Cash-Out Refinance for Debt Consolidation
If you are carrying high-interest debt and have equity in your home, a cash-out refinance could help you simplify your payments and potentially save money. After 17 years helping families across the United States weigh this exact decision, I can tell you it is a powerful tool when used carefully and a disaster when it is not. It is not right for everyone.
How It Works
A cash-out refinance replaces your current mortgage with a larger one. You get the difference in cash at closing. If you use that cash to pay off credit cards, personal loans, or other debt, you have consolidated everything into a single mortgage payment.
Mortgage rates are typically much lower than credit card rates. By moving that debt to your mortgage, you could pay a lower rate on it.
The Potential Benefits
One payment. Instead of juggling multiple bills, you have one mortgage payment.
Lower interest rate on the debt. Credit card rates can be very high. Mortgage rates are usually much lower. The rate difference could mean meaningful savings.
Possible tax benefits. If you use the cash for home improvements, the interest may be deductible. Consult a tax professional for your specific situation.
The Risks to Consider
You are putting your home at risk. Credit card debt is unsecured. When you move it to your mortgage, your home becomes the collateral. If you cannot make payments, you could face foreclosure.
You might extend your debt timeline. If you spread credit card debt over a 30-year mortgage, you are paying interest on it for a lot longer, even at a lower rate. The total interest could end up being more.
You could run up new debt. If you pay off your credit cards and then charge them up again, you will be in a worse position than before.
When It Makes Sense
- You have significant high-interest debt
- You have enough equity (most lenders require at least 20 percent equity remaining after the cash-out)
- You are disciplined about not running up new debt
- The combined mortgage payment is manageable
- The total interest savings justify the closing costs
When to Think Twice
- Your debt balances are small and can be paid off in a year or two
- You do not have enough equity
- You are not confident you can avoid running up new debt
Check your rate and equity at Lendtrain to see if a cash-out refinance could work for your situation. Run the refinance break-even point math first to confirm the savings justify the closing costs.
Rate quotes are estimates based on the credit score you enter. Actual rates may differ based on verified credit, income, and property details. Lendtrain (NMLS# 1844873) is a licensed mortgage broker. Equal Housing Opportunity.