How Does Home Equity Financing Compare With a Mortgage Cash-out Refinance?

By Michael Pressman
TD Residential Lending Product Manager

In a mortgage cash-out refinance, you'll replace your existing mortgage with a new home loan—and get the difference between the two in a lump sum of cash. In order to obtain a home equity loan or line of credit, you must have equity in your home available to draw from. Determining what option is best for you can be particularly difficult, given that mortgage interest rates tend to be more favorable than those available with a home equity loan or line of credit.

Home equity loans and lines of credit financing pros and cons

  • Pros

    • Get the cash you need without resetting your existing mortgage term and interest rate
    • Lower closing costs and fees, in most cases, compared to a mortgage cash-out refinance
    • Flexibility to take out the cash you need as a line of credit or a lump sum
  • Cons

    • You'll have to make multiple payments on your home—the existing mortgage and the new home equity product
    • Home equity interest rates are typically higher than the equivalent mortgage cash-out refinance rate

Mortgage cash-out refinancing pros and cons

  • Pros

    • Generally lower variable or fixed interest rates than home equity financing, which can lead to a lower cost to borrow, especially for larger loan amounts
    • Wider variety of mortgage lending options helps you to find a solution that meets your goals and budget
  • Cons

    • Typically resets the term of your mortgage—meaning you could make payments for a longer period
    • Since you are borrowing more, your monthly mortgage payment will typically increase
    • If mortgage rates have risen or your credit worthiness has declined, your new mortgage rate may be higher
    • There are closing costs and fees associated with refinancing a mortgage
    • Funds are only available as a single lump sum

When to choose home equity financing


A home equity line of credit (HELOC) is a revolving line of credit that you can access now and into the future if necessary. With a HELOC, you'll have access to a revolving line of credit that can help you manage large expenses as they arise—and you'll only pay interest on what you borrow. Compared with a mortgage refinance, where you receive a large lump sum of cash, a home equity line of credit may have a lower cost of borrowing.

On the other hand, a home equity loan may be best if you need a large lump sum of cash and have a lower mortgage rate than what you'd get with a new mortgage. Home equity financing can offer lower interest rates (because it's secured by the equity/ownership you have in your home) with minimal closing costs and fees. If your mortgage refinance comes with a big increase in your interest rate, and depending on how high the interest rate is and how much cash you take out and your closing costs and fees, a home equity line of credit may offer a lower cost of borrowing.

Learn more about the differences between home equity loans and lines of credit


When to choose a mortgage cash-out refinance


Choose a mortgage refinance with cash-out to secure the lowest variable and fixed rates available if you need a large lump sum of cash. Furthermore, the expansive suite of mortgage loan options allows you to shop for the solution that meets your needs—now and in the future. You'll pay higher closing costs and fees with a mortgage cash-out refinance, but it's possible that these are offset by the competitive interest rates available in today's market. Just make sure you have a need for all or most of the cash you're getting and compare the total of your new mortgage with alternatives.

Learn more about mortgage refinancing

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This article is based on information available in July 2021. It is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be acted or relied upon without the advice of a professional advisor. A professional advisor will recommend action based on your personal circumstances and the most recent information available.