Refinance vs Home Equity Loan
A refinance replaces your existing mortgage with a new one — usually to lower the rate, change the term, or pull cash out. A home equity loan (or HELOC) is an additional loan secured against the equity you've already built. Both let you access the value in your home; they have different costs and different best-fit situations.
Last reviewed on 2026-04-27.
Quick Comparison
| Aspect | Refinance | Home Equity Loan |
|---|---|---|
| Replaces existing mortgage? | Yes — original loan is paid off and replaced | No — adds a second loan |
| Total loans | Still one mortgage | Two loans (or one mortgage + a line of credit) |
| Rate | Whatever today's market rate is | Often higher than first-mortgage rates; depends on product |
| Closing costs | High — full refinance costs | Lower for HELOCs; moderate for closed-end home equity loans |
| Best for | Lower overall rate or term change | Targeted borrowing without disturbing a low original mortgage rate |
| Common products | Rate-and-term refi, cash-out refi | Home equity loan (lump sum), HELOC (line of credit) |
| When low original rate matters | You might give up a great low rate by refinancing | Original mortgage stays in place; you only pay current rates on the new loan |
Key Differences
1. Replace versus add
A refinance pays off your current mortgage and creates a new one in its place. After closing, you have one mortgage at new terms.
A home equity loan sits on top of your existing mortgage. You keep the original loan and add a second one secured by your equity. After closing, you have two payments.
2. Cost
Refinances involve full closing costs — typically 2–5% of the loan amount. The break-even point on rate-and-term refinances is usually 2–4 years; pay attention before refinancing for a small rate drop.
Home equity loans have lower closing costs, especially HELOCs which sometimes have minimal fees. The trade-off is a typically higher rate than a first mortgage.
3. When refinancing wins
Rate-and-term refinances make sense when current rates are meaningfully below your existing rate, you'll stay long enough to recoup closing costs, or you want to change the term (e.g., 30-year to 15-year).
Cash-out refinances make sense when you want to pull out a large amount of equity and current rates are favourable enough to justify replacing the existing loan.
4. When a home equity product wins
A home equity loan or HELOC wins when your existing mortgage rate is significantly below current market rates. Refinancing would force you to give up the low rate; a second loan keeps it.
It also wins for smaller, targeted borrowing — renovations, education, a one-time large expense — where full refinance costs would dominate.
5. HELOC versus closed-end
A HELOC is a line of credit against your equity. You draw on it as needed during a draw period (often 10 years), then enter a repayment period. Variable rate is typical.
A closed-end home equity loan is a lump-sum second mortgage, usually fixed-rate, with predictable monthly payments. Better for known one-time expenses; less flexible than a HELOC.
6. Risk
Both put your home at risk because both are secured by it. A refinance carries no more risk than your original mortgage.
A second loan stacks risk: missing payments on either loan can lead to foreclosure. Total monthly housing burden is what to watch.
When to Choose Each
Choose Refinance if:
- Current rates are well below your existing mortgage rate.
- You want to change the loan term (shorter for less interest, longer for lower payments).
- You want to pull out a large amount of equity in one transaction.
- You'll stay long enough to recover closing costs.
Choose Home Equity Loan if:
- Your existing mortgage rate is much lower than current market rates.
- You want to borrow a moderate, specific amount for renovations, debt consolidation, or education.
- You prefer lower closing costs even at a slightly higher rate.
- You want flexible access (HELOC) versus a one-time lump sum.
Worked example
A homeowner with a 3.5% mortgage from 2020 is renovating her kitchen for £40,000. Refinancing would mean swapping the 3.5% rate for, say, 6.5% — a costly trade for a kitchen. Instead, she takes a HELOC for the renovation: she keeps the great primary mortgage, pays current rates only on the £40,000 line, and has the option to repay early without affecting her main loan.
Common Mistakes
- "Refinancing always saves money." Closing costs and the new rate matter. A small rate drop with high closing costs and a short remaining stay can lose money.
- "A HELOC is free until you use it." Many have annual fees; check the fine print.
- "Cash-out refinance always beats a HELOC." Only if current first-mortgage rates are favourable. Otherwise, the HELOC keeps your low primary rate intact.
- "Both options are equally safe." Both put the home at risk, but stacking a second loan increases total monthly burden — and the risk that comes with it.
This is general educational information, not personalised advice. See the disclaimer for the full note.