make more sense for your financial situation. Our friends at Rocket Loans® offer personal loans up to $45,000.

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This Post Has 38 Comments

  1. We are currently have a mortgage with you all and I’m so pleased with everything and have since financing with you all 7 years ago. We meed a few repairs and I would like to pay off some credit cards. Interested in cash-out refi. Do both my husband and myself need to apply or could it be just one of us? We’re both on the mortgage.

    1. Hi Mrs. Williams:

      I’m glad to hear that we’ve been able to serve you so well when it comes to your mortgage. That’s wonderful!

      As far as your question, one of you may apply on your own. However, if you do that, we can only use the income of the person applying to help you qualify for the refinance. If you both apply together, it could help you have more options when it comes to qualifying. If you would like to look into your options online, you can do so through Rocket Mortgage or go ahead and give one of our Home Loan Experts a call at (888) 980-6716. Have a great day!

  2. will be leasing my current home out for 3 years and I am wondering if i should do a cash out refi. I will use the money to pay off bills and do some maintenance before purchasing another home while this one is leased.

    Kurt

    1. Hi Kurt:

      I’m going to recommend you speak with one of our Home Loan Experts at (888) 980-6716. We can certainly help you look into your options to do this and see if we can match you up with a loan that meets your goals. Thanks for reaching out!

  3. Your loans are talked about, but they fail to mention how much you will continue to “advertise “ @ many of our non-related searches, on our cellphones especially. Crazy annoying! (That tips the scales for me.)

    1. Hi Kallen:

      While we do employ many methods of advertising including text messages, the intention is not to be annoying, but instead to help you through the process. I do understand your feedback. I’m going to give you a couple of options. You can remove your contact information from our database here. We would also be able to take care of you if you email Sarah@quickenloans.com with your contact info so we can process removal on our end. I’m sorry about your experience and we want to make sure we take care of this for you. Thanks for reaching out!

  4. I own my house with my mother. I have good credit but she does not. We have no mortgage but the house needs renovations. Can I get an equity loan without her?
    Thanks,
    Errin

    1. Hi Errin:

      While we don’t do home equity loans, we could help you look into a cash-out refinance. Your mother doesn’t have to be on the loan. If you would like to look into your options, you can do so through Rocket Mortgage. You can also give one of our Home Loan Experts a call at (888) 980-6716.

  5. We are retired and our home mortgage was a VA refi with Rocket Mortgage (Quicken Loans). We recently had several home improvements made, using both cash and credit cards. We would like to eliminate the credit card debt, about $12,000, without tapping our savings account further. Does Rocket offer personal loans for this kind of approach? We currently have over $100K in equity and our home is our final home.
    Thank you,
    Chris

    1. Hi Chris:

      Thank you for your service and for choosing Rocket Mortgage®.

      You mentioned two different avenues of handling this credit card debt, so I want to make sure I touch on both for you. We have a sister company, Rocket Loans®, and that offers personal loans for debt consolidation. The rate would be slightly higher than if you did a cash-out refinance, but you wouldn’t have to touch your home equity. If you do want to tap your home’s value, we can look into your options for a cash-out refinance. If you chose to go that route, you could start your application online with Rocket Mortgage® or give one of our Home Loan Experts a call at (888) 980-6716. Either avenue could work, and which is best is ultimately going to depend on your personal financial situation.

  6. I have an existing FHA loan with Quiken Loans and I have some equity on my home. I have been paying for MPI and a lien attached to my home that I want both to get rid of. I was going to do a traditional home refinance with QL about 2 yrs ago to get rid of my MPI, but I was told that I have to pay off my lien of 32G to HUD( Housing and Urban Development before I can do it. I told QL that I dont have the money to pay off the lien. Can I take out money from my home equity to pay off my lien so I can refinance to get rid of paying MPI? Please help? Thank you

    1. Hi George:

      In order to avoid paying for any form of mortgage insurance on your current home in the future, you would have to have enough equity left over after the payoff to leave 20% equity in the home unless it was a VA loan. We can help you look into your options if you give us a call at (888) 980-6716. Good luck!

    1. Hello, Gale! My name is Patrick, and I work on the Quicken Loans Zing Blog. We may have some options for you, but we’ll need some more information about your situation first. Please call (888) 980-6716 or add your information here to speak with one of our Home Loan Experts. They’ll look at your situation and provide the best option. Thanks, and have a nice night!

    1. Hi Amy:

      We don’t do second mortgages, but we can help you take cash-out of your primary mortgage. Odds are you’ll get a better rate on this than you would on a second mortgage because when it’s a second mortgage, the lender assumes more risk due to the fact that you’re likely to make your payment on your primary mortgage first. If you’d like to go over your options online, you can do so through Rocket Mortgage. If you’d rather get started by talking to one of our Home Loan Experts, you can give us a call at (888) 980-6716.

      Thanks,
      Kevin Graham

  7. we have an FHA backed mortgage with Quickenloans. We owe $640K but the property could be appraised at close to $850K. Can we take out a home equity loan? Thank you

    1. Thanks for choosing us Michael! We don’t do home equity loans, but we do cash-out refinances. Since this is your primary mortgage, it carries less risk on our end. This is good for you because you can get a better rate. I’m going to recommend you talk to one of our Home Loan Experts by filling out this form or calling (888) 728-4702.

  8. I have an existing loan with Quicken loans. The equity has double since we bought it. We are an older couple and this is our final home. We are in the middle of winter and our heating system is shot. It will take $8,000 to do the job right. I would like to do a cash out refinance ASAP, Can you help. Please respond. Thank you Kathy. E mail only please.

    1. Hi Kathy:

      I’m sorry to hear about your heating system. We can definitely look into your options. Rocket Mortgage will allow you to share information about your income and assets as well as pull your own credit. You could have a customized solution in minutes. Otherwise, you can get started over the phone by calling 888-728-4702. Good luck and stay warm!

      Thanks,
      Kevin Graham

  9. I have a home no mortgage on it value is about 110.000 I’m looking to take a loan for about 21000. What’s the best way to go

    1. Hi David:

      You could definitely take a look at Rocket Mortgage. Mortgage rates are pretty low right now and you might find that to be an attractive option. You could also give us a call at 888-728-4702.

      Thanks,
      Kevin Graham

  10. Im looking to do some home improvements and pay some small bills off and maybe purchase a vehicle. would a cash out refi be the way to go? Im confused on what would work best for us.I have alot of equity built up and need some advice because i dont want to have a second mortgage over my head. HELP PLEASE.

    1. Hi Leticia:

      We can definitely help you look into a cash-out refi. That’s not a second mortgage, but instead a new loan for your primary mortgage, so it may be what you’re looking for. Rates are also really good right now. You can use Rocket Mortgage in order to get a solution customized to your financial situation online. If you prefer to get started over the phone, you can call (888) 728-4702. Hope this helps!

      Thanks,
      Kevin Graham

  11. My house was on the market a month ago. I want to do a cash out refi but the bank is telling me i have to wait at least 6 months for cash out option. Is this a universal truth, or is it lender-specific policy?

    1. Hi Richard:

      When you say your house was on the market a month ago, do you mean you had the property listed for sale or that you bought the property and are trying to take cash out? I’ll try to cover both scenarios:

      1. If the property was listed for sale, you may have to wait 180 days after the property is taken off the market depending on the loan type and the amount of equity you have in the home. If your equity is 30% or more, you don’t have to wait except on jumbo loans under Quicken Loans policy.
      2. If you bought the home, you generally have to spend six months on title before taking cash out. The exception to this is if you bought the home with cash and were doing a cash out as part of a plan for delayed financing.

      I hope this helps!

  12. We are under contract to sell our house, and close near the end of August. However, we need about $5000 for some repairs before closing, and would rather not put that on a credit card. So do you think a cash-out refinance or a personal loan would be better for us? We could pay it off when we close.

    1. Hi Rachel:

      I have a couple thoughts here. First, $5000 is really too small for a mortgage. Second, most mortgage companies won’t let you do a cash-out refinance when the property is up for sale. A personal loan would make a lot more sense. Our sister company Rocket Loans could help you there.

      Thanks,
      Kevin Graham

  13. I refinanced with QL a couple of years ago now I’m looking to update my home. Should I refinance again and get extra cash or do a home improvement loan?

    1. Hi David:

      First, thanks for choosing us! It’s been a pleasure to work with you.

      A refinance is definitely something you can look at. The easiest way to get started is to visit Rocket Mortgage and see if we have an option that makes sense for you. You can run through the process in a few minutes and get the approval right online if it fits with your goals. If you prefer to get started over the phone, you can call 800-251-9080.

      Thanks,
      Kevin

  14. I am wanting to borrow about $1500.00 to replace my windows. I have my mtg through Quicken Loans.

    1. Hi Lee Ann:

      With a loan amount that small, you’re better off going with a personal loan. However, the minimum for our sister company Rocket Loans is $2,000. You may want to check around with some other lenders. I’m sure someone can help you out. Hope this helps clarify things!

      Thanks,
      Kevin Graham

  15. I would like some information on Home Improvement Loans,we now have a home mortgage with Quicken and wonder about rates and payments!!!

    1. Hi Marci:

      We can certainly help you look into your options. Someone will be reaching out.

      Thanks,
      Kevin Graham

  16. I am putting a house I own ( no mortgage ) up for sale in June. I need cash now to cover our expenses……..several thousand dollars. I have never applied for a loan and hope you can help me. I would like you to send me information.

    Thank you

    Andrea Lee Anderson

    1. No problem, Andrea! I can have someone reach out to you and go over your options. Have a great weekend!

      Thanks,
      Kevin Graham

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