Quick answer: A cash-out refinance can pay off high-interest credit cards with a lower-rate mortgage. In one example, refinancing $200,000 at 4.5% and $50,000 of 20% credit card debt into a $250,000 mortgage at 6% cuts total monthly payments from about $2,338 to about $1,499. But your whole mortgage moves to the higher rate and the debt stretches to 30 years, so compare it to a HELOC or home equity loan.
For homeowners with significant equity, a cash-out refinance can pay off high-interest credit cards or personal loans with a lower-rate mortgage. But the math is not as simple as it looks, and a different type of loan may work better. Here is how to compare.
How Does Cash-Out Refinancing Work?
A cash-out refinance replaces your current mortgage with a new, larger one. You receive the difference in cash and use it to pay off higher-interest debt.
Example: Paying Off $50,000 in Credit Card Debt
Assume you have a $200,000 mortgage at 4.5% and $50,000 in credit card debt at 20%. You refinance into a new $250,000 mortgage at 6% over 30 years and use $50,000 to pay off the cards.
| Before | After | |
| Mortgage payment (principal and interest) | about $1,013 | about $1,499 |
| Credit card payment (5-year payoff at 20%) | about $1,325 | $0 |
| Total monthly payment | about $2,338 | about $1,499 |
Your monthly payments would drop by roughly $839, but there are trade-offs behind that number:
- Your whole mortgage moves to 6%, not just the $50,000. The existing $200,000 goes from 4.5% to 6%.
- The debt stretches to 30 years. The credit cards would have been paid off in 5, so you may pay more total interest even at a lower rate.
- Closing costs apply, which reduce your savings.
Next step: Have your own numbers? Share your mortgage rate, balance and card debt and a loan officer will compare a cash-out refinance with a home equity option side by side.
No obligation. It only takes a few minutes.
Benefits of Using a Cash-Out Refinance to Pay Off Debt
- Lower interest rates: Mortgage rates are typically much lower than credit card rates.
- Lower monthly payments: Consolidating high-interest debt can reduce your total monthly obligations.
- Simpler finances: One payment instead of several.
Risks and Considerations
- Your home secures the loan. Credit card debt generally is not secured. If you cannot repay the new loan, your home is at risk.
- Longer repayment: Spreading the debt over 30 years can cost more in total interest.
- Closing costs and a reset loan term.
- Running the cards back up leaves you with both a larger mortgage and new debt.
- Taxes: Interest on money used to pay credit cards is generally not tax deductible (IRS Publication 936). Ask a tax professional about your situation.
Is There a Better Option Than a Cash-Out Refinance?
If your current mortgage rate is lower than today’s rates, a home equity loan or HELOC lets you keep your existing first mortgage and add a separate loan for the debt. See Using Home Equity to Pay Off Credit Card Debt and Cash-Out Refinance vs. HELOC.
Is Using Home Equity to Pay Off Debt Right for You?
It can reduce your interest and simplify your finances if you stop adding to the debt. A loan officer can compare a cash-out refinance, a home equity loan and a HELOC using your actual numbers.
Frequently Asked Questions
Is it a good idea to use a cash-out refinance to pay off credit cards?
It can save money if you stop adding to the debt and your savings outweigh the closing costs and the higher rate on your existing balance. Compare it to a HELOC or home equity loan first.
Is interest on a cash-out refinance tax deductible when I pay off credit cards?
Generally not. According to IRS Publication 936, interest is deductible only on money used to buy, build or substantially improve the home. Ask a tax professional.
How much equity do I need to consolidate debt?
Lenders usually limit total borrowing to a percentage of your home’s value, often in the 80% to 90% range depending on the loan and your credit.
Next step: Your current mortgage rate decides which option wins. Tell us what you owe and what you pay now, and we will show you both.
No obligation. It only takes a few minutes.
Sources
- IRS Publication 936, Home Mortgage Interest Deduction
- CFPB, Home equity loans and HELOCs: what is the difference?
Method: Payments and interest figures are calculated with the standard fixed-rate amortization formula. They exclude taxes, insurance, mortgage insurance and closing costs, and are examples, not offers.
Tithe Lending LLC | NMLS #2439006 | Equal Housing Lender. General information only; not a loan offer or financial, tax or legal advice.