Cash-Out Refinance to Pay Off Debt

A cash-out refinance replaces your existing mortgage with a new, larger loan. The difference between the new loan amount and your current mortgage balance is paid to you as cash, which you can use to wipe out credit cards, personal loans, and other higher-interest debt.

Why People Consider It

• Credit card interest rates are generally far higher than mortgage rates, so moving that balance can lower the rate you pay.
• It can consolidate several payments into a single monthly mortgage payment.
• Paying down card balances may help your credit utilization over time.
• Mortgage interest may be tax-deductible in some cases. Consult a tax advisor.

Rates change constantly and vary by borrower. Rather than relying on any single quoted number, check current mortgage and credit card rates and run your own comparison before deciding.

How the Math Generally Works

The core idea is simple: if you move a balance from a higher interest rate to a lower one, you pay less interest on that balance over time. The size of the benefit depends on the gap between your old rate and your new rate, the balance you consolidate, the new loan term, and the closing costs involved. Stretching debt over a longer mortgage term can lower monthly cost while increasing total interest, so look at both monthly payment and lifetime cost.

A Worked Example

Consider a homeowner with $30,000 in credit card debt at an average APR of 22%. They pay approximately $6,600 per year in interest. Their home is worth $400,000, and they owe $240,000 on their mortgage at 4.5%.

A cash-out refinance to $275,000 at 6.5% gives them $35,000 in cash (minus closing costs of roughly $5,500). They use $30,000 to pay off the credit cards. The interest on the consolidated $30,000 drops from $6,600 per year to about $1,950 per year. However, their mortgage rate also increases from 4.5% to 6.5% on the full $275,000 balance, adding roughly $5,500 per year in mortgage interest. The net annual savings depend on the exact terms, which is why comparing total cost, not just monthly payment, is critical.

Use the debt consolidation calculator to model your specific scenario with real quotes.

Pros and Cons

Advantages

• Typically a lower interest rate than credit cards
• A single monthly payment instead of many
• Potential credit score benefit as card balances drop
• Mortgage interest may be tax-deductible (consult a tax advisor)

Considerations

• Your home secures the loan, so missed payments risk foreclosure
• Closing costs apply and can be significant
• It can reset or extend your mortgage term
• Requires sufficient home equity and qualifying credit
• Converts unsecured debt into debt backed by your home