Consolidating credit card debt with a cash-out refinance can be a smart financial move for those looking to manage and reduce their debt effectively. While consolidating credit card debt with a cash-out refinance offers several benefits, it’s essential to approach this strategy with caution. It involves securing your debt with your home, which could put your property at risk if you can’t meet your new obligations. It’s crucial to work with a trusted financial advisor or mortgage professional to determine if this option is right for your unique financial situation and goals.
Credit card debt is a major problem for millions of American households. Credit card debt can be a serious burden when you add it on top of mortgages, car loans and student loans. That’s why a cash mortgage refinance to consolidate credit cards that have adjustable interest rates makes financial sense.
According to recent statistics, the average US household has over $15,000 of credit card debt. In 2024, the average home owner paid a rate of nearly 14% per year on that debt. Some Americans pay even higher rates on higher balances.
Many people may feel like they have few options to get out from underneath that debt. But there is hope for many American home owners: You can consolidate your credit card debt with a cash out refinance.
Talk to financial advisers and mortgage brokers that understand how to consolidate credit card debt with a cash out mortgage refinance program.
Benefits of Consolidating Credit Card Debt with a Cash Out Mortgage
Lower Interest Rates: One of the most significant advantages is the potential to secure a much lower interest rate with a cash-out refinance compared to the high-interest rates typically associated with credit card debt. Mortgage interest rates are generally lower, which can lead to substantial savings over time.
Single Monthly Payment: With multiple credit card bills, it’s easy to become overwhelmed and miss payments. A cash-out refinance combines all your credit card debt into a single monthly mortgage payment, simplifying your financial obligations and making it easier to budget and manage your finances.
Tax Deductibility: Unlike credit card interest, mortgage interest on your primary residence may be tax-deductible in many cases. This can lead to additional savings, making the cost of consolidation even more attractive. Read more about tax deductibility on cash out refinancing.
Fixed Repayment Schedule: Credit card payments can vary each month, making it challenging to predict when you’ll become debt-free. With a cash-out refinance, you have a fixed repayment schedule, so you know exactly when you’ll be debt-free.
Build Home Equity: By consolidating debt into your mortgage, you can effectively convert unsecured debt into secured debt. This means that your home serves as collateral, which can lead to better terms and rates. Moreover, you’re building equity in your home as you make mortgage payments.
Improved Credit Score: Paying off high-interest credit card debt with a cash-out refinance can boost your credit score. It shows that you’re managing your debt responsibly, which can lead to better credit terms in the future.
Financial Peace of Mind: The stress of managing multiple credit card payments can take a toll on your mental and emotional well-being. Consolidating debt with a cash-out refinance provides peace of mind by streamlining payments and simplifying your financial life.
You may have noticed just how low mortgage rates have become in the last several years. As of August 2023, rates for a cash out refinance are still in the high 6% range. If you are paying 15% per year on your credit cards, you can easily save 10% or more in interest.
Mortgage interest rates are much lower than credit card rates because the mortgage debt is secured by your home. If you don’t pay, you lose the house. So, lenders can give you a much lower rate with your cash out refinance than an unsecured loan such as a credit card.
How a Cash Out Refinance Works
If you are a home owner who has equity in their property and a higher than current market interest rate, you could be the perfect candidate to get a new mortgage.
With a new mortgage, you can both lower your interest rate and pull out cash to pay off your credit card bills. Do you think that this could be for you? Keep reading! Read FHA cash-out guidelines.
How to Get Access to Money with a Refinance for Bill Consolidation
First, you need to check that you are paying a higher rate on your mortgage than the rate that you can get right now. Generally, you should be able to lower your rate by about .5% or more for a cash out refinance to be financially worth it. Check with your lender on what rate you can qualify for. If you can’t really save on the rate, don’t worry: You may be a candidate for to consolidate debt with a home equity loan or a HELOC.
Next, be sure that you have enough equity in the home so that you have a loan to value (LTV) of no more than 80% when you do the refi. Going above that ratio means you will need mortgage insurance, which adds substantially to your monthly payment.
You may have trouble finding lenders who will allow you to exceed 80% LTV in any case. Also, some states only allow the home owner to have a maximum 80% LTV, so check with your lender on what is possible in your area.
Considerations for Consolidating Debt with Mortgage Refinance for Cash Out
There is no doubt that there are good reasons to do a cash out mortgage refinance to pay off credit card debt:
- Lower your mortgage interest rate
- Reduce interest paid on your debts
- Write off mortgage interest on your taxes
- Possibly increase your credit score with less unsecured and more secured debt
- Peace of mind of having no high interest debt
However, as with any financial move, there are potential downsides to carefully consider:
- You are increasing the balance due on your mortgage. This causes monthly payments to go up.
- You are putting your home on the line by consolidating credit card debt with a cash out refinance. If you do not pay your mortgage, you will lose your home.
- Paying off credit cards leaves you with open and available credit lines. It is very tempting for some people to simply run up more credit card bills again.
- As you add more debt to your mortgage, you are increasing the length of time it will take to pay it off.
- You are really simply moving debt around rather than paying it off. The move can make sense, but it has to be for the right reasons. As we mentioned earlier, you only want to do a cash out refinance if you are going to substantially lower your mortgage interest rate. If not, you should talk to your lender about a home equity loan or a home equity line of credit. You could be better off pulling cash out of your home with a 2nd mortgage instead of replacing your current first mortgage. Find out why so many homeowners have chosen a second mortgage to consolidate debt over the last three decades.
Take-Aways on Consolidating Debt with a Home Refinance
There are many excellent reasons to pull equity out of your property to pay off credit card bills. You are going to certainly lower your interest rate and save on your monthly payments. But you do need to make sure that you are not going to use those open credit card lines to simply run up more debt.
If you have the financial discipline to not run up your credit cards again, doing a cash out refinance to pay off credit card debt makes great sense for many people.
References: Refinancing Mortgage to Pay Off Debt. (n.d.).