For homeowners sitting on substantial equity, the question isn’t whether you can access that wealth—it’s which method makes the most financial sense. With average American homeowners holding record levels of home equity in 2026, understanding the difference between a home equity loan and a cash-out refinance has never been more critical. Both options allow you to convert your home’s value into spendable cash, but they work fundamentally differently and suit distinct financial situations.
Which Is the Best Way to Get Cash From Your House?
As lending authorities, we’ve analyzed extensive data from Bankrate, RefiGuide.org, and other expert sources to provide you with a comprehensive comparison that will help you make the right choice for your circumstances.
What Is a Cash-Out Refinance?
A cash-out refinance replaces your existing mortgage with a new, larger loan. According to Bankrate, this strategy involves taking out a new mortgage that exceeds your current balance and keeping the difference as cash (Bankrate, 2025a). For example, if you owe $200,000 on a home worth $400,000, you might refinance into a $250,000 mortgage and receive $50,000 in cash, minus closing costs.
How it works: The new mortgage pays off your old loan entirely, and you receive the remaining funds. You’ll have just one monthly payment, but at new terms—potentially with a different interest rate, loan type, and repayment period (Rocket Mortgage, 2025).
Key characteristics:
- Replaces your entire existing mortgage
- Typically offers lower interest rates than home equity loans
- Closing costs range from 2% to 6% of the loan amount
- Single monthly payment
- Can be fixed or adjustable rate
- Resets your mortgage term (often back to 30 years)
What Is a Home Equity Loan?
A home equity loan, often called a second mortgage, allows you to borrow against your accumulated equity while keeping your original mortgage intact. According to RefiGuide.org, this option makes particular sense when you have a favorable interest rate on your first mortgage that you don’t want to disturb (RefiGuide, 2025a).
How it works: You take out a separate loan secured by your home equity. The lender typically allows you to borrow up to 85% of your home’s value, minus your existing mortgage balance. You receive the funds as a lump sum with fixed monthly payments over a predetermined term, usually 10 to 20 years.
Key characteristics:
- Second mortgage in addition to your primary loan
- Interest rates typically 1-2% higher than first mortgages
- Lower closing costs (1% to 5% of loan amount)
- Fixed interest rate with predictable payments
- Separate monthly payment from your first mortgage
- Doesn’t affect your existing mortgage terms
When Cash-Out Refinancing Makes the Most Sense
Based on expert analysis from multiple sources, cash-out refinancing represents the optimal choice in specific scenarios:
Scenario 1: You Have a High Current Interest Rate
If your existing mortgage rate significantly exceeds current market rates, a cash-out refinance allows you to accomplish two goals simultaneously: accessing cash and lowering your interest rate. According to U.S. Bank, homeowners looking to lower their mortgage rate while getting cash should consider cash-out refinancing (U.S. Bank, 2025).
Example: Sarah has a $300,000 mortgage at 7.5% from 2023. With rates now at 6.5%, she refinances to a $350,000 loan, receives $50,000 cash (minus closing costs), and saves money on her monthly payment despite the larger loan balance.
Scenario 2: You Want to Avoid Managing Multiple Payments
Borrowers who prefer simplicity often choose cash-out refinancing. CBS News research notes that dealing with a single mortgage payment rather than managing two separate loans provides administrative convenience and clarity (CBS News, 2025).
Scenario 3: You Need Access to Maximum Funds
Cash-out refinances often allow borrowers to access larger amounts than home equity loans. Bankrate explains that consolidating all your debt into one loan with favorable terms can make sense for major expenses like extensive home renovations or significant debt consolidation (Bankrate, 2025b).
Scenario 4: You Can Secure Significantly Lower Rates
RefiGuide.org recommends cash-out refinancing when you can achieve at least a 0.5% interest rate reduction on your primary mortgage, making the closing costs worthwhile (RefiGuide, 2025b).
When a Home Equity Loan Makes the Most Sense
Home equity loans shine in different circumstances, particularly in today’s interest rate environment:
Scenario 1: You Have a Low Existing Mortgage Rate
This represents the most compelling reason to choose a home equity loan over cash-out refinancing. According to CBS News financial experts, homeowners who secured mortgages during the pandemic at rates below 4% should avoid refinancing and instead use home equity loans to preserve those valuable low rates (CBS News, 2026).
Example: Michael locked in a 3.25% mortgage rate in 2021. Rather than refinancing at today’s 6.5% rates, he takes out a $75,000 home equity loan at 8%, keeping his advantageous primary mortgage rate intact.
Scenario 2: You Need a Specific Amount for a Defined Purpose
Home equity loans work well when you know exactly how much you need for projects like kitchen remodels, college tuition, or business investments. The fixed-rate structure provides predictable payments, and you avoid the higher closing costs associated with refinancing your entire mortgage (RefiGuide, 2025a).
Scenario 3: You Recently Refinanced
If you refinanced within the past few years to secure favorable terms, taking out a home equity loan allows you to access cash without paying another round of substantial closing costs on your primary mortgage.
Scenario 4: You Want Lower Initial Costs
With closing costs typically ranging from 1% to 5% compared to 2% to 6% for cash-out refinances, home equity loans require less upfront investment. Some lenders even offer no-closing-cost home equity loan options (Bankrate, 2025a).
Scenario 5: You Value Rate Flexibility
If interest rates continue declining in 2026, as many economists predict, borrowers with home equity loans maintain the option to refinance that second mortgage separately without disturbing their primary loan. This flexibility doesn’t exist with cash-out refinances, where you’re locked into one combined rate.
Critical Factors to Consider
Current Mortgage Rate Environment
Real estate economist Matthew Gardner emphasizes that your existing mortgage rate serves as the pivotal decision factor. Households with mortgage rates above 5% may find cash-out refinancing appealing in 2026, while those with rates below 5% typically benefit more from home equity loans (CBS News, 2026).
Total Cost Analysis
Don’t focus solely on interest rates. Calculate the total cost including closing costs, fees, and total interest paid over the life of both options. Use the following formula:
Total Cost = (Monthly Payment × Number of Months) + Closing Costs
Tax Implications
Both options may offer tax-deductible interest if you use the funds for substantial home improvements. However, tax laws are complex and vary by situation. Always consult a qualified tax professional before proceeding (Bankrate, 2025b).
Risk Assessment
Remember that both options use your home as collateral. Failure to repay can result in foreclosure. Only borrow what you can comfortably afford to repay, and maintain an emergency fund covering at least six months of mortgage payments.
Making Your Decision
The “best” option depends entirely on your individual circumstances. According to RefiGuide.org’s lending experts with over 25 years of industry experience, the decision should consider your current mortgage rate, how long you plan to stay in the home, your need for flexibility, and your total borrowing costs.
Before proceeding with either option:
- Check your credit score and work to improve it if necessary
- Calculate your home equity and loan-to-value ratio
- Get quotes from at least three to five lenders
- Calculate total costs for both scenarios over different time horizons
- Consider your long-term financial goals and stability
Both home equity loans and cash-out refinances offer legitimate pathways to accessing your home’s equity. In 2026’s moderate interest rate environment, homeowners with low existing mortgage rates generally benefit from home equity loans that preserve those favorable terms, while those with higher rates may find cash-out refinancing more advantageous. The key lies in understanding your current mortgage situation, calculating true costs, and aligning your choice with your broader financial objectives.
Work with licensed lending professionals who can evaluate your specific circumstances and provide personalized guidance. Your home represents your most valuable asset—make decisions that protect and leverage that value wisely.
References
Bankrate. (2025). What’s the best way to borrow against your home?
RefiGuide. (2025). Cash-out refinance vs home equity loans 2026.
CBS News. (2025). Which is better heading into 2026?
