A cash-out refinance can pay off credit-card balances, personal loans, and other consumer debt with mortgage debt at a lower interest cost, and that unsecured debt becomes debt secured by your home. This guide covers the interest comparison, the borrowing limit, the costs, and the cases where a HELOC, home equity loan, or other option fits better.
How consolidating debt into a mortgage lowers interest cost
Credit card and personal-loan rates are higher than first-mortgage rates, so moving a balance from a card to a mortgage cuts the monthly interest cost. How much interest you save depends on the cash-out rate you qualify for; see today's rates.
Two rules for the comparison:
- Compare the interest line first, then the payment. A mortgage payment is spread over up to 30 years, so the payment drops even when the interest saving is small.
- Cash-out prices above a rate-and-term refinance. Lenders price cash-out higher than a purchase or a straight refinance, so ask for the cash-out rate.
How much you can borrow with a cash-out refinance
Conventional and FHA cash-out refinances cap at 80% of the appraised value. Take your home's value, multiply by 0.8, and subtract your current balance; that figure is the most you can take out before closing costs. If paying off the cards is what brings your debt-to-income ratio within the lender's limit, the lender pays the cards at closing rather than handing you the cash.
Closing costs on a DC cash-out refinance
Include closing costs in the comparison:
- Lender, title and appraisal fees: your Loan Estimate will show yours, itemized, within three business days of applying
- DC recordation tax: $0. Residential refinances are fully exempt, including the cash-out, with a one-page affidavit your settlement agent files at closing (D.C. Code § 42-1102(21))
- Break-even: closing costs ÷ monthly interest saving = months to recoup. Run it in the refinance analysis
The refinance pays off if you stay in the home past the break-even month.
Who a debt consolidation refinance fits
A cash-out refinance for debt consolidation fits when:
- Your card rates are far above today's cash-out rate; the larger the difference, the more interest you save
- You have enough equity to keep at least 20% after the refinance
- The spending that created the debt has stopped
- You plan to stay in your home long enough to recoup closing costs
- Your current mortgage rate is close to today's: a refinance replaces a 2020-2021 rate on the whole balance
Reasons not to consolidate debt with a cash-out refinance
New card balances after consolidation
If you consolidate $35,000 in credit card debt into your mortgage and then run up another $35,000 on the cards, you have doubled your total debt, and half of the new total is secured by your home.
Your current mortgage rate is lower than today's
If you locked a low rate in 2020-2021, a refinance reprices your entire balance at today's rates, and the consolidated amount is the smaller part of the new loan. A HELOC or home equity loan leaves the first mortgage in place.
A small debt balance
On a $5,000-$10,000 balance, the closing costs on a cash-out refinance offset the interest saving. A balance-transfer card, a personal loan, or a payoff plan fits amounts that size.
A mortgage that is close to paid off
If you have a few years left on your mortgage, a new 30-year loan restarts the interest on a balance you were about to pay off.
Secured and unsecured debt
A cash-out refinance converts unsecured debt into debt secured by your home. A credit card company cannot take your house if you fall behind on payments; a mortgage lender can. Once consumer debt is part of your mortgage, missing payments puts the home at risk of foreclosure.
Tax deductibility of cash-out refinance interest
Under current tax law, mortgage interest is only deductible when the loan proceeds are used to buy, build, or substantially improve your home. Interest on a cash-out refinance used for debt consolidation is not tax-deductible. Credit card interest is not deductible either, so the deduction rule does not change the comparison.
Steps before a debt consolidation refinance
- Get your credit report: list each debt, its balance, and its rate
- Estimate your home's value: online tools give a rough idea; your lender will order an appraisal
- Calculate your equity: home value minus mortgage balance
- Run the break-even analysis: include all closing costs and the rate change on your whole balance
- Stop new card balances: consider closing the paid-off cards or lowering their limits
- Compare options: ask your loan officer to compare a cash-out refinance, HELOC, and home equity loan on your numbers
Plan a debt consolidation refinance as a one-time step. Refinancing again to pay off new card debt adds that debt to the balance secured by your home.
See the DC cash-out refinance guide or run a refinance analysis in two minutes with no credit pull.