February 8, 2023

Cash-Out Refinance vs Home Equity Loans: What Are the Key Differences?

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As life gets more expensive in Canadian cities nationwide, homeowners are increasingly looking for ways to stabilize and improve their finances. There is a wide range of options available.

Some involve adjusting lifestyles, such as changing grocery stores or sacrificing personal indulgence for budgetary reasons. Homeowners are looking for ways to leverage their equity, and they have options to choose from.

Let’s take a closer look at two by comparing cash-out refinances to home equity loans.

What is Cash-Out Refinancing?

When you cash out of a casino, you convert the chips into cash. In a cash-out refinancing, something similar occurs, except you’re converting your home equity into cash. Here’s how it works.

The homeowner takes out a new mortgage for more than the previous one’s balance then they receive the difference in cash. Replacing the existing mortgage with a new one typically lets people decrease their monthly payments, negotiate a lower interest rate, renegotiate the periodic loan terms, or get the equity in their home in cash form.

If the mortgage amount stays the same, you usually pay more in interest compared to a rate-and-term refinance, which stays constant. In a way, you’re using your home as leverage to get the cash in your hand, as opposed to access to the cash you’ll pay financing on.

At the end of the day, you’ll have a new mortgage which is larger than your current one, but you’ll have cash in hand. The lender will assess the current mortgage terms, the remaining balance, and the borrower’s credit profile.

The lender will make an offer factoring in the analysis of an underwriting. They receive the amount beyond the mortgage payment in cash. Ultimately, they get cash in hand instead of lower monthly payments. Going back to the casino analogy, rather than continuing to keep the chips in play, you decide to redeem the equity you’ve built and receive it in cash form.

Also, because the lender is taking on greater risk, cash-out refinancing usually results in the homeowner having less equity in their property. Closing costs, fees, and interest rates tend to be higher. Cash-out refinancing is excellent if you intend on living in your home for more than a year, and your interest rates will drop.

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The award-winning experts at Burke Financial can walk you through the difference and clarify any points of confusion to find you the right mortgage financing solutions for your lifestyle and goals. It’s impossible to hear a general description of any one approach and know it’s the one for you.

Speak to an expert full of mortgage refinancing tips who understands your situation in depth, and they’ll walk you through your options.

How Do Home Equity Loans Work?

Home equity loans also leverage your home’s current value and the mortgage payments you’ve paid over the years, but instead of cash in your pocket, you’ll get a lump sum payment in your bank you need to repay according to agreed-upon terms.

People who opt for a home equity loan may prefer to keep their monthly payments the same, as they tend to have lower interest rate payments than cash-out refinancing. You may extend the length of time your mortgage lasts, but the monthly payments can be smaller.

A home equity loan represents a new loan, not a new mortgage. This solution is perfect if you want to access your home equity in a reserve of cash over a period of time rather than at a given moment.

Experts will make it a point to tell borrowers that they’re free to use the cash however they please. It’s their money and their home, and they can legally do with them what they want! But knowing how to use a home equity loan and how not to can be the difference between making a profit on a renovation and losing your home due to foreclosure.


A home equity line of credit, or HELOC, is like a home equity loan, except the borrower receives access to a revolving line of credit rather than one lump sum payment. HELOCs are great when you aren’t sure precisely how much money you’ll need.

For example, if you’re renovating a section of your home, you may not know exactly how long it’ll take, making the final bill impossible to know beforehand. People also use HELOCs to improve their credit, pay off debts, consolidate loans, and more.

While you’re free to use the money you borrow however you’d like, as with a home equity loan, HELOCs are ideally used to reinvest in the asset you’re borrowing against — your home.

Anytime you use your home as collateral for a loan, you risk foreclosure in the event you can’t meet the agreed-upon terms. That’s why many people recommend using the funds to raise the value of your collateral rather than spend it on entirely unrelated things that won’t net you any return.

There are many benefits of a HELOC compared to a home equity loan or cash-out refinancing, so speak to our brokers to learn more! They’ll guide you through all the flexible options you have within a HELOC and weigh this approach against the others.

Many homeowners are struggling right now as rising interest rates have made their mortgages more expensive without a clear end in sight. Depending on the type of mortgage, some homeowners have suddenly found their monthly bills rise significantly without a change in any other variable. It’s unsurprising, then, that people are eager to fight back as best they can, especially given the cost of housing in general.

Speak to the experts at Burke Financial! We’re proud to work closely with every client to meet and even exceed their expectations, no matter their level of income, credit, or debt. To learn which type of cash-out refinance, home equity loan or HELOC is right for you, dial 1-877-709-0709 or visit Burke Financial today.


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