What’s the difference between a cash out refinance, a home equity loan, and a home equity line of credit?
Choosing between a cash-out refinance, a home equity loan, or a home equity line of credit (HELOC) depends on your financial situation, your current mortgage terms, and how you plan to use the funds. Here’s a breakdown to help you decide:
Cash-Out Refinance: Best if you want to replace your current mortgage—perhaps to change the loan term or lock in a fixed rate—and take out a lump sum of cash. However, it may not be ideal if your existing mortgage has a significantly lower interest rate than what's currently available.
Home Equity Loan: A good option if you need a one-time lump sum and want the stability of a fixed interest rate and predictable monthly payments—without touching your existing mortgage.
Home Equity Line of Credit (HELOC): Ideal if you need flexible, ongoing access to funds over time (such as for home renovations or educational expenses). Most HELOCs offer variable interest rates and only require interest payments during the initial draw period.
Each of these options uses your home as collateral, so it’s important to weigh the risks and benefits carefully. Consider your long-term plans, interest rate environment, and cash flow needs when making your decision.
Is 2025 a Good Time for a Mortgage?
It’s the question on everyone’s mind and, while there is no 100% correct answer, 2025 presents some unique challenges and opportunities for both homebuyers and refinancers. While mortgage rates in early 2025 remain slightly elevated compared to pre-pandemic lows, they’ve started to stabilize. Inflation has cooled, and the Federal Reserve has signaled fewer rate hikes, which could lead to more competitive mortgage offers in the coming months.
That said, there’s also the old wisdom that “the best time to buy a house is when you need a new house”, or something to that effect. You could also rephrase that to “the right time to refinance is when a refinance makes financial sense” and we luckily have a calculator that can help with figuring that out.
If you’re financially prepared, this could be a great time to buy, especially with increased housing inventory in many markets. Or to get a cashout refinance and take advantage of the equity you’ve built up in your home over time and rising home prices. Sign up for our newsletter to stay informed and act when conditions align with your personal and financial goals.
How to Compare Mortgage Rates & Mortgage Lenders
To compare mortgage rates effectively, look beyond just the interest rate. Review the Annual Percentage Rate (APR), which includes lender fees, points, and closing costs. And be sure to ask for a loan estimate from each lender, which breaks down the total cost of the loan. Also consider the loan term, monthly payments, and whether the rate is fixed or adjustable. Online comparison tools like HSH’s Today’s Mortgage Rates page can help you compare real-time offers. Just don’t forget to factor in customer service reputation and lender responsiveness when making your decision.
Picking a Mortgage Lender
Choosing the right lender can save you time, stress, and money. Start by comparing rates and fees from banks, credit unions, online lenders, and mortgage brokers. Consider customer reviews, responsiveness, and transparency. A good lender will offer:
- Clear communication
- Pre-approval options
- Competitive rates with minimal junk fees
Don’t just pick the first offer—shop around. Even a 0.25% difference in rate can mean thousands saved over time. Ask about rate locks, closing timelines, and support for your specific financial situation. Get a quote from up to five different lenders by answering just a few questions.
What Are the Main Factors That Go Into Mortgage Rates
Mortgage rates are determined by both personal and market factors. Lenders look at your credit score, debt-to-income ratio, loan amount, and down payment size. Broader influences include the 10-year Treasury bond yield, Federal Reserve policy, and inflation. Economic conditions, employment data, and housing demand also affect rates. The type of loan and whether it's a conforming or jumbo loan will impact the rate too. Since many variables are involved, it’s important to understand what you can control—especially your credit and financial profile.
Types of Mortgages
There are several common mortgage types to choose from. Each loan type suits different financial needs, so compare them based on your credit, income, and goals.
- Fixed-Rate Mortgages (FRMs): Stable interest and monthly payments, ideal for long-term homeowners.
- Adjustable-Rate Mortgages (ARMs): Lower initial rate, which adjusts after a set period.
- FHA Loans: Government-backed, suitable for lower-credit borrowers with smaller down payments.
- VA Loans: Available to veterans and active-duty military often with no down payment.
- USDA Loans: For rural properties, offering low rates and no down payment.
How Much House Can I Afford?
Good news! With HSH’s How Much House Can I Afford calculator to help you determine your home buying budget. A general rule is to keep your monthly housing costs under 28–30% of your gross income. Lenders also look at your total debt-to-income ratio, which ideally should be under 43%. Use online affordability calculators to estimate how much you can borrow, factoring in property taxes, homeowner’s insurance, and PMI if your down payment is below 20%. Don’t forget closing costs and potential maintenance expenses. Pre-qualification with a lender can give you a clearer picture of your home buying budget.
How Does Credit Affect Rates? How Can I Improve My Credit?
Credit significantly impacts the rate you’re offered. Borrowers with scores above 740 typically get the lowest rates, while scores below 620 may face higher costs or limited loan options. Improving your credit can save you thousands over the life of your loan. To improve your credit:
- Pay bills on time
- Reduce your credit utilization below 30%
- Dispute errors on your credit report
- Avoid new debts before applying for a mortgage
What If I Have Less Than Perfect Credit?
If your credit isn't perfect, you can still qualify for a mortgage. In fact, HSH has a resource to help you find a lender that can help you access the equity in your home with less than perfect credit. Many lenders offer options for borrowers with scores as low as 580, especially through FHA loans. With a 620+ score, you may qualify for conventional loans, though you might pay a higher interest rate or need private mortgage insurance (PMI). Improve your chances by reducing debt, paying bills on time, and avoiding new credit applications before applying. There are also services that can help you improve your credit score, build history, or monitor your current credit profile.
What is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance (PMI) is a type of insurance that lenders require when you make a down payment of less than 20% on a conventional home loan. It protects the lender—not you—in case you default on the mortgage. PMI typically costs between 0.5% and 1.5% of the loan amount annually and is added to your monthly mortgage payment. While it increases your monthly costs, PMI allows you to purchase a home sooner with a smaller down payment. Once you reach 20% equity in your home, you can usually request to cancel PMI to reduce your payment. The PMI Calculator at HSH can enable you to better understand your situation with regards to PMI.
Why would I refinance if rates today aren’t much better than the rate I already have on my mortgage?
Even if current mortgage rates are higher than your existing rate, refinancing can still make sense if you’ve built substantial equity in your home. Through a cash-out refinance, you can tap into that equity to access a lump sum of cash—often at a lower rate than personal loans or credit cards. This can be a smart strategy to pay off high-interest debt, fund major home renovations, or cover large expenses like college tuition. While your mortgage rate might increase, consolidating higher-rate debt into one manageable payment can improve monthly cash flow and long-term financial health. Just be sure to weigh the costs and benefits carefully.
What is this "Equity in My Home" I’ve heard of and How Do I Access It?
Your home equity is the difference between your home’s value and your current mortgage balance. For instance, if your home is worth $400,000 and you owe $250,000, your equity is $150,000. You can access this equity through:
These options let you convert part of your equity into cash, usually for home improvements, debt consolidation, or major expenses. Each has pros and cons, so compare interest rates, fees, and repayment terms before deciding.
Difference Between Home Equity and HELOC
A Home Equity Line of Credit (HELOC) allows you to access that equity without selling your home. It works like a revolving line of credit—similar to a credit card—where you're approved for a maximum amount and can borrow, repay, and borrow again during the draw period (typically 5–10 years). Interest is only charged on the amount you use, making it a flexible solution for variable expenses such as home renovations, medical bills, or tuition.
A home equity loan offers a fixed lump sum upfront, repaid over time with a fixed interest rate. The HELOC, while offering more flexibility, usually has a variable interest rate, meaning your payments can fluctuate. Both options use your home as collateral, so it’s important to borrow responsibly to avoid the risk of foreclosure.
Where to Start? Sign Up for Our Newsletter and Get Our Guide
If you're just starting your home-buying journey, our free mortgage guide is the perfect place to begin. You can also sign up for our newsletter to get access to step-by-step checklists, financial tips, and updates on mortgage rate trends in 2025. Whether you're building credit, exploring loan options, or preparing to make an offer, HSH is here to give you the tools to move forward with confidence.