The Quick Read: Both products can turn the equity in the home you own into down-payment money, and neither is the winner in every case. A cash-out refinance replaces your current mortgage with a bigger one and hands you the difference. A home equity loan leaves that mortgage alone and adds a second loan on top. The better fit depends on whether your current first mortgage is worth keeping and how large a sum you need. Either way, the new payment counts against you when you apply for the next house.
Key Takeaways
- A cash-out refinance means one loan on your current home. A home equity loan means two.
- Lenders can accept borrowed, home-secured money as a down payment, but they count the new payment as debt.
- The leverage you can reach depends on the type of home you borrow against. Occupancy sets the limit.
- Both options put your current home at risk if you cannot repay.
Side-by-Side
The cash-out column reflects the wholesale conventional programs a broker places loans with. Home equity loan terms vary more, because each second-lien lender writes its own rules.
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.
| Factor | Cash-Out Refinance | Home Equity Loan |
|---|---|---|
| Effect on current mortgage | Paid off and replaced | Stays in place |
| Liens on the home | One first lien | First lien plus a second |
| Leverage (LTV) | 80% on a one-unit primary home | Set by the second-lien lender |
| Leverage, other homes | 75% on 2–4 units, second homes, investment | Set by the second-lien lender |
| Credit floor | 620 decision score on wholesale conventional | Set by the second-lien lender |
| Mortgage insurance | None at 80% or below; no-MI lane reaches 89.99% | Generally not part of a second lien |
| Occupancy | Primary, second home or investment; sets LTV | Varies by lender |
| Seasoning | First loan 12+ months old; 6 months on title | Varies by lender |
| Documentation | Full new first-mortgage file and appraisal | Smaller file; income, credit and value still checked |
Two notes on that table. First, the 80% cap on a cash-out is the total balance of the new loan against your home’s value. If you owe 50% of value today, the most you could pull out is about 30% of value, before costs. Second, the credit floor is where the file starts, not where it ends. The automated underwriting finding governs most files, and the total debt ratio ceiling is 50%.
How Each Option Puts Cash in Your Hands
A cash-out refinance pays off your existing first mortgage with a new, larger one. The difference comes to you as cash at closing. You then carry one payment on that home. The terms of the old loan go away, and the new loan sets a fresh term.
Lendmire’s cash-out refinance programs page lays out how occupancy changes the leverage. The same home carries a different limit depending on whether you live in it, use it as a second home, or rent it out.
A home equity loan works differently. It is a second mortgage that sits behind your first one. The CFPB explains that you borrow against the home’s equity as collateral, receive a lump sum, and usually get a fixed rate. Equity is the home’s current value minus what you owe. Because the lender is second in line if the home is sold, the CFPB notes that second mortgages often cost more to carry than first mortgages. Home equity loans also carry upfront costs, so compare more than the monthly payment.
In most cases, both products rely on an appraisal of the current home. The appraised value drives how much equity you can reach.
Can Borrowed Equity Really Be a Down Payment?
Yes, with conditions. The Fannie Mae Selling Guide says borrowed funds secured by an asset are an acceptable source for the down payment, closing costs and reserves, because the money represents a return of equity. Real estate counts as one of those assets.
The same section sets two conditions. The lender must count the monthly payment on the secured loan as a debt. And the lender must document the terms of the loan and show the funds reached you. Because the lender has to document both the loan terms and the receipt of funds, clean paperwork matters.
When a Cash-Out Refinance Is the Better Fit
A cash-out refinance is the stronger choice when the first mortgage on your current home is not worth protecting and you need a large amount of cash. Several situations fit that description.
You need a big slice of the equity. On a one-unit primary home, the cash-out limit is 80% LTV. That is generally a higher ceiling than a second-lien lender will offer on a combined basis, though second-lien limits vary. If the down payment on the next house is a large share of your equity, the replacement loan reaches further.
You want one payment instead of two. A cash-out refinance leaves a single payment on the current home. A home equity loan leaves two, and a lender reviewing your next mortgage sees both.
Your current loan has little left to protect. If you are early in a long term and your current terms are ordinary, resetting costs you little. If your current first mortgage is a standout, the answer flips. Keep that loan and look at the other option.
Your balance sits high or you want to restructure. You might also want to pull out cash and change your loan term in one step. Only a refinance does both.
You have good credit and a stable file. Wholesale conventional programs start at a 620 decision score. There is also a wholesale lane that reaches 89.99% LTV with no mortgage insurance. It requires a 680 score and a 50% ratio on a thirty-year fixed, a primary residence and a conforming balance. It carries its own six months of seasoning. This is the one exception to the mortgage-insurance rule that applies above 80% on the agency path. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
Seasoning is the waiting period before you can cash out. For the conventional programs, the first mortgage being paid off must be at least 12 months old, counted note date to note date. You must also have been on title for six months. Delayed financing, inheritance and legal-award exceptions exist.
Mortgage insurance is the other factor. Above 80% LTV it is required on the agency path, with the no-MI wholesale lane above as the exception. You can request cancellation at 80% of original value, given good payment history, no subordinate liens and no decline in value. The servicer must end it automatically at 78%. Both cancellation points come from federal law rather than from any one lender.
A cash-out is also possible on a second home or an investment property you already own. Occupancy sets the leverage there: 75% on two- to four-unit principal residences, second homes and investment property.
Some states add their own rules. In Texas, a cash-out on a homestead is capped at 80% of the home’s value by the state constitution, and the wholesale no-MI lane is not written there.
If your current loan is VA, the answer can change. Lendmire’s piece VA Cash-Out Refinance vs. Conventional Cash-Out as a Down Payment on Another House walks through that fork. If your balance runs above the conforming limit, see Jumbo Cash-Out Refinance vs. Conforming Cash-Out as a Down Payment on Another House.
When a Home Equity Loan Is the Better Fit
A home equity loan is the stronger choice when the first mortgage you have is worth keeping and the sum you need is modest. Here are the cases where it wins.
You have a first mortgage you would hate to lose. A cash-out refinance replaces the whole loan. A home equity loan does not touch it. If your current first mortgage has terms that would be hard to match, the second lien keeps them intact. For a borrower in that position, this is the main argument for the second-lien route. The trade-off depends on your existing loan’s terms, which you should read before you decide.
You need a smaller amount. A home equity loan is a smaller loan. Upfront costs are generally lower than on a full new first mortgage, because there is less to underwrite. The CFPB still warns that home equity loans can carry upfront fees, so compare the full costs on the Loan Estimate.
You want to keep the equity cushion on your current home. Borrowing less leaves more equity in place. The FTC notes that many lenders prefer you leave a cushion of equity rather than borrow all of it. A smaller draw also leaves more room if values dip.
You are close to the seasoning limit. A cash-out refinance has waiting periods on both the first loan and your time on title. A second-lien lender writes its own timing rules. Those can differ, so ask before assuming.
The drawback is the second payment. You will carry your first mortgage payment, plus the second-lien payment, plus the payment on the new house. That stack is what a lender looks at next.
What Either One Does to Qualifying for the Next Mortgage
The new loan on your current home is a debt, and the lender for the new house counts it. The Selling Guide language is plain: the lender must consider monthly payments on secured loans as a debt when qualifying you. The exception for loans secured by financial assets does not extend to loans secured by real estate, even though real estate is an acceptable source of down-payment funds. So a home equity loan or a cash-out refinance payment goes into your debt-to-income ratio.
Debt-to-income, or DTI, is your monthly debts divided by your monthly income. It is the measure lenders use to see whether another payment fits. Wholesale conventional programs carry a total ratio ceiling of 50% on files the automated finding approves. Manually underwritten loans use 36% or 45%, with reserve and score factors from the Eligibility Matrix.
Reserves are the cash left in your account after closing. The Fannie Mae Eligibility Matrix says reserves can apply to cash-out refinances when the debt ratio runs high. Reserve rules also tighten on second homes and when you own several financed properties.
Occupancy of the next house changes the leverage on its purchase. Conventional purchases reach 95% LTV on a one-unit principal residence, 90% on a second home, and 85% on a one-unit investment property. A lower LTV means a larger down payment, and that is the very cash you are trying to raise. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
Documenting the Money
Lenders want a clear trail. Expect to provide the terms of the loan that produced the cash and proof the money landed in your account. A cash-out refinance leaves a closing disclosure. A home equity loan leaves a loan agreement and a deposit record.
Tell each lender the true purpose of the money. Saying the funds are for home improvements when they fund a down payment is a misstatement on the application. It can be treated as mortgage fraud. State the real use.
A Worked Comparison, in Percentages
Skip the dollar figures and think in shares of value. Say your home is worth 100 units and you owe 50 on the first mortgage. That is a 50% balance against value.
Cash-out path. You refinance to a new loan of up to 80 units on a one-unit primary home. That pays off the 50 you owe. About 30 units of cash comes back, before closing costs. After closing you have one loan at 80% of value.
Home equity loan path. You keep the 50-unit first mortgage and add a second lien. The second-lien lender sets the limit on the combined balance. Say it lets you reach 70% combined. You receive about 20 units. After closing you have two loans totaling 70% of value.
The cash-out reaches more cash. The second lien leaves more equity in the house and keeps the first loan. Which matters more depends on how much you need.
Now compare that with the down payment. If the next house costs about the same as the current home is worth, a second-home purchase at 90% LTV needs about 10 units down, plus closing costs. A primary-residence purchase at 95% needs about 5. Either down payment fits within the roughly 20 units from the second lien, so the larger draw is not required for that purpose. The larger cash-out reaches higher and covers reserves too, but it costs you a bigger monthly commitment. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
Run this arithmetic on your own file before you choose. The results swing with your balance, your equity and the house you want.
Risks and Mistakes to Avoid
Both paths put your current home on the line. That is true of a cash-out refinance as well, since the home secures the new first mortgage. The CFPB also cautions that borrowing against your home as part of an investment strategy carries risk, so weigh all your options.
Common mistakes follow a pattern:
- Ignoring the stack. You will hold the payments on the current home and the new one at once. If your income dips, both are at risk.
- Draining the equity. Borrowing the maximum leaves little cushion if values fall.
- Borrowing before the purchase is firm. If the sale falls through, you still owe the new loan. Sequence the steps carefully.
- Counting on the wrong product. FHA Streamline and VA IRRRL loans refinance an existing government loan. They are not designed to produce down-payment cash. FHA and VA cash-out loans exist, with their own occupancy and equity limits.
- Assuming the seasoning clock is short. Waiting periods apply, so check yours before you plan a title-recording date.
- Skipping the cost comparison. Look at the Loan Estimate for each option, not just the payment.
A HELOC, a home equity line of credit, is a third path. It works like a revolving credit line against your equity. It is a different product from the lump-sum home equity loan, and it deserves its own comparison. Part-savings, part-equity mixes can also reduce how much you borrow.
The Balanced Verdict
Pick the cash-out refinance when you need a large amount, when you want a single payment, and when your current first mortgage has no special terms to protect. Pick the home equity loan when you need a modest amount and your current first mortgage is one you want to keep. This one is a genuine toss-up for many owners in the middle, so run both through your own numbers.
The deciding factors are the same either way. How much cash do you really need? What is your current loan worth keeping? How much room is left in your debt ratio once the new payment counts? And how much equity are you comfortable leaving behind?
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. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Key Terms Defined
Cash-out refinance: A new first mortgage that pays off your old one and gives you the extra amount as cash.
Home equity loan: A second mortgage that gives you a lump sum and sits behind your first mortgage.
Lien: A lender’s legal claim on a property as collateral for a loan.
LTV (loan-to-value): Your loan balance as a percentage of the home’s value.
DTI (debt-to-income): Your monthly debt payments as a share of your monthly income.
Seasoning: The waiting period a lender requires before you can cash out.
Reserves: Cash you keep after closing, which some files must show.
Frequently Asked Questions
Can I use a home equity loan for the down payment on a second home?
Yes, in many cases. The Fannie Mae Selling Guide treats borrowed funds secured by an asset as an acceptable source for a down payment. The new payment is counted as debt, and you must document the loan terms and the transfer of funds. Leverage on the purchase depends on occupancy, with second homes reaching 90% LTV. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
Does a cash-out refinance add a payment on top of my old mortgage?
No. It replaces your old first mortgage, so you carry one payment on the current home. The home equity loan is the one that adds a second payment. The new loan has fresh terms, so check what you give up from the old one.
How much equity do I need to leave in the home?
On a conventional cash-out of a one-unit primary home, the limit is 80% LTV, so at least 20% of value stays as equity. The wholesale no-MI lane reaches 89.99% at a 680 score. Second homes and 2–4 unit properties carry a 75% limit. Home equity loan limits are set by the second-lien lender, and many prefer you keep a cushion. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
How long must I own the home before I can cash out?
For the conventional programs, the first mortgage being paid off must be at least 12 months old. A second-lien lender sets its own timing.
Can I use an FHA Streamline or VA IRRRL to get down-payment cash?
No. Those programs are built to refinance an existing FHA or VA loan with limited paperwork, not to deliver cash. If you need cash from a government-backed home, ask about the cash-out versions, which have their own occupancy and equity limits.
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 brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. 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. CFPB: What Is a Home Equity Loan
2. CFPB: What Is a Second Mortgage Loan or Junior Lien
3. Fannie Mae Selling Guide B3-4.3-15: Borrowed Funds Secured by an Asset
4. FTC: Home Equity Loans and Home Equity Lines of Credit
5. Fannie Mae Eligibility Matrix
This article is part of Lendmire’s cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Cash-Out Refinance Requirements With 30% Equity in the Home · How to Use a Cash-Out Refinance to Pay for Home Improvements · Cash-Out Refinance vs Home Equity Loan to Fund Renovations
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.