The Quick Read: A home equity loan fits when your current first mortgage has terms worth keeping and the bill is a one-time amount. A cash-out refinance fits when replacing the first mortgage makes sense anyway and you have enough equity to meet its leverage limit. Either way, you turn a bill that is usually unsecured into debt tied to your home. That is the decision to weigh first.
The Honest Answer: Who Each Option Is Really For
A home equity loan is a second mortgage. It sits behind your first mortgage, pays you a lump sum, and leaves the first loan untouched. It is built for the homeowner who likes the first mortgage they have and needs one defined amount of cash.
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.
A cash-out refinance replaces the first mortgage with a new, larger loan. The difference comes to you as cash. It is built for the homeowner who would consider a new first mortgage anyway, or who has no first mortgage left to protect.
Neither option is a payment plan with the hospital. Neither one is a gift. Both put your house behind a bill that, until now, was not secured by it. Medical providers often negotiate, itemize and set up payment arrangements. A lender will not.
Lenders do not treat a medical bill differently from any other use of the money. Under Freddie Mac’s cash-out refinance rules, the proceeds have no restriction on how they are used. The medical bill is just a use of cash. What the lender examines is your equity, your credit, your income and the first mortgage being paid off.
Side-by-Side
| Factor | Cash-Out Refinance | Home Equity Loan |
|---|---|---|
| What happens to the first mortgage | Paid off and replaced | Stays in place |
| Number of loans afterward | One | Two |
| Leverage | 80% LTV on a one-unit primary home | Set by the lender; a cushion of equity is kept |
| Seasoning | First mortgage at least 12 months old; 6 months on title | Varies by lender |
| Credit floor | 620 decision score on wholesale conventional programs | Varies by lender |
| Mortgage insurance | Rarely applies at 80% LTV or below | Not typical |
| Occupancy | Primary, second home or investment property; occupancy sets leverage | Usually the home you live in |
| Documentation | Full income, asset and appraisal review | Income review; value estimate or appraisal |
| Terms on existing loan | New terms apply to the whole balance | Original terms stay |
A few notes on the table. The leverage and seasoning figures for the cash-out refinance reflect the conventional programs Lendmire’s wholesale lenders use and are subject to lender guidelines and full file review. Home equity loan terms vary more from lender to lender, because those are second mortgages written by banks and credit unions to their own standards. Lendmire’s work centers on first-mortgage programs, so use that column as a general guide and ask the second-lien lender for its specifics.
What You’re Actually Trading
Most medical bills are unsecured debt. If you can’t pay, the provider can pursue collections. They cannot take your home on the bill alone. Once you borrow against the house, the picture changes. The federal consumer-finance regulator describes using equity to pay other debts as taking one loan to repay another, and notes that the lower cost can reflect the fact that your home is collateral. The FTC adds that a lender can foreclose on a home equity loan if you don’t repay as agreed.
That is the core trade. You may get a longer repayment schedule and a lender who won’t call you at dinner. You give up the protection of unsecured status. Before you borrow, ask the provider for an itemized bill, ask about payment plans and charity care, and consider a credit counselor. Those steps cost nothing and put no lien on the house.
When a Cash-Out Refinance Is the Better Fit
A cash-out refinance tends to work when the first mortgage is the thing you want to change.
- You would refinance anyway. If your current loan has a structure you want to replace, a cash-out refinance does both jobs in one closing. You end up with a single payment instead of two.
- You have no first mortgage. On a home owned free and clear, a new mortgage is treated as a cash-out refinance. A home equity loan on a paid-off home would become the first lien anyway.
- The bill is large and equity is deep. On a one-unit primary home the conventional cash-out limit is 80% LTV. That means the new loan can’t exceed 80% of the appraised value. A two- to four-unit primary residence, a second home or an investment property is capped at 75%. Occupancy sets the leverage.
- You want a simple structure. One loan, one servicer, one set of closing disclosures. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
Here is what the lender checks. The first mortgage being paid off must be at least 12 months old, counted from note date to note date, under Freddie Mac’s Guide section 4301.5. The borrower has to have been on title for 6 months, with exceptions for delayed financing, inheritance and legal awards. Wholesale conventional programs start at a 620 decision score, and the automated finding governs most files with a total ratio ceiling of 50%. Lendmire’s cash-out refinance programs page lays out how the loan is structured.
One lane worth knowing about: the wholesale network has a cash-out option that reaches 89.99% LTV with no mortgage insurance. It requires a 680 score, a 50% ratio, a thirty-year fixed rate, a primary residence, a conforming balance and its own six months of seasoning. That is the one exception to the rule that mortgage insurance applies above 80% LTV. It is not available on every file. Every figure here varies by lender and program, and guidelines, property type, leverage and credit profile all apply.
Texas works differently. A cash-out on a Texas homestead, a Section 50(a)(6) loan, is capped at 80% of the home’s value by the state constitution, whatever the occupancy rules elsewhere, and the no-mortgage-insurance lane is not written there.
The Catch With Cash-Out
New terms apply to the whole balance, not just the cash you take. If your existing first mortgage has terms you like, replacing it to cover a bill is the expensive way to do it. You also pay a full new mortgage closing. That is the main reason a smaller bill often points toward a second lien.
When a Home Equity Loan Is the Better Fit
A home equity loan fits when the first mortgage is the thing you want to protect.
- Your first mortgage has terms worth keeping. A second lien leaves the original loan untouched. You borrow only the cash you need and nothing else changes.
- The bill is a one-time, defined amount. A home equity loan pays a lump sum and repays on a fixed schedule. The CFPB lists it among the common second mortgages. That structure suits a bill you can total on one page.
- Your equity is thinner than a cash-out refinance requires. A second lien works from the equity left over after the first mortgage. Lenders usually want you to keep a cushion, so check the combined leverage a lender will allow before assuming anything.
- You want to avoid a full new first-mortgage closing. Second liens carry their own fees, often fewer than a full refinance, though the CFPB advises comparing more than the monthly payment.
The Catch With a Home Equity Loan
You now have two payments, and the second lien is junior to the first. That sits fine when income is steady. It strains a budget when the illness that caused the bill also cut your hours. If you can’t repay, foreclosure is possible. A home equity loan is also a separate underwriting event, so your credit and debts get reviewed again.
Two Scenarios, Described in Percentages
A smaller bill, a good first mortgage. Picture a homeowner with a first mortgage they want to keep and a bill that is a modest share of their equity. A second lien handles it without touching the first loan. A cash-out refinance would apply new terms to the whole balance just to fund a small amount. For this borrower, the second lien usually wins on simplicity, though the second mortgage’s own fees and terms still need comparing.
A larger bill, deep equity, a refinance already on the table. Picture a homeowner with a one-unit primary residence, a first mortgage past its 12-month seasoning, and a plan to refinance regardless. The conventional cash-out refinance can fund the bill at up to 80% LTV, meaning the new loan stays at or below 80% of the appraised value, and it consolidates everything into one payment. For this borrower, the cash-out refinance can make sense, provided the new first-mortgage terms are acceptable on their own merits. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
Why a Rate-and-Term Refinance Won’t Cover a Big Bill
Some borrowers hear “refinance” and assume any version can hand over cash. It can’t. A rate-and-term refinance, called a limited cash-out refinance, pays off the existing first mortgage, closing costs and a purchase-money second lien, with only incidental cash back. At Fannie Mae the cap is the lesser of 2% of the new loan amount or $2,000. Fannie Mae’s Selling Guide B2-1.3-02 also explains that when you add new subordinate financing alongside a refinance, the transaction is treated as limited cash-out only if the first mortgage meets those same limits.
The government streamlines work the same way. An FHA Streamline refinances an existing FHA loan with no meaningful cash back. A VA IRRRL is a VA-to-VA loan aimed at the existing loan’s terms, not at raising cash. If you need real money for a bill, those products aren’t it. A VA cash-out refinance exists as a separate product for eligible veterans.
Medical Debt and Your Credit File
Borrowers often ask whether medical debt is kept out of mortgage underwriting. Not by federal rule today. The credit bureaus have voluntarily changed how they report some medical debt, and individual lenders treat it differently.
What that means in practice: an underwriter reviews the whole credit file. Paying off a medical collection with loan proceeds is a common reason to borrow, but how it affects the decision varies by lender. If a medical collection is dragging down your score, raise it with your loan officer at the start, not at the end.
Checklist Before You Borrow Against the House
1. Get an itemized bill and check it for errors.
2. Ask the provider about payment plans, charity care and negotiation.
3. Confirm the bill is final and not still being disputed or reduced.
4. Decide whether the first mortgage is worth keeping. If yes, lean toward a second lien. If no, a cash-out refinance can make sense.
5. Check your equity against the leverage limit, and leave a cushion.
6. Test the budget against reduced income, not just current income.
Key Terms Defined
Home equity loan: A lump-sum second mortgage secured by your home, repaid on a fixed schedule while your first mortgage stays in place.
Cash-out refinance: A new first mortgage that pays off the old one and gives you the difference as cash.
LTV (loan-to-value): The loan amount divided by the home’s appraised value, shown as a percentage.
Seasoning: The minimum time a mortgage or ownership must exist before a lender will refinance it with cash back.
Limited cash-out refinance: A refinance that pays off the existing loan and costs, with only a small, incidental amount of cash back.
Second lien: A loan secured by your home that ranks behind the first mortgage if the home is ever sold to repay debts.
Balanced Verdict
Choose a home equity loan when the first mortgage is worth protecting and the bill is a defined, one-time amount. Choose a cash-out refinance when you would replace the first mortgage anyway and your equity meets the 80% limit. Choose neither if the provider will set up a payment plan you can manage, because the home is the one thing the bill didn’t put at risk.
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.
Frequently Asked Questions
Can I use a cash-out refinance to pay a medical bill?
Yes. Freddie Mac’s Guide section 4301.5 places no restriction on how cash-out proceeds are used, so a medical bill is an acceptable use. The lender reviews equity, credit, income and the first mortgage being paid off, not the bill itself. Eligibility depends on lender guidelines and full file review.
How much equity do I need for each option?
A conventional cash-out refinance on a one-unit primary home reaches 80% LTV, and 75% on two- to four-unit primary residences, second homes and investment property. A home equity loan depends on the second-lien lender, but lenders typically want you to keep a cushion of equity after the new debt. A wholesale lane reaching 89.99% LTV with no mortgage insurance exists for qualifying primary-residence files, but it is not written in Texas.
Does a home equity loan change my first mortgage?
No. The first mortgage’s balance and terms stay the same, and you add a second payment. A cash-out refinance replaces the first mortgage, so the new terms apply to the whole balance.
Can a rate-and-term refinance or an FHA Streamline pull cash out for a bill?
Not in any meaningful amount. FHA Streamlines and VA IRRRLs are aimed at the existing loan’s terms, not at raising cash.
Is medical debt barred from mortgage underwriting?
Treatment varies by lender and by credit bureau reporting practices.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program 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
1. Freddie Mac Guide, Section 4301.5 (Cash-Out Refinance Mortgages)
2. CFPB
3. FTC: Home Equity Loans and Home Equity Lines of Credit
4. Fannie Mae Selling Guide, B2-1.3-02 (Limited Cash-Out Refinance Transactions)
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 to Qualify for a Cash-Out Refinance on a CPA PL Loan · How Lenders Underwrite a Cash-Out Refinance on a Home You Own · How to Meet Seasoning for a Cash-Out Refinance on a Primary Home
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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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.