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Cash-out refinancing vs. home equity loan: What to consider now

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Your home offers a cost-effective way to borrow money in 2025. Getty Images

Although mortgage interest rates surged in recent years, making homebuying difficult for many Americans, home values rose at the same time. With prices high in many parts of the country currently, the average homeowner finds themselves in possession of approximately $320,000 worth of equity right now. And they can access that in a variety of ways, ranging from home equity lines of credit (HELOCs) to reverse mortgages to cash-out refinancing and home equity loans

While a HELOC comes with a variable interest rate subject to change and a reverse mortgage will generally only apply for seniors, cash-out refinancing and home equity loans can both be advantageous in today's market. That's especially true now, with the Federal Reserve pausing its recent interest-rate cut campaign. With the federal funds rate on hold at a range between 4.25% and 4.50%, interest rates on borrowing products are likely to remain where they are, giving homeowners some breathing room to better evaluate their borrowing options. Some homeowners may wonder then, about the benefits of cash-out refinancing and home equity loans, specifically. Below, we'll break down what to consider.

Start by seeing what home equity loan interest rate you could qualify for here.

Cash-out refinancing vs. home equity loan: Which is better with rates on hold?

Each homeowner's financial situation is different and, in some instances, a cash-out refinance may be preferable. For many, however, a home equity loan may be preferable now. Here's why:

Home equity loans let you keep your mortgage rate: Home equity loans, unlike cash-out refinancing in which you'll need to re-work your mortgage terms, allow you to keep your existing mortgage rate. This is critical now with mortgage rates in the 7% range. With a cash-out refinance you'll need to get a new mortgage loan (and rate), pay off the original loan and keep the balance as cash. That could mean exchanging an interest rate in the 3% to 5% range for a much higher one, negating much of the help the extra cash provides. But a fixed-rate home equity loan doesn't come with this concern and, with interest rates on pause, prospective borrowers have some time now to shop around and find the lowest rate possible.

Start shopping for home equity loans online now.

Home equity loan rates will fall quicker than mortgage rates: Home equity loan interest rates are more impacted by the Fed's actions and lack thereof than mortgage rates are. Mortgage rates are driven by a series of interrelated factors of which the Fed is just one (the 10-year Treasury yield is also critical). But home equity loan rates have steadily declined for much of the last year while mortgage interest rates, not accounting for a drop last September, have remained high and are currently hovering around the same range they were last summer. And lenders don't need to wait for formal Fed action to adjust their offers. So if they think additional rate cuts are on the horizon, they could start reducing their home equity loan rates in advance while mortgage rates will remain relatively static.

The bottom line

Both cash-out refinancing and home equity loans have unique benefits for homeowners right now. But with interest rates on pause, many may benefit by shopping around for a low-rate home equity loan to finance their needs instead of a cash-out refinance. By choosing this option, homeowners can maintain their existing, low mortgage rate and better position themselves for savings in the future should home equity loan rates fall (they can be refinanced). Each option should be thoroughly evaluated before acting, however. If you can't pay the lender in either scenario you could jeopardize your homeownership, so vet both carefully before applying.

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