New Cash Out Opportunities with Home Equity Financing

Millions of home owners today like to tap the equity in their home to pay for things they want or need with a cash out home equity loan, refinance or HELOC financing. One of the big reasons is that homes are appreciating in value; last year, homes in the US on average grew in value by more than 6%.  Finding a cash out home equity financing loan for first time house buyers is not always easy, but it is possible, so let’s explore how.

Many New Cash Out Home Equity Financing Opportunities Will Become Available in 2025

From home renovations to college tuition to a new car, refinancing debt, there are many big-ticket expenses that many people can only afford by using the equity in their property.

There are several basic ways for home owners to use the equity in their houses to be approved for cash out loan programs that we will detail in this article. They are:

• Cash Out Mortgage Refinance
• Fixed Home Equity Loan
• Home Equity Line of Credit or HELOC

Home Equity Loans vs Cash Out Refinancing: Which Is Right for You?

When homeowners need access to cash, two common options are a cash-out refinance and a home equity loan. Both allow you to tap into the equity in your home, but they work differently and are suited for different financial needs. Understanding how each option works, their pros and cons, and which is best for your situation is key to making an informed decision.

Key Differences Between Cash-Out Refinance and Home Equity Loan

1. Loan Structure
   • Cash-Out Refinance: Combines your mortgage and additional borrowed funds into a single loan with new terms.
   • Home Equity Loan: A separate loan that adds to your existing mortgage, creating two monthly payments.
2. Interest Rates
   • Cash-Out Refinance: May offer lower interest rates compared to home equity loans because it replaces your primary mortgage.
   • Home Equity Loan: Generally has higher rates than a refinance but provides stability with fixed interest rates.
3. Costs
   • Cash-Out Refinance: Includes closing costs similar to a mortgage refinance, typically 2%–5% of the loan amount.
   • Home Equity Loan: May have lower upfront costs, but fees vary by lender.
4. Repayment Terms
   • Cash-Out Refinance: Resets the repayment period of your mortgage, often to 15 or 30 years.
   • Home Equity Loan: Typically comes with shorter repayment terms, such as 10–25 years.

Pros and Cons of Each Option

Cash-Out Refinance Loan

Pros:

• Potentially lower interest rate if refinancing to a better mortgage rate.
• Consolidates your mortgage and cash-out funds into a single payment.
• Can reduce monthly payments if the new interest rate is significantly lower.

Cons:

• Resets the clock on your mortgage, extending the time to pay off your home.
• Higher closing costs compared to a home equity loan.
• Interest costs may increase if you refinance to a longer term.

Home Equity Loan Finance

Pros:

• Maintains the terms of your existing mortgage.
• Fixed interest rate offers predictable payments.
• Lower upfront costs in some cases.

Cons:

• Adds a second monthly payment to your budget.
• Interest rates are typically higher than those on a cash-out refinance.
• May be harder to qualify for if you have a high debt-to-income ratio or poor credit.

Which Option Is Best for You?

The right choice depends on your financial goals and circumstances:

• Choose a Cash-Out Refinance If:
  • You want to refinance your mortgage to a lower interest rate.
  • You need a large amount of cash and prefer a single loan payment.
  • You are comfortable resetting your mortgage terms.
• Choose a Home Equity Financing If:
  • You’re happy with your current mortgage terms and interest rate.
  • You need a smaller amount of cash for specific purposes like renovations.
  • You prefer predictable, fixed monthly payments.

Both cash-out refinancing and home equity loans are effective ways to access your home’s equity, but they serve different needs. Cash-out refinancing is ideal for borrowers looking to refinance their mortgage while accessing cash, whereas a home equity loan is better suited for those who need additional funds without altering their existing mortgage. Evaluate your financial situation, compare loan terms, and consult with a lender to determine the best option for your needs.

Do You Have to Pay Taxes on Home Equity Cash-Out?

Generally, you do not have to pay taxes on the funds received from a home equity cash-out because it is considered borrowed money, not income. When you refinance for cash back, you are essentially replacing your existing mortgage with a larger loan and withdrawing the difference. Since this amount is not earned income, it is not taxable. Learn more about home equity loans and tax deductions.

However, how you use the funds can influence potential tax implications. For instance, if the cash-out is used for substantial home improvements, the interest on the new loan may be tax-deductible, as long as the renovations increase the value of the home and meet IRS criteria. On the other hand, if the funds are used for personal expenses, like vacations or paying off credit card debt, the interest is generally not deductible.

It’s also important to note that state tax laws may vary, so the implications could differ depending on your location. Consulting with a tax advisor is highly recommended to understand the specific impact of a home equity cash-out on your tax situation and to ensure compliance with IRS guidelines while maximizing potential deductions. Find out if you have to pay taxes on a cash out refinance?

Homeowners have a huge advantage in accessing cheap money with home equity loans & HELOCs being advertised with very low interest rates.

To determine if pulling cash out of your home is for you, it is necessary to explain what each of these types of cash out loans are in detail.

Cash Out Refinancing

A cash-out refinance just means that you are refinancing your mortgage to a lower rate for an amount higher than the current balance. You keep some of the difference between the old and new loans – this is some of your equity in the property.

For example, say you want $25,000 to pay for college tuition, but you own $100,000 on a $200,000 home. You can do a cash out refinance on your home at $125,000 and keep the $25,000 of equity to pay for college. And usually, you will be getting a lower home equity interest rate on top of the equity you keep. Consider conventional, VA and FHA cash out loans.

A mortgage refinance for cash back have these advantages:

• Pay for large expenses. You can use your equity for whatever you want. The most common uses are home renovations, college and medical expenses.
• Improve your credit score. Using a cash back refinance to pay off credit card debt will increase your credit score. Mortgage debt is scored differently and more favorably than credit card debt, as people are more likely over time to pay their mortgage given that it is their personal residence.
• Lower and more stable rate: Mortgage interest rates are some of the lowest interest rates you will ever pay on a loan. Also, it is a steady rate; usually people refinance into a fixed rate loan. So, you know what your payments will be for many years.

On the down side, your cash out refinance interest rate is going to be a bit higher than your original interest rate because you are pulling out cash, which makes the loan bigger and riskier.

You also need to fully document your credit score, debts, assets and income again just like when you got your original home loan. You also will need to provide your tax returns for the last two years.

Closing costs are another requirement of doing a cash out-mortgage. Last, your home is at greater risk of foreclosure because you owe more on your loan, which could be more than the home is worth if prices decline.

A cash out refinance could be your best option if you have an interest rate that is higher than current market rates. You do not usually want to refinance unless you are going to be moving into a lower rate.

Fixed Home Equity Loans for Cash-Out

If you’re satisfied with your current mortgage terms and interest rate but need to access your home’s equity, a home equity loan is a great alternative. This type of second mortgage financing provides a lump sum payment based on a portion of your available equity, making it ideal for covering large, one-time expenses like college tuition or significant medical bills.

The primary benefit of a home equity financing is its fixed interest rate. While typically higher than the rate on your first mortgage, it’s significantly lower than the rates on personal loans or credit cards. A fixed rate also offers predictable payments, giving you a clear repayment schedule and certainty about the loan’s duration and cost.

On the downside, home equity loans generally may have higher interest rates than HELOCs. Additionally, borrowing against your equity always carries the risk of foreclosure if you’re unable to make payments.

Adjustable Home Equity Line of Credit for Quick Cash

A HELOC is another option for leveraging your home’s equity. This form of second mortgage operates like a credit card, providing a revolving line of credit based on your available equity. You can borrow up to a pre-set limit and only pay interest on the amount used.

HELOCs typically start with a low variable interest rate, which can increase over time depending on market conditions. During the draw period, interest-only payments are common, but repayments often rise when you begin paying down the principal. While a HELOC offers flexibility and lower initial costs, the variable rates and payment increases require careful financial planning

HELOCs are a good choice for people who need to draw on cash over a longer period. A good use of a home equity line of credit is a home renovation. Some home owners also get a cash out lines of credit just to have an emergency reserve if they need it.

No matter if you choose a cash out loan, HELOC, or refinance you should be able to write off the mortgage interest on your taxes. This is a major benefit of using home equity instead of credit cards and other unsecured loans.  Review the current HELOC rates from competitive sources across the nation.

With home prices increasing, more home owners in 2025 are turning to home equity to pay for the things that they need. You should talk to your mortgage broker to determine which type of cash out equity loan is best for you. Compare the pros and cons of the home equity loan to the HELOC.

Top 4 Reasons to Choose a Home Equity Loan Over Refinancing for Cash Back

Homeowners who are interested in pulling cash out of their properties may wonder which is the best option – a home equity loan or a refinance for cash back. Which of these two options makes the most sense?

The answer depends upon several factors, but this article will assume that you decide to get a home equity loan instead of a cash out refinance of your first mortgage.

The home equity loan is a 2nd mortgage on your home that leaves the first mortgage in place. You are able to pull out a portion of your equity, typically up to 80% or 85% of the value of the home minus what you owe. You are given this money in a lump sum payment to your bank account to use as you wish.

A home equity loan is a frequent choice for homeowners who have one fixed expense that they want to pay for. A common example is a college education, or a major home renovation. Some people also use a home equity loan to pay off credit card debt with a low interest secured loan instead of paying high interest credit cards.

Below are the most common reasons that people choose a home equity loan instead of a cash out refinance. Note that a cash out refinance also can be a good option for many homeowners as well, depending upon individual circumstances:

#1 Home Equity Loan Is Good for People with a Low Interest First Mortgage

Probably the biggest reason that you might choose a home equity loan over a cash out refinance is that you currently are enjoying a low interest rate on their first mortgage.

In recent years, interest rates have been very low. In some cases, homeowners may be enjoying a rate on their first mortgage between 3% and 3.5%. In that case, it makes sense to keep the first mortgage in place and get a second mortgage with a home equity loan.

The case where it may make sense to do a cash out refinance is if you have a higher interest rate home loan from a decade ago. You may be able to lower your first mortgage rate and to get the cash you need. Otherwise, if you have a low rate on your first, it is logical to keep your first in place and get a home equity loan.

#2 Home Equity Loans Are Easier to Get

Generally speaking, it is easier and less paperwork to get a home equity loan than to do another first mortgage. It will take less time to get the loan closed and to get the cash that you need. Redoing a first mortgage can take more than two months to close. Many second mortgages can be closed in a few weeks.

You will still need to show your income and credit history to get a home equity loan. But it will still be easier and less complicated than doing a first mortgage.

#3 Fees and Closing Costs Are Usually Lower

Getting any new mortgage will involve closing costs and fees. However, the closing costs and fees associated with a second mortgage are lower than a first mortgage.

#4 Second Mortgage Is Below First Mortgage in Terms of Foreclosure

It’s essential to make timely payments on any mortgage tied to your home to avoid foreclosure and protect your credit score. Late payments can harm your financial standing and jeopardize your ownership of the property.

That said, in the event of foreclosure, the second mortgage lender is paid only after the first mortgage lender. As a result, paying the first mortgage is more critical. In some states, it’s even possible to default on a second mortgage, such as a home equity loan, while retaining ownership of the property. However, this approach is risky and can severely damage your credit.

We strongly recommend paying both mortgages consistently to avoid foreclosure or negative credit impacts. Consult an experienced lender to explore your options for cash-out loans or equity solutions.

More Advantages of Cash Out Home Equity Financing

Home equity loans offer several benefits. One major advantage is their fixed payment schedule and fixed interest rate, providing predictable payments throughout the loan term. From the outset, you’ll know the interest rate and repayment timeline, offering stability and peace of mind.

In contrast, a HELOC often starts with a lower interest rate but features a variable rate that can increase over time, introducing unpredictability. For those who value financial stability, a home equity loan may be more appealing.

Another advantage is the relatively low interest rate of home equity loans compared to credit cards, though they typically have a slightly higher rate than first mortgages.

For homeowners with a low-interest first mortgage—such as one in the 3-4% range—a home equity loan is an excellent way to access cash while preserving the favorable terms of the original loan. This option allows you to maintain a low-rate first mortgage and still meet your financial needs at a competitive interest rate

References: Home Equity Loan, HELOC or Cash Out Refinance? (n.d.). Retrieved from and Pros and Cons of a Cash Out Refinance. (n.d.). Retrieved from http://www.bankrate.com/finance/refinance/pros-and-cons-of-cash-out-refinance.aspx

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