The Quick Read: The cash from either product is borrowed money you repay, so it is a loan, not earnings. That also means the tax angle does not pick the winner, because both products are treated alike on this point. A cash-out refinance replaces your first mortgage and pays you the difference. A home equity loan adds a second mortgage and leaves the first one alone.
The choice comes down to what you want from your first mortgage and how much cash you need. A cash-out refinance fits you if you want one payment, need a large amount, and are comfortable re-borrowing the whole balance on new terms. A home equity loan fits you if your current first mortgage is one you want to keep and you need a smaller, defined lump sum.
Cash-out refinance estimate
The starting figures are an example value with a balance and a cash request in proportion. Replace them with yours.
Editable benchmark: 7.18% as of November 5, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the agency cap on a one-unit principal residence, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a cash-out refinance quote; a cash-out loan is priced by the lender at lock. The cash available is the loan the program cap allows less the balances paid off, before closing costs, which are not included. The HELOC line is the program’s combined loan-to-value ceiling applied to the same value and balance. Taxes and insurance are editable estimates. Licensed in sixteen states for consumer mortgages.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Side-by-Side
| Factor | Cash-Out Refinance | Home Equity Loan |
|---|---|---|
| Structure | New first mortgage replaces the old one | Separate second mortgage |
| Your current first loan | Paid off and replaced | Stays in place |
| Number of payments | One | Two |
| Leverage (principal residence) | 80% LTV, conventional | Set by the second-lien lender |
| Credit floor | Wholesale conventional starts at a 620 score | Set by the second-lien lender |
| Mortgage insurance | Above 80% LTV, with one wholesale exception | Generally none on the second loan |
| Occupancy | Primary residence, second home or investment property; occupancy sets leverage | Varies by lender |
| Documentation | Full new-loan review: credit, income, assets, ratios | Full review of the second loan |
| Seasoning | First mortgage at least 12 months old | Varies by lender |
Two notes on that table. The leverage line is the conventional limit on a one-unit principal residence. Two- to four-unit principal residences, second homes and investment property carry a lower cap of 75%. And the home equity loan column is deliberately loose, because second-lien terms are set lender by lender rather than by a common rulebook. Every figure here is subject to lender guidelines and full file review.
Is the Cash Taxable Income?
No, it is not earnings. You borrowed it, and you owe it back with interest. Receiving loan proceeds is a different event from being paid for work or selling something at a gain.
No tax rule changes between the two products, so the choice does not hinge on it. Where tax does show up is interest deductibility, which is a separate question. IRS Publication 936 says interest on home equity debt is deductible only when the money is used to buy, build or substantially improve the home that secures the loan. Spend it on credit cards or other living expenses, and the interest is not deductible. That depends on how you use the money, not on which product you picked. Your tax professional can sort out your case.
What Each Product Actually Is
A cash-out refinance is a brand-new first mortgage. It pays off your old one, and you receive the difference as cash, with no specific restrictions on how you use the proceeds. Because it is a new loan, you qualify all over again: credit, income, assets and debt-to-income ratio.
A home equity loan is a second mortgage. Per the Consumer Financial Protection Bureau, it uses your equity as collateral, pays out as a lump sum and usually carries a fixed rate. If you cannot repay it, the lender could foreclose. It sits behind your first mortgage in line, and that lower priority is why second mortgages often cost more in interest than first mortgages.
Across the wholesale programs Lendmire places files with, the cash-out refinance is the one that reshapes your whole mortgage. Lendmire’s cash-out refinance programs page lays out how those programs work. The home equity loan is a separate product with its own lender.
When a Cash-Out Refinance Is the Better Fit
A cash-out refinance tends to win in three situations.
You want one payment. A home equity loan means a second bill on top of the first. A cash-out refinance folds everything into one loan.
You need a larger sum. The new first mortgage can reach 80% LTV on a one-unit principal residence, so it can unlock more equity than many second-lien lenders will allow. Many lenders prefer you borrow no more than 80 percent of your equity, a general market habit rather than a rule, per the Federal Trade Commission.
Your current first mortgage is not worth protecting. If the terms you hold no longer serve you, replacing the loan is the point. If those terms are good, replacing them is a real cost, and a home equity loan avoids it.
One caution applies to any refinance: it resets the clock. A new term can also change how much of each payment goes to principal, so look at the whole loan, not only the monthly bill.
There is a mortgage insurance wrinkle too. On the agency path, insurance is required above 80% LTV, with the wholesale no-MI cash-out lane as the one exception. That lane allows cash-out with no mortgage insurance at a 680 score and a 50% ratio on a thirty-year fixed, primary residence, conforming balance. It has its own six months of seasoning, and it is not written in Texas. When mortgage insurance applies, you can request cancellation at 80% of original value with good payment history, and the servicer must end it automatically at 78%. Final terms depend on lender guidelines, property type, leverage, and your complete credit picture.
The seasoning test
You cannot cash out the day after you buy. Under Fannie Mae’s cash-out eligibility update, the first mortgage being paid off must be at least 12 months old, measured from the old note date to the new one. You also generally need to be on title for six months, with exceptions for delayed financing, inheritance and legal awards.
Two more rules matter if you live in Texas or hold an FHA loan. A Texas homestead cash-out, called a Section 50(a)(6) loan, is capped at 80% of the home’s value by the state constitution. For FHA cash-out refinances, the loan-to-value and combined loan-to-value limits are also set at 80 percent. Check the current FHA guidelines before relying on that figure.
When a Home Equity Loan Is the Better Fit
A home equity loan tends to win when you hold a first mortgage you like.
Keep what works. A new home equity loan is a second mortgage you pay in addition to your first, which stays untouched. If your existing first loan has terms worth keeping, that matters more than consolidating into one payment.
You need a smaller, one-time amount. A lump sum for a defined project fits the product well. You borrow what you need and no more.
You are inside the seasoning window. Cash-out refinance has ownership and loan-age tests. Second-lien lenders set their own, and they may differ.
You do not want to re-qualify the whole mortgage. You still qualify for the second loan, but the first one is not rewritten.
The trade-offs are real. A second mortgage often costs more in interest than a first mortgage because of its place in line. Home equity loans can carry upfront fees, so compare more than the monthly payment. And if you later refinance the first mortgage, the second-lien lender has to agree to stay behind the new loan unless the refinance pays it off, as the CFPB’s guidance on second mortgages explains.
Does Tax Treatment Change the Choice?
Not much. This is the point most comparisons blur. When the cash is not income under either product, and when deductibility follows how you spend the money, tax does not separate the two. If you spend the cash on a kitchen remodel, the use of funds drives the deduction question. If you spend it on a car or consolidating cards, it drives that answer the other way. The product label does not.
Think of it as a quick filter:
- Same dollars, same purpose, same treatment under either product.
- Mixed uses split the picture, so keep records of where each portion went.
- Your tax professional, not a loan officer, decides what applies to you.
So spend your energy on the factors that do differ: leverage, your current first mortgage, seasoning, number of payments and total cost.
A Scenario Without Dollar Figures
Picture a homeowner with a first mortgage that has been in place for several years and is well within what they can carry. They want to finish a basement and have a good idea of the cost, which is modest compared with their equity. A home equity loan lets them keep the first mortgage intact and borrow only the project amount.
Now picture a different homeowner. Their first mortgage is a few years old with terms that no longer fit, they want to pay off higher-interest debt and fund a larger project, and they would rather have one bill. A cash-out refinance on their primary residence fits that goal better. They would need to qualify for a new first mortgage, and the whole balance resets on new terms. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
Same equity, two different answers. The deciding factor was the first mortgage, not the tax treatment.
Risks Both Share
Using home equity to pay off other debts moves the debt, it does not erase it. You are taking out one loan to repay another, and now your home secures it. If you cannot repay, the home is at risk.
Both products also carry a right to cancel. For a refinance or home equity loan on your primary home, you generally have three business days to rescind, and Saturdays count, per the CFPB’s right-of-rescission guidance. If a lender fails to provide the required disclosures, that right can extend up to three years. And if you rescind a refinance, you still owe the original loan.
Key Terms Defined
LTV (loan-to-value): The loan balance divided by the home’s value, shown as a percentage.
Seasoning: The waiting period a lender requires, such as how long you have owned the home or held the loan you are paying off.
Second mortgage: A loan secured by your home that sits behind your first mortgage in repayment priority.
Mortgage insurance: Coverage that protects the lender when you borrow above 80% LTV on the agency path; it cancels at set thresholds. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
Rescission: Your legal right to cancel certain home loans within three business days after closing documents are signed.
Frequently Asked Questions
Is the money from a cash-out refinance reported as income?
No. It is borrowed money, so it is treated as a loan to repay rather than earnings. The deduction question, which depends on how you spend the funds, is separate. A qualified tax professional can confirm how this applies to your return.
Can I deduct the interest on either one?
It depends on the use of the money. IRS Publication 936 ties home equity interest deductibility to buying, building or substantially improving the home that secures the loan. Interest on money spent on personal living expenses is not deductible. A qualified tax professional can confirm what applies to you.
How much equity can I take out?
On a conventional cash-out refinance, the cap is 80% LTV on a one-unit principal residence and 75% on two- to four-unit principal residences, second homes and investment property, subject to lender guidelines. One wholesale lane goes higher, reaching 89.99% LTV with no mortgage insurance at a 680 score and a 50% ratio on a thirty-year fixed, primary residence, conforming balance. Home equity loan limits are set by the second-lien lender.
Can I do a cash-out refinance right after buying a home?
Usually not. The first mortgage being paid off must be at least 12 months old, and you generally need six months on title. Delayed financing is a named exception for recent all-cash buyers who can document their funds.
Should I pay off my home equity loan when I refinance my first mortgage?
You do not have to, but the choice carries consequences. Leaving the second lien in place requires that lender to agree to stay behind the new loan. Paying it off through the new first mortgage is a different path, and your loan officer can explain how the lender would classify the transaction and which limits would apply.
Final Verdict
Neither product wins on taxes, because the cash is not taxable income under either one. Pick the cash-out refinance if you want a single payment, a larger amount, and a fresh first mortgage you are happy to qualify for. Pick the home equity loan if your current first mortgage is worth keeping and your need is smaller. If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. All program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
About Lendmire
As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
2. Consumer Financial Protection Bureau
3. Federal Trade Commission: Home equity loans and lines of credit
4. Fannie Mae: cash-out refinance eligibility update
5. CFPB: second mortgages and refinancing
This article is part of Lendmire’s cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How Lenders Underwrite a Cash-Out Refinance When Relocating and Tapping Home Equity · Cash-Out Refinance vs Home Equity Loan Without a Property Release · How Much Cash Comes Out of a Cash-Out Refinance With 30% Equity in Your Home?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.