Consolidating Debt with a Cash-Out Refinance

What it is

A cash-out refinance uses your home equity to access a lump sum of money. Unlike a home equity loan, this debt consolidation method replaces your old mortgage with a new, larger one instead of adding a second mortgage to your monthly payments.

How it works

In terms of debt consolidation, the goal of a cash-out refinance is to save you money on interest and maybe even lower your monthly payments. This is possible because mortgage interest rates tend to be a lot lower than credit card APRs (i.e., ~5% vs. ~16%).

Factors to consider

  • Credit score
  • Debt-to-income ratio
  • How long you’ve had your mortgage

Important to know

  • To be eligible for a cash-out refinance, you typically need more than 20% equity in your home.

Pros

  • You can borrow more than you owe on your mortgage
  • Lower credit requirements than a home equity loan
  • Receive money as a lump sum

Cons

  • Higher interest rates
  • Closing costs apply
  • Risk foreclosure if you default

FAQs

Unlike other home refinance methods, a cash-out refinance does not add a second mortgage to your monthly payments.

To find the best cash-out refinance rates, consider your options regarding fixed loan terms, adjustable rate mortgages, and FHA loans. For veterans, the VA is a good option, especially if you don’t have excellent credit.

Depending on your situation, a mortgage refinance could drive your total financing costs up and you could even face a prepayment penalty if you pay off your balance early.

Bottom Line

Cash-out refinances depend heavily on the housing market. If your home’s value is up and you want to consolidate your debt by refinancing your mortgage, it may be a good time. It also depends on what type of debt you’re looking to consolidate. For example, cash-out refinances work best when consolidating credit card debt. If your debt includes auto or student loans, you may want to consider another option.