This guide breaks down what each option actually costs, how they work, and which fits your situation. We'll also cover when real estate investment financing through a lender like Lendora Funding makes sense for larger deals.
Key Takeaways
- Cash-out refinance replaces your mortgage with a larger loan and pays you the difference in cash
- Home equity loan adds a second mortgage with its own fixed payment alongside your current one
- Refinances often mean lower rates but 2%–6% closing costs; equity loans cost less upfront but add a second bill
- Choose based on your current rate, how much cash you need, and how long you'll keep the home
Cash-Out Refinance vs Equity Loan: Quick Comparison
| Factor | Cash-Out Refinance | Home Equity Loan |
|---|---|---|
| Cost | Closing costs typically 2%–5% of the new loan (up to 6%) (Bankrate) | Closing costs often 1%–5%, usually less than a full refinance (Bankrate) |
| Loan structure | Single new first mortgage replaces the old one | Second mortgage added alongside your existing loan |
| Interest rate | Often lower as a primary lien | Typically higher fixed rate, reflecting added lender risk |
| Monthly payments | One combined payment | Two separate payments each month |
| Best for | Larger cash needs, long-term owners open to a new rate | Homeowners protecting a low existing mortgage rate |
If you need a larger sum and are comfortable resetting your loan term, a cash-out refinance often wins. If you want to keep a low existing mortgage rate, a home equity loan leaves that first loan intact.
What is a Cash-Out Refinance?
A cash-out refinance pays off your current mortgage with a new, larger one. You pocket the difference in cash. Because it becomes your primary lien, it often comes with a lower overall rate than a second mortgage would. You can choose a fixed or adjustable rate based on how long you plan to hold the property and your tolerance for rate changes.
Equity requirements vary by property type. Fannie Mae's eligibility matrix sets these maximum loan-to-value limits:
- 80% LTV for a 1-unit primary residence (20% equity retained)
- 75% LTV for 2-4-unit primary residences, second homes, and 1-unit investment properties
- 70% LTV for 2-4-unit investment properties
Those figures are the baseline. Individual lenders may allow exceptions (Fannie Mae Eligibility Matrix).
How Much Are Investors Actually Withdrawing?
Freddie Mac reported an average cash withdrawal of $93,000 in the first half of 2024, about 24% of average property value (Freddie Mac Refi Trends). That is often enough capital to fund a down payment on another property.
Common Cash-Out Refinance Use Cases
- Fund a down payment on a rental or fix-and-flip acquisition
- Pull a larger lump sum than a typical second mortgage allows
- Reposition equity across multiple investment properties in one close
For investors running more than one deal at a time, Lendora Funding's real estate funding line pairs cash-out refinancing with acquisition, bridge, and short-term capital options.
What is a Home Equity Loan?
A home equity loan is a fixed-rate second mortgage. You borrow a lump sum against your equity, and your original mortgage (rate and all) stays untouched. The CFPB defines it plainly: proceeds arrive in one payment, secured by the difference between your property's value and what you still owe (CFPB).
This differs from a HELOC. A home equity loan gives you a lump sum with fixed payments. A HELOC is an open-end revolving line you draw from repeatedly, similar to a credit card (CFPB HELOC guide).
Closing costs tend to run lower than a refinance. Bankrate pegs typical fixed home equity loan costs at 2%-5% of the loan amount, sometimes as low as 1%, versus 3%-6% for general refinancing (Bankrate).
Use Cases for a Home Equity Loan
- One-time expenses: kitchen remodels, medical bills, or a single renovation project
- Rate protection: keep a low first-mortgage rate instead of replacing it
- Targeted investment work: fund a rental renovation without refinancing the whole property
If you locked in a 3% mortgage rate a few years back, refinancing to pull cash out could mean giving that up entirely. A second mortgage lets you keep the good rate and only pay a higher rate on the new amount borrowed.
Cash-Out Refinance vs Equity Loan: Which is Better?
There's no universal winner here. The right answer depends on:
- Your current mortgage rate — is it worth protecting, or is refinancing actually a rate improvement?
- How much equity you have available — larger withdrawals may require a refinance
- Your credit score — both products have minimum thresholds, though they differ
- How much cash you actually need — modest, well-defined amounts often fit an equity loan better
- How quickly you need the funds — closing timelines and funding speed differ by product
Choose a cash-out refinance if:
- You need a large sum
- You're comfortable resetting your mortgage term
- Current market rates are favorable compared to your existing rate
Choose a home equity loan if:
- You want to protect a low existing mortgage rate
- You prefer a smaller, predictable second payment
- Your cash need is modest and well-defined
Real estate investors often juggle several financing needs at once: bridge loans, fix-and-flip capital, and new development funding. A specialized partner like Lendora Funding matches the right product to each deal instead of defaulting to a single approach.
Real World Example
Consider an investor who bought a rental property four years ago at a 3.25% mortgage rate. She wants to buy a second rental but needs $80,000 for the down payment and closing costs.
The challenge: Current mortgage rates sit well above her existing rate. A cash-out refinance would mean resetting her entire loan balance at a higher rate, which gets costly over the life of the loan.
The decision: She opts for a fixed home equity loan instead. Her original 3.25% rate stays untouched on the bulk of her balance. She takes on a second, smaller loan just for the $80,000 she needs.
The outcome: She keeps a low blended rate across both loans and gains a predictable second payment she can plan around. She moves forward on her second property without disturbing the financing that's already working.
Protecting a strong existing rate while still accessing equity is often the smarter play when the cash need is targeted rather than open-ended. If you're weighing a similar decision, a Lendora Funding specialist can walk through your specific numbers and help identify which financing path fits your investment goals.
Conclusion
Neither a cash-out refinance nor a home equity loan wins by default. Your mortgage rate, equity position, and financial goals decide which path fits.
Either option can lower monthly costs, free up capital, or preserve a favorable existing rate when the product matches your situation. A funding specialist can run both scenarios against your numbers so you choose with clarity, not guesswork.
Frequently Asked Questions
Is it better to do a home equity loan or a cash-out refinance?
It depends on your current mortgage rate and equity. A cash-out refinance often works better if you can secure a lower rate than what you have now. A home equity loan is better if you want to keep your existing mortgage terms intact.
How much would a $50,000 home equity loan cost per month?
A $50,000 home equity loan at recent rates runs about $613.50/month on a 10-year term (8.28%) or $484.25/month on a 15-year term (8.22%), per Bankrate. These figures exclude closing costs, taxes, and insurance.
What credit score do I need to qualify for a cash-out refinance or equity loan?
Cash-out refinances typically require a minimum score around 620. Home equity loans often need higher scores, with some lenders looking for 680 or more depending on your overall credit profile.
Can I use a cash-out refinance or equity loan for a real estate investment property?
Yes. Both can fund investment property purchases or renovations. Lendora Funding works with real estate investors who need financing for purchases, renovations, and related projects.
Does tapping home equity affect my credit score?
New debt and increased credit utilization can cause a temporary dip. Opening a new account also affects your average account age, which can influence your score, especially if you have limited credit history.
How much equity do I need to qualify for either option?
The general rule is retaining at least 20% equity after borrowing, though this varies. Investment properties and multi-unit buildings often require 25%-30% equity depending on the lender and loan type.
