The Quick Read: It depends on the loan you already have and how long you plan to stay. A cash-out refinance replaces your first mortgage and reprices the whole balance. A home equity loan leaves the first mortgage alone and adds a second payment on only the new money. The usual break-even formula, closing costs divided by monthly savings, breaks down here because a cash-out often raises the payment instead of lowering it.
Here is the honest answer on who each option is for. A cash-out refinance fits the homeowner whose current first mortgage is not cheap to keep, or who wants one payment and one loan. A home equity loan fits the homeowner with a first mortgage worth protecting who needs a defined amount of cash. Either way, the real comparison is the cost of getting the same cash two ways, not a rate-versus-rate contest.
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.
Lendmire is a mortgage broker, and its cash-out refinance programs page lays out the first-lien side of this decision. Everything below is subject to lender guidelines and full file review, and none of it is a commitment to lend.
Side-by-Side
| Factor | Cash-Out Refinance | Home Equity Loan |
|---|---|---|
| Structure | New first mortgage replaces the old one | Second mortgage added behind the first |
| Payments | One combined payment | Two separate payments |
| Closing costs apply to | The whole new loan | The smaller second loan |
| Leverage (conventional) | 80% LTV on a one-unit primary residence; one wholesale no-MI lane reaches 89.99% | Set by each lender |
| Credit floor | Wholesale conventional programs start at a 620 decision score | Set by each lender |
| Mortgage insurance | Generally above 80%, with one no-MI lane | Not an agency feature |
| Documentation | Full new first-lien file and appraisal | Underwritten; valuation varies by lender |
| Existing first-mortgage rate | Replaced for the whole balance | Left in place |
The 80% figure is the standard conventional limit on a one-unit primary residence. The one exception is a wholesale lane that reaches 89.99% LTV with no mortgage insurance, on a thirty-year fixed rate, a primary residence and a conforming balance, at a 680 score. Cash-out limits drop to 75% on two- to four-unit properties, second homes and investment property, so occupancy sets the number.
Why the Standard Break-Even Formula Does Not Transfer
The standard test divides your closing costs by your monthly savings. That gives the months until the refinance pays for itself. It works for a refinance, where the payment drops.
A cash-out is different. You borrow more, so the payment often rises. There are no savings to divide by. If you run the formula anyway, you get a meaningless number or a divide-by-zero.
The fix is to change the question. Fix the same dollar amount of cash under both options. Then compare what each path costs you over the years you will keep the loan. The break-even point becomes the month when the cash-out’s extra upfront cost is recovered by a lower combined monthly cost, if it ever is. If the cash-out is also the more expensive monthly choice, no break-even exists. At that point you are deciding what it costs to give up your current first mortgage. (This is an analytical framework, not a regulatory rule.)
The Consumer Financial Protection Bureau describes a cash-out refinance as replacing your mortgage with a bigger one and taking the difference in cash, and notes that you often pay closing costs. It also says that, depending on terms, a cash-out may be more or less expensive than a HELOC. Neither product wins by default.
How to Run the Comparison, Step by Step
Gather these inputs first: the balance and payment on your current first mortgage, the cash you need, your home value, any quotes you receive in a Loan Estimate, and how long you expect to keep the home.
1. Fix the cash need. Use the same amount under both options.
2. Price Option A, the cash-out. One new first mortgage pays off the old one. Closing costs apply to the full new balance. The entire balance takes the new rate and a new term.
3. Price Option B, the home equity loan. The first mortgage stays. Closing costs apply only to the smaller second loan. The CFPB’s home equity guide describes it as a second mortgage with a second, separate payment.
4. Add up the monthly housing cost. Under Option B, that is the first payment plus the second payment. Under Option A, it is the single new payment.
5. Find the cost gap. Take Option A’s extra upfront cost over Option B. Divide it by Option A’s monthly advantage, if there is one. No monthly advantage means no break-even.
6. Set it against your time horizon. Break-even only matters if you keep the loan past that month. Sell or refinance again sooner and the upfront cost never comes back.
7. Check total cost beyond the break-even month. A cash-out can reset the term and stretch out payoff. The CFPB guide notes that a cash-out refinance may extend the time it takes to pay off the mortgage. A lower payment bought with a longer term is not the same as a cheaper loan.
The Blended-Cost Idea
Think of Option B as two loans with two costs: your existing first mortgage and the new second lien. Option A is one loan at one cost. Comparing Option A’s single cost against only the second lien’s cost is the common mistake. You have to compare it against the blended cost of the first and second together.
That is why your existing first mortgage matters most. If the current first mortgage is well suited to keep, the cash-out reprices all of it to get at a slice of equity. If the current first mortgage is already costly to keep, the cash-out gives up very little by replacing it.
When a Cash-Out Refinance Is the Better Fit
A cash-out tends to win in these situations:
- Your current first mortgage has no special value to protect. Replacing it costs you little, and one loan is simpler than two.
- You want one payment. One payment on one loan is easier to budget than two.
- You need a larger sum and plan to stay long. The extra upfront cost is spread over many years, so it has time to be recovered.
- You want to change the loan itself. A new term or loan type comes with a new first mortgage.
Know the guardrails. On a one-unit primary residence, conventional cash-out tops out at 80% LTV. Across the wholesale programs Lendmire places files with, the first mortgage being paid off generally must be at least 12 months old, counted note date to note date, and a borrower must have been on title for six months, with exceptions for delayed financing, inheritance and legal awards. Freddie Mac’s Guide sets the same six-month title rule for its cash-out loans, and names delayed financing as an exception.
There is also one lane worth knowing. A wholesale program reaches 89.99% LTV with no mortgage insurance at a 680 score and a 50% ratio on a thirty-year fixed, primary residence, conforming balance, with its own six months of seasoning. It is the exception to the usual mortgage insurance rule, and it is not offered in Texas. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
Texas has its own cap. A cash-out on a homestead, a Section 50(a)(6) loan, is limited to 80% of the home’s value by the state constitution.
When a Home Equity Loan Is the Better Fit
A home equity loan tends to win in these situations:
- Your first mortgage is worth keeping. You leave it untouched and borrow only what you need.
- The cash need is modest. Closing costs land on a smaller loan, so the upfront cost is lower.
- Your stay may be short. A smaller upfront cost has less time to recover, which suits a shorter horizon.
- You would fall outside the cash-out limits. Seasoning on the first loan or title rules can block a cash-out, and a second mortgage follows each lender’s own terms instead.
The trade-offs are real. You carry two payments. Terms are set lender by lender, with no agency framework behind them, so they vary widely. The CFPB’s guide also points out that turning equity into cash creates debt you must repay, and that either route puts the home at risk if payments are missed. The CFPB adds that repayment of a home equity loan is often required when you sell.
The Edge Cases That Change the Math
Too much cash flips the category. A refinance with only incidental cash back is a limited cash-out, or rate-and-term, loan. On the programs Lendmire works with, Fannie Mae allows the lesser of 2% of the new loan amount or $2,000 back, and Freddie Mac allows the greater of 1% of the new loan amount or $2,000. Take more and the loan is a cash-out. Rate-and-term reaches 95% LTV on a one-unit primary residence, so crossing the line costs you leverage. Check the cash-back figure before you set the loan amount. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
Free-and-clear homes. Freddie Mac treats a new mortgage on a home with no lien as a cash-out refinance. A home equity loan on a paid-off home is also a new mortgage.
Government loans. FHA Streamline and VA IRRRL do not offer cash-out. HUD says a streamline needs an FHA-insured, current loan with a net tangible benefit, that closing costs cannot be added to the new loan, and that cash back is limited to $500. A VA IRRRL requires a net tangible benefit, and VA lender training materials say fees must be recouped within 36 months. The same deck says a Type 1 cash-out is subject to the same 36-month test. That VA test is not the same as your all-in consumer break-even, so a loan can pass one and still fail the other. A homeowner with an FHA or VA first mortgage who wants cash is choosing between a different cash-out product and a second mortgage.
Prepayment terms. Before you pay off a first mortgage, read your existing note for any clause that charges a fee for paying the loan off early. If one applies, add that charge to your closing costs when you calculate break-even, because it lengthens the time needed to recover your costs. If the note is unclear, ask your servicer to confirm the terms in writing.
Mortgage insurance. On the agency path, mortgage insurance is generally required above 80% LTV, except in the wholesale no-MI cash-out lane described above. It can be cancelled at the borrower’s request at 80% of the original value, and servicers must end it automatically at 78%.
Common Mistakes
- Applying the rate-and-term formula to a cash-out. There are no monthly savings to divide by.
- Comparing the new rate to the second-lien rate alone. The cash-out reprices the whole balance. Compare blended cost to blended cost.
- Ignoring the term reset. A lower payment can hide a longer payoff.
- Assuming “no-cost” means no cost. When a lender advertises “no closing costs,” the costs are built into the rate or the balance. Compare Loan Estimates line by line.
- Taking a little too much cash. It can push a limited cash-out into the cash-out category.
- Forgetting the time horizon. Break-even is meaningless if you sell before you reach it.
Key Terms Defined
Break-even point: The month when a higher upfront cost has been recovered by a lower ongoing cost.
LTV (loan-to-value): Your first-mortgage balance divided by your home’s value.
CLTV (combined loan-to-value): All loans against the home, first and second together, divided by its value.
Cash-out refinance: A new, larger first mortgage that pays off the old one and delivers the difference in cash.
Home equity loan: A second mortgage with a lump sum up front and its own fixed payment schedule.
Limited cash-out (rate-and-term) refinance: A refinance that pays off the old loan and costs, with only small cash back.
Seasoning: How long you have held the loan or the title before a new loan is allowed.
Verdict
Neither option wins on its face. The cash-out is cleaner when your current first mortgage has little to protect and you plan to stay. The home equity loan is better when your first mortgage is worth keeping and the cash need is smaller. Put the same cash need through both, use blended costs, and test the answer at more than one time horizon. If the cash-out is the more expensive monthly path, the question is not break-even at all. It is what it costs you to give up the first mortgage you hold.
For more on this choice, see Lendmire’s piece Cash-Out Refinance vs. Home Equity Loan When You Need Full Value.
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
Which is cheaper, a cash-out refinance or a home equity loan?
Neither is cheaper in every case. A cash-out charges closing costs on the whole balance and reprices all of it. A home equity loan charges costs on the smaller loan but adds a second payment.
Does the break-even formula work for a cash-out refinance?
Not directly. The formula needs monthly savings, and a cash-out often raises the payment. Compare the cost of getting the same cash both ways, then test it against how long you will keep the loan.
How much equity do I have to leave in the home?
On a conventional cash-out for a one-unit primary residence, the cap is 80% LTV, so at least 20% equity stays. In a Texas homestead cash-out, the state constitution caps the loan at 80% of the home’s value. A home equity loan follows each lender’s own limits. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
Can I take cash out with an FHA Streamline or VA IRRRL?
No. Those are rate-and-term streamlines. HUD limits FHA Streamline cash back to $500, and a VA IRRRL must show a net tangible benefit. Cash needs on those loans call for a different cash-out product or a second mortgage.
Does it matter how long I have owned the home?
Yes. Freddie Mac requires a borrower on title for at least six months, with exceptions such as delayed financing. Across the wholesale programs Lendmire places, the first mortgage being paid off generally must be at least 12 months old. A second mortgage may not carry the same seasoning rules.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. 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 other types of loans are similar to a HELOC
2. CFPB – Using home equity to meet financial needs
4. Freddie Mac Guide §4301.5 – cash-out definition
5. HUD – Streamline Refinance Your Mortgage
6. VA Loan Guaranty Conference – Refinancing Loans
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 to Use a Cash-Out Refinance for a Down Payment on the Next Home · How to Check Your Break-Even Before a Cash-Out Refinance
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.