Many aspiring second-home buyers assume they’ll never save enough for a down payment—especially when it could exceed $100,000 or more. However, homeowners often overlook a valuable asset that can help: the equity in their current home.
A cash-out refinance allows homeowners to tap into this equity, potentially covering the down payment or even paying for the second home outright.
A cash-out refinance lets homeowners access the equity built up in their primary home.
These funds can be used to purchase a second home or investment property.
The approval process for a cash-out refi is similar to a home purchase loan.
Borrowers should ensure the return on investment (ROI) of the new home outweighs borrowing costs.
Getting the best interest rates and fees on the cash-out refi helps minimize costs.
A cash-out refinance replaces your current mortgage with a larger loan, allowing you to convert your home’s equity into cash. Here’s how it works:
The existing mortgage is replaced with a new loan for a higher amount.
The new loan pays off the old mortgage balance.
The additional loan amount is paid out in cash at closing, sourced from the home’s equity.
The homeowner begins making monthly payments on the new mortgage.
Let’s say the Smith family owns a home in Salem, Oregon, valued at $500,000. They still owe $200,000 on their current mortgage.
If their lender allows a loan amount up to 80% of the home’s value, they can take out a $400,000 loan in total. Here's how that breaks down:
$200,000 of the loan is used to pay off their existing mortgage.
The remaining $200,000 is cash in hand, which they can use as a down payment or even to purchase a second home outright.
For homeowners with substantial equity, a cash-out refinance can accelerate the purchase of a second home—eliminating the need to spend years saving for a down payment.
According to Chad Collins, a Realtor, CPA, and financial advisor in Greensboro, N.C., the key is comparing the return on investment (ROI) to the borrowing cost:
“Ask yourself, ‘Does the ROI exceed the cost of capital (interest rate)?’” Collins says. “For example, if my ROI is 10% and my interest rate is 7%, then I may consider this as an option.”
A property’s ROI comes from:
✔ Appreciation – The increase in home value over time.
✔ Rental income – Earnings from short-term or long-term rentals.
By weighing potential gains against borrowing costs, many real estate investors find that leveraging home equity is a smart strategy.
Collins also advises factoring in inflation, which affects investment costs. While inflation spiked in 2022 and 2023, it typically ranges from 2% to 4% per year, influencing the overall cost of borrowing.
A cash-out refinance isn’t the only way to finance a second home—you could also take out a personal loan, sell an existing property, or use personal savings. However, a cash-out refi offers unique benefits:
✔ No Need to Sell Your Current Home – You can keep your primary residence while leveraging its equity.
✔ Lower Borrowing Costs – Since the loan is secured by your home, interest rates are typically lower than unsecured loans or credit lines.
✔ One Mortgage Payment Instead of Two – Unlike a home equity line of credit (HELOC), which requires a second loan payment, a cash-out refi consolidates everything into a single mortgage.
✔ Faster Home Buying Process – Instead of spending years saving for a down payment (while home prices rise), you can buy sooner and potentially benefit from appreciation.
✔ Preserve Your Savings – By using home equity instead of cash reserves, you can maintain a healthy emergency fund or invest in other opportunities.
A cash-out refinance can be a powerful tool for buying a second home, but it’s not for everyone. Consider this approach if:
✅ You have significant equity in your current home.
✅ You qualify for a favorable interest rate.
✅ You plan to hold the new property long enough for appreciation or rental income to offset borrowing costs.
Before making a decision, compare loan offers from multiple lenders and run the numbers to ensure the ROI on the new home exceeds the cost of financing.
Using a cash-out refinance to generate a down payment for a second home isn’t the right choice for everyone. Consider these potential drawbacks:
Increases debt on the current home – Homeowners who have spent a decade or more paying down their mortgage may not want to increase their debt on the same property.
May result in a higher interest rate – A cash-out refinance locks in current interest rates, which may be higher than the existing loan rate—especially if the original mortgage was secured during the pandemic when rates were historically low.
Can lead to higher long-term interest costs – Even if the new loan has a similar interest rate, extending the debt over a longer term often increases total interest expenses.
Closing costs apply – These costs typically range from 2% to 4% of the loan amount. On a $400,000 loan, that translates to closing costs between $8,000 and $16,000.
Buyers should carefully weigh these potential downsides against the benefits when deciding whether to proceed with a cash-out refinance. For some, the opportunity to invest in additional real estate outweighs these costs.
Earlier, we discussed the Smith family, who own a $500,000 home with a $200,000 mortgage balance and took out a $400,000 cash-out refinance. You may wonder: Why not borrow the full $500,000?
The answer lies in eligibility requirements.
The existing home must have sufficient equity to support the new loan amount. Lenders typically require borrowers to retain at least 20% equity in their home.
For example, the Smiths could only borrow up to $400,000, leaving $100,000 (20%) of their home’s value untouched.
Lenders determine a home's value through a professional appraisal. If the appraisal comes in lower than expected, the maximum loan amount will also be lower.
For instance, if the Smiths believed their home was worth $500,000, but the appraisal set the value at $490,000, their max loan amount would be 80% of $490,000 ($392,000) instead of $400,000.
Credit score requirements for cash-out refinancing are similar to those for home purchase loans:
Conventional loans – Minimum 620, with the best rates typically available to those above 720.
VA loans – Require a minimum FICO score of 620.
FHA loans – Can approve borrowers with scores as low as 580.
A higher credit score can increase the amount of equity a borrower can access.
Lenders assess a borrower's ability to repay the loan by reviewing their debt-to-income ratio (DTI)—the percentage of gross monthly income allocated to debt payments, including mortgages, credit cards, student loans, and car loans.
Conventional loans – Preferably no higher than 36% DTI.
FHA loans – Can go up to 45% DTI, or higher in some cases.
VA loans – Ideally capped at 41% DTI.
DTI also plays a key role in determining the maximum loan amount a borrower can qualify for.
Eligibility for cash-out refinancing varies by loan type.
VA loans – Allow borrowers to access up to 100% of their home’s value. If the Smiths qualified for a VA loan, they could have borrowed the full $500,000 instead of being limited to 80% equity.
FHA loans – Offer more lenient eligibility criteria than conventional loans but require ongoing mortgage insurance fees.
USDA loans – Do not support cash-out refinancing.
Selecting the right loan type can enhance borrowing potential.
A cash-out refinance isn’t the only way to finance a second home or investment property. Consider these alternative financing options:
A home equity loan also leverages home equity, but unlike a cash-out refinance, it leaves the original mortgage untouched. Instead, it adds a second loan secured by the property.
If the Smiths preferred to keep their existing mortgage, they could take out a home equity loan for additional funds. These loans typically have fixed interest rates and repayment terms of 10 to 20 years.
Pros: Maintains the current first mortgage.
Cons: Home equity loans usually have higher interest rates than first mortgages, add a second monthly payment, and place a second lien on the home.
Christina McCollum, a market leader at Churchill Mortgage, notes:
“Lenders factor the home equity loan payment into the borrower’s debt-to-income ratio, which could impact eligibility for other financing needed for the second home.”
A HELOC functions similarly to a home equity loan but operates as a revolving line of credit rather than a lump-sum loan. Instead of receiving a fixed amount, borrowers can draw funds as needed during the 10-year draw period, making interest-only payments during this time.
Pros: Allows borrowers to retain their current mortgage rate.
Cons: Variable interest rates may increase over time.
Chad Collins, a financial advisor, states:
“HELOCs and home equity loans work well for short-term financing needs, but borrowers should note that current tax laws only allow interest deductions if funds are reinvested in the primary residence—not a second home.”
A bridge loan provides temporary financing for buyers needing quick access to funds for a down payment. These loans are short-term and require a clear repayment plan.
For example, if the Smiths found their ideal vacation home but needed to act quickly, they could secure a bridge loan for the down payment and later use a cash-out refinance to pay it off.
Pros: Quick approvals make bridge loans useful in competitive markets.
Cons: Higher interest rates, short repayment periods, and large balloon payments may apply.
Unlike a cash-out refinance or home equity loan, a bridge loan is not a long-term financing solution.
Using home equity to purchase a second property can be a viable strategy—as long as the benefits outweigh borrowing costs.
A cash-out refinance simplifies repayment by consolidating everything into one mortgage payment, often reducing monthly expenses compared to alternative financing methods.
Since rates and fees play a crucial role, shopping around and comparing lender offers can help borrowers secure the best deal.
If you’ve used a home equity loan to consolidate debt, fund home improvements, or make a down payment on a second home, you’ve likely taken advantage of your home’s value to save on financing costs.
Now that the loan has served its purpose and the funds are spent, you’re left with the monthly payments—payments that could continue for years. Refinancing your home equity loan might help you pay off the debt faster and reduce the overall interest paid.
Home equity loans can be refinanced.
The most beneficial refinances save more than they cost.
Interest rates, closing costs, and loan terms determine whether refinancing saves money.
Comparing rates and fees from multiple lenders helps maximize savings.
Refinancing replaces an existing home equity loan with a new one, but both you and your home must meet the lender’s qualifications.
Your ability to refinance depends largely on your home’s equity. If your home’s value has risen since taking out your home equity loan—and you’ve been making payments that reduce the balance—you may have enough equity to qualify for refinancing.
To determine your equity, calculate your combined loan-to-value ratio (CLTV):
Add up all existing mortgage debt, including the primary mortgage and any secondary loans.
Compare the total mortgage debt to your home’s current market value.
Most lenders set a maximum CLTV between 80% and 85%.
Consider this scenario:
Home value: $400,000
Primary mortgage balance: $200,000
Home equity loan balance: $50,000
To find the CLTV:
Add both loan balances ($200,000 + $50,000 = $250,000).
Divide by the home’s value ($250,000 ÷ $400,000 = 62.5%).
With a CLTV of 62.5%, this homeowner could potentially refinance or even take out additional equity.
However, if the homeowner owed $250,000 on the primary mortgage and $90,000 on the home equity loan, the combined debt would be $340,000—which is 85% of the home’s value. Many lenders wouldn’t approve a refinance in this case.
If your home has enough equity, the next step is meeting lender requirements as a borrower. Similar to a primary mortgage, approval depends on credit score, income, and debt levels.
Credit Score – Lenders typically require a minimum score of 680 for home equity loans, with scores above 720 qualifying for the best interest rates.
Income & Debt – Lenders review debt-to-income ratio (DTI) to ensure you can afford payments. Most lenders require a DTI of 43% or lower.
Borrowers who meet these criteria have a good chance of refinancing their home equity loan.
Lenders vary in their approval criteria. Some lenders may accept borrowers with higher DTI ratios if they have excellent credit.
Borrowers who obtain multiple quotes from different lenders improve their chances of finding the most favorable terms. Those who settle for a single quote may miss out on better loan offers.
Requesting loan estimates from three to four lenders increases the likelihood of securing the best refinance deal.
There’s no limit to how often you can refinance a home equity loan—lenders will approve a refinance as long as you qualify. However, refinancing comes with closing costs, including appraisal, lender, and legal fees.
For example, if a refinance costs $2,000 upfront but saves $100 per month, it would take 20 months to break even. Borrowers should typically ensure a refinance pays for itself before considering another.
However, if interest rates drop significantly, refinancing sooner could lead to greater long-term savings.
Homeowners have several refinancing options:
Replacing an existing home equity loan with a new one may offer a lower interest rate, lower payments, or reduced total interest costs.
Pro: Fixed interest rates provide stability and make comparison shopping easier.
Con: Extending the loan term may increase total interest paid over time.
This option works best for homeowners who want to lower their rate while keeping a separate home equity loan.
A cash-out refinance combines multiple loans into a single new mortgage—potentially at a lower rate—and provides additional cash if enough equity is available.
For example, a homeowner with a $50,000 home equity loan and a $150,000 primary mortgage could refinance into a $200,000 mortgage with a single payment. If the home is worth $300,000, they could also take out an extra $40,000 in cash for any purpose.
Pro: Simplifies mortgage payments and provides additional cash.
Con: Higher loan amounts increase closing costs.
A cash-out refinance is ideal for borrowers who want to consolidate mortgage debt while accessing additional equity.
A home equity line of credit (HELOC) allows homeowners to tap into their home’s equity through a revolving credit line. HELOCs provide a credit limit, enabling borrowers to withdraw funds as needed while only paying interest on the outstanding balance each month.
A homeowner with a home equity loan could refinance by transferring the loan’s balance into a HELOC.
During the draw period (typically lasting 10 years), HELOC balances can be repaid and reborrowed. Once the draw period ends, the remaining balance converts into a traditional loan with fixed monthly payments.
Pro: HELOCs typically offer lower initial monthly payments, as borrowers only pay interest during the draw period.
Con: A HELOC’s variable interest rate can lead to unpredictable payments, increasing if market rates rise.
Refinancing into a HELOC is ideal for homeowners who plan to pay off their initial home equity balance and later use the credit line for other projects.
Refinancing a home equity loan into a primary mortgage is similar to a cash-out refinance—both loans are combined into one. However, unlike a cash-out refinance, this option does not generate extra cash.
For example, a homeowner with a $150,000 primary mortgage and a $50,000 home equity loan could refinance into a single $200,000 mortgage.
Pro: Combining two loans into one can reduce the overall monthly payment compared to making separate payments on both.
Con: Extending the mortgage term gives the lender more time to collect interest, potentially increasing the total cost over time.
This approach works best for homeowners who want to simplify their debt and reduce their total monthly payments.
Yes, homeowners can refinance their primary mortgage while keeping their existing home equity loan. Those satisfied with their home equity loan’s terms but looking to improve their primary mortgage may choose this option.
The home equity lender must agree to remain in second lien position behind the refinanced primary mortgage—most lenders allow this.
Refinancing a home equity loan replaces the existing debt with a new loan, often with better terms. Homeowners typically refinance to save money.
Borrowers can reduce their monthly payments in two ways:
Extending the loan term – Spreading the same loan balance over a longer period reduces monthly payments.
Securing a lower interest rate – A lower rate can decrease the amount owed each month.
For example, here are payments on a $50,000 loan at different terms and rates:
$50,000 Loan Monthly Payments
A longer term can help achieve the goal of lower monthly payments; however, the longer term will charge more interest over time, as discussed below.
A longer loan term lowers monthly payments on the same amount of debt. But, keeping the debt for a longer term gives the lender more time to charge interest. This chart shows the lifetime interest charged on a $50,000 loan:
$50,000 Loan Lifetime Interest
As the chart shows, longer loan terms increase the total amount of interest paid, even at the same interest rate. Borrowers can also reduce the total interest paid by paying off a loan early, assuming the loan has no early payoff fee.
Beyond adjusting the loan balance, refinancing a home equity loan can offer other advantages:
Consolidating debt: Merging a home equity loan with other mortgage debt can reduce monthly payments.
Accessing additional cash: If the home’s value supports it, refinancing can provide extra cash.
Switching lenders: Refinancing allows borrowers to replace their current lender with a new one.
Removing a co-borrower: By paying off the existing home equity loan, refinancing can remove a co-borrower’s financial obligation—provided the borrower qualifies independently.
Reassigning debt: A refinance can transfer responsibility for home equity debt, such as in a divorce or estate settlement.
Refinancing is often the most effective way to restructure debt while potentially lowering costs.
Understanding the costs associated with refinancing is essential for making an informed decision.
Refinancing requires closing costs, covering lender fees (such as origination and processing fees) and third-party expenses (such as appraisal, legal, and title company fees). These costs typically range between 3% and 6% of the loan amount—meaning a $50,000 refinance could incur $1,500 to $3,000 in fees.
Borrowers can roll these costs into the new loan, though this increases the loan amount and interest paid over time.
Some lenders offer no-closing-cost loans, where the lender covers upfront fees. However, these loans typically come with higher interest rates, meaning borrowers still pay the costs over time through increased monthly payments.
To determine whether refinancing is worthwhile, borrowers should compare savings against costs by considering:
Breakeven point: If closing costs total $3,000 and the refinance saves $100 per month, the borrower must keep the loan for 30 months to offset the expense.
Prepayment penalties: Some lenders charge fees for paying off an existing loan early, which can reduce the potential savings of refinancing.
Remaining interest on the current loan: If a significant portion of the loan’s interest has already been paid, refinancing may not be as beneficial.
The goal is for the new loan’s savings to outweigh all associated costs.
If refinancing isn’t the best option, other strategies can help reduce costs.
Paying down the loan principal—beyond the required monthly payment—can shorten the loan term and reduce interest expenses.
For example, on a $50,000 home equity loan at 8% interest over 20 years, the regular monthly payment is $418. Adding $100 per month could cut the loan term by seven years, saving nearly $20,000 in interest.
Borrowers should confirm with their lender that extra payments are applied directly to the principal balance.
While less common, the following options may be worth considering:
Reverse Mortgage: Homeowners 62 and older may use a reverse mortgage to pay off a home equity loan—provided they have little to no primary mortgage balance. While no monthly payments are required, interest accrues, and the loan must be repaid upon selling the home or the homeowner’s passing.
Home Equity Investment (HEI): HEIs allow investors to purchase a share of the home’s equity in exchange for an upfront cash payment. The investor’s stake grows if the home’s value increases.
Selling the Home: If downsizing or relocating is already a consideration, selling the home can eliminate mortgage debt entirely. Otherwise, it’s likely not the best solution.
Each alternative has trade-offs, often involving the loss of equity or homeownership. For most homeowners, refinancing remains the best option for managing home equity debt.
Shopping for a home equity loan refinance follows the same principles as purchasing any major financial product: compare offers from multiple lenders to find the best deal.
While loan terms can seem complex, taking the time to compare rates and fees can lead to significant long-term savings.
At FedCutRates.net, we believe that knowledge is power—especially when it comes to making important financial decisions.
