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Should you refinance your mortgage to pay off your debts?

Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, which we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to herein as “Credible”.

The average American household has personal debt of $92,727, according to Experian data — and if you’re in a similar situation, you might be looking for a way to consolidate your balances and save on interest.

One option you can take if you’re a homeowner is a cash refinance, but there are pros and cons to consider before taking this approach.

Here’s how to know if using cash refinance to pay off high-interest debt is right for you:

How Refinancing Your Mortgage Can Help Pay Off Your Debts

When you refinance a mortgage to pay off debt, one of the main benefits is that you will pay less interest. Mortgage rates are much lower than other consumer products like credit cards, personal loans and private student loans.

How you use a refinance to pay off your debt depends on whether you are doing a rate and term refinance or a cash refinance.

Refinancing at rate and duration

A rate and term refinance allows you to take out a mortgage with a new loan term, a new interest rate, or both. The old loan is paid off and you make payments on the new mortgage over time.

Ideally, you save money with a lower rate – and with those savings, you pay off your higher-interest debt.

For example: Let’s say you want to refinance your home to pay off your credit card debt. You have a mortgage balance of $200,000 with an APR of 5% and a monthly payment of $1,690.

Refinancing into a new 30-year loan with a rate of 3% can reduce your monthly payment to $1,240 per month. With the monthly savings of $450, you could pay off a credit card balance of $5,000 in one year, assuming an 18% APR on the card.

Refinancing by collection

When you do a cash refinance, you take out a new mortgage for more than you owe, pay off the original mortgage, and pocket the difference in cash. You can then use this money to pay off other debts.

To qualify for a cash-out refinance, you must have sufficient net worth and meet credit requirements.

For example: Let’s say you have the same mortgage balance of $200,000, but this time you also have credit card debt of $10,000. With a cash refinance, you’ll take out a new $210,000 mortgage to cover both balances.

When the lender gives you the extra $10,000 in cash, you’ll use it to pay off your credit card balance.

See: Reasons for a cash-out refinance: how to use the equity in your home

How to qualify for a cash refinance

The qualifying requirements for a cash-out refinance differ from other refinances because you are borrowing against the equity in your home.

To qualify for a cash-out refinance, lenders typically verify that you have:
  • A credit score of 620 or higher
  • A debt-to-income ratio not exceeding 45%
  • Enough equity in your home that you can retain 20% equity after refinancing

If you decide that cash-in refinancing is right for you, be sure to compare as many options as possible to find a good deal. Credible makes it easy – you can compare multiple lenders and see personalized pre-qualified rates in just minutes.

Get the money you need and the rate you deserve
  • Compare lenders
  • Get money to pay off high interest debt
  • Prequalify in just 3 minutes

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Find: What documents do you need to refinance your mortgage? A checklist

Advantages and disadvantages of refinancing to pay off debt

The most immediate benefit you get from refinancing is that you save money. But this move can also impact your credit scores, and you’ll need to consider the costs involved. Consider these pros and cons before refinancing your home to pay off your debts.


  • You could save money every month. When you use rate and term refinance to consolidate your debt, you get a loan with a lower interest rate. The benefits are two-fold: not only do you save money on interest, but you also get a lower mortgage payment.
  • You could pay off the debt faster. Your other option is to use a cash-out refinance, which increases your mortgage payments, but allows you to pay off high-interest balances quickly.
  • You could benefit from a tax advantage. Interest you pay on a mortgage is tax deductible if you qualify and itemize your deductions. Balances that you pay off with a refinance, such as credit card debt, are generally not tax efficient.

The inconvenients

  • You use your home as collateral. When you use cash refinance to consolidate credit card debt, you are essentially converting unsecured debt into secured debt. Your mortgage payments will increase, and if you can’t keep up, the bank could foreclose on your property.
  • Closing costs could eat into your savings. Do the math to see if the refinancing costs are worth it. Closing costs, which are fees you pay the lender to process the loan, cost around $5,000 on average. You can usually choose to pay these fees up front or roll them into the new mortgage.
  • The loan could have an impact on your credit ratings. When you apply for refinancing, the lender does a thorough investigation of your credit reports. This could temporarily lower your credit scores. Refinancing also resets the average age of your credit history, which could also impact your credit.

Learn more: How to Get the Best Mortgage Refinance Rates

Should you refinance to pay off your debts?

Refinance a home loan Consolidating your debts might make sense if you qualify for new loan terms that help you save money.

Here are some questions to ask yourself before applying:

  • What type of refinancing is best for me?
  • Am I eligible for refinancing?
  • If I do a cash-out refinance, can I afford the new mortgage payment?
  • If I do a rate and term refinance, how much money do I save each month?
  • If I change the term of the mortgage, will I end up paying more interest overall? Am I okay with this?

Learn more:

Other Ways to Pay Off Debt

There are other ways to pay off your debts without using your home as collateral. Start by determining how much you earn, how much of your income is spent on essential expenses, and how much you have left over that you can allocate to your debt each month.

Then consider the following strategies for paying off your debts. The best method depends on your financial situation or preferences.

Get a credit card with balance transfer

A balance transfer allows you to transfer multiple debt balances to a single credit card. Some come with an introductory APR of 0% for an extended period, usually 12 to 21 months. If you can pay off the balance within that time, you can save money.

The interest rate usually increases after this introductory period, so if you have a balance left, your debt could become expensive.

This option might also not be very useful if you cannot consolidate all your debts. You might receive different loan terms – and issuers might limit the amount you can transfer into the account.

Get a debt consolidation loan

A debt consolidation loan is usually an unsecured personal loan that you repay in installments over time, usually three to five years. This can be a good option if you qualify for a contract with good terms and prefer a predictable payment schedule.

Use the Debt Snowball Method

It may not be worth consolidating your debt if you have small balances that you can pay off in a year or if you don’t qualify for a personal loan or credit card.

With the debt snowball method, you make the minimum payments on all of your debts each month, but put the extra money on your smallest debt first. Then move in order from the next smallest balance to the largest. You should pick up momentum like a snowball rolling down a hill.

Use the debt avalanche method

Also a good option for people who don’t qualify for a loan or credit card, the debt avalanche method helps you save money on interest.

You make the minimum payments on all your debts, but you put your extra income toward the balance with the highest interest rate. Once it’s paid off, keep moving to the balance with the higher interest rate until all of your debt is gone.

Consider a debt relief program

You may need professional financial help if you can’t pay your monthly bills, if you can’t pay off your unsecured debt in a few years, or if your debt is more than half your income.

Contact a nonprofit credit counseling agency. A Certified Financial Advisor can review your finances with you and help you develop a plan of attack.

If you’re still ready to refinance, Credible can help you find the latest rates for your next mortgage refinance. With Credible, you can compare multiple custom rates from our partner lenders in just minutes – it’s free, secure, and won’t affect your credit score.

About the Author

Kim Porter

Kim Porter

Kim Porter is an expert in credit, mortgages, student loans and debt management. She has been featured in US News & World Report,, Bankrate, Credit Karma, and more.

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