When to Consolidate Debt With a Cash-Out Refinance

One of the benefits of owning a home is the ability to use your home's equity to consolidate existing debt such as credit cards, medical bills, and car loans. In addition to interest rate savings, other incentives include tax benefits and simplified monthly payments. This article covers the basics of consolidating debt with a cash-out mortgage refinance, and includes a few quick tips for homeowners to keep in mind during the process

What Is a Cash-Out Refinance?

During the mortgage process, mortgage lenders categorize refinances as either "rate-and-term" or "cash-out". Limits may vary with different lenders, but in general, if a homeowner exceeds their original loan balance by more than a couple of thousand dollars , the new refinance is considered a cash-out. And when consolidating any type of debt in addition to your original mortgage balance, most lenders will consider your refinance a cash-out mortgage as well.

Compare Your Existing Debts to Your Available Home Equity

Before proceeding any further, the current housing market has proved that homeowners without sufficient equity can get in serious trouble by over leveraging their home. In particular, borrowers should first consult with an appraiser or mortgage professional to determine the amount of available equity in their home. If you have enough equity to consolidate debts, you may be a good candidate for a money-saving home loan. If there is not sufficient equity in your home, it's better to hold back on refinancing rather than accepting less favorable terms from private or "hard money" lenders.

Compare Interest Rates with an Online Mortgage Calculator

Once your home's equity checks out, the next step is to crunch the numbers. One of the key steps to ensuring a successful cash-out refinance is making sure it's worth your time and money. Although mortgage rates are generally lower than most other personal loans, the process will make more sense if you calculate the numbers beforehand. By using an online mortgage calculator, you can calculate interest rate savings, estimate monthly payments, and determine the time it will take for you to break even. Remember, refinancing a mortgage will always include certain fees and closing costs, so you'll want to factor this into your loan comparison.

Keep an Eye on Those Mortgage Rates. Remember, Cash-Out Mortgages Often Cost More

When most advertisements and news reports quote mortgage rates, they are typically quoting rates for a traditional thirty year fixed rate and term mortgage. In a cash-out refinance, mortgage lenders charge a higher rate of interest whether you're paying off debts or simply taking the cash for other expenses. Most lenders will increase rates anywhere from a quarter to a full percentage point for cash-out mortgages. Additionally, keep in mind that your mortgage rate will still depend on your total loan to value ratio, credit history, and total household income. After comparing mortgage lenders, review their mortgage quotes to make sure it still makes sense to consolidate your debts.

Quick Tips for Homeowners Consolidating Debts with a Cash-Out Refinance:

  • Don't Be Overly Aggressive With Your Refinance

Although a mortgage can payoff most debts such as credit cards, car loans, and various personal loans, it does not mean you have to consolidate every eligible debt. Keep in mind that when you consolidate debts into your mortgage, you're often extending the terms of your repayment period. Additionally, debt consolidation mortgages means owing more money on your home and adding more financial responsibility secured by your home as collateral.

  • After Consolidating Debts, Make Sure They Don't Reappear

Most people will consider $10,000 in credit card debt to be quite substantial. But let's face it; add that $10,000 to your mortgage balance in the hundreds of thousands, and suddenly $10,000 doesn't seem that bad after all. What homeowners need to look out for is this type of reasoning that could tempt them into spending more after clearing their old debts. Consolidating debts through a mortgage should be a planned financial move to save money--it should not be an escape, or a safe haven to excuse your spending.

  • Cash-Out Refinance or Home Equity Loan?

Although both can be just as effective in consolidating debts, only one will usually be the best option for homeowners. Home equity loans allow homeowners to tap into their home's equity without altering their existing mortgage, and at significantly lower closing costs than an entire mortgage refinance. On the other hand, home equity loan interest rates are usually variable and can go higher than traditional mortgages. Homeowners with a superb rate on their existing mortgage may prefer a home equity loan as it can be easier, and cheaper, to consolidate their debts. But if current mortgage rates are lower than what a borrower currently has on the current mortgage, a cash-out refinance may be the smarter move to take advantage of lower rates while consolidating debts.

One thing for sure is that generalizations can't be made here to determine if a cash-out refinance is right for you. As mentioned, there are so many factors that differ with each borrower that the right time and right mortgage depend on. By using an online refinance calculator, individuals can better decide which alternatives may be the best route. These online mortgage calculators are easy to use and will help simplify the available options into numbers you can understand.



Posted By :
Heindrick So is a mortgage consultant at a local Bay Area Real Estate Brokerage--specializing in residential wholesale lending. Heindrick frequently contributes to various finance columns, ranging from home loans and mortgages, debt management, and other personal finance topics.

Get Free Mortgage Quotes

Property State:
Property Type:
Credit Rating:

Today's Best Mortgage Rates




Last Week

5/1 ARM

2.64 %


15 Year Fixed

2.50 %


30 Year Fixed

4.62 %