Rolling credit cards, personal loans or car loans into a cash-out refinance can cut your monthly payments sharply, because mortgage rates are usually far below card rates. The catch is that you stretch the debt over the length of the mortgage and secure it with your home.
How it works
- The lender totals your current mortgage plus the debts you want to pay off.
- If the total fits under the cash-out limit — usually 80% of your home's value, or up to 100% for eligible VA borrowers — the new loan pays them all off.
- Debts are often paid directly at closing, and they then drop out of your debt-to-income ratio. That can help you qualify.
Example
| Before | After | |
|---|---|---|
| Credit-card balances | $40,000 | $0 |
| Card payments | about $1,200/month (3% minimums) | $0 |
| Extra mortgage payment for $40,000 at an example 6.75%, 30 years | — | about $259/month |
| Monthly difference | about $940 lower |
The trade-off: if you kept that $40,000 on the mortgage for the full 30 years, you'd pay roughly $53,000 in interest on it. Paying extra toward principal — for example, the amount you used to send to the cards — cuts that dramatically.
When it makes sense
- Your current mortgage rate isn't far below today's rates.
- The debt carries high rates and the savings are large.
- You have a plan to keep card balances from creeping back up.
- You'll stay in the home long enough to recover closing costs.
When to choose something else
- You have a very low mortgage rate. A home equity loan or HELOC lets you keep it.
- The debt is small. Closing costs may outweigh the savings.
- You're likely to run up the cards again. That leaves you with both the bigger mortgage and new debt.
Rules to know
- Conventional cash-outs need the current mortgage to be at least 12 months old; FHA needs 12 months of owning and living in the home with on-time payments. See requirements.
- Interest on cash used to pay consumer debt isn't deductible as mortgage interest — see taxes.
- If your credit is bruised from high balances, an FHA cash-out may be easier to qualify for than conventional.
Estimate your proceeds with the cash-out refinance calculator.
Frequently asked questions
Is it smart to use a cash-out refinance to pay off credit cards?+
It can be, when the monthly savings are large, your current mortgage rate isn't much lower than today's, and you won't run the balances back up. Paying extra principal each month limits the long-term interest cost.
Can the lender pay my debts directly at closing?+
Yes. Debts are often paid directly from the loan proceeds at closing, and the paid-off accounts are then left out of your debt-to-income ratio.
Will consolidating debt into my mortgage cost more in the long run?+
It can. Spreading the debt over 30 years at a lower rate can still mean more total interest than paying the cards off quickly. Extra principal payments help.