Carrying a lot of credit card debt? But also sitting on a bunch of home equity? You’re probably not alone these days.
It’s a common issue, with mounting everyday costs making it tough to make ends meet, in spite of the record home equity homeowners have these days.
The problem is most homeowners with mortgages also have ultra-low interest rates they don’t want to touch.
So while it could be tempting to roll all your other debt into your mortgage and make just one payment, it might not actually make financial sense.
Use the calculator below to see how a cash-out refinance would change your monthly payments, and what it could cost you over time. Along with the option to compare a HELOC or home equity loan too.
Debt Consolidation Cash-Out Refinance Calculator
- Your home becomes the collateral for debt that used to be unsecured. Miss payments on the new mortgage and you risk foreclosure, not just a hit to your credit.
- A lower monthly payment often comes from spreading the debt over 15 to 30 years. That can cost more in total interest unless you keep paying more than the minimum.
- You’d replace your current mortgage rate with the new rate on your entire balance, not just the cash you take out.
- Federal student loans have protections and repayment options that you give up if you pay them off with a mortgage.
- Paying off cards can free up credit, and running them back up leaves you with the old debt plus the new mortgage.
- Most lenders cap cash-out refinances around 80% loan-to-value, and you’ll need to qualify based on your income and credit.
How to Use the Debt Consolidation Cash-Out Refinance Calculator
Start with your current mortgage information. Enter your home’s value (estimate), along with your original loan amount, interest rate, loan term, and closing date.
No need to look up your balance. This calculator estimates it for you!
Next, enter the debts you’d like to pay off. Add the balance, interest rate, and monthly payment for each one (look it up on your bank/lender’s website).
Got more than one credit card? Hit the add button to enter as many as you need. Same with all other debts.
Then enter the cash-out refinance rate you expect to receive (you can ballpark), the loan term, and estimated closing costs.
If you’re curious how it all stacks up against a home equity loan or HELOC, enter that interest rate and loan term too.
That option (which might work out way better if you have a low-rate on your mortgage) leaves your current mortgage alone and only borrows what you need to pay off the debts.
Once you hit “Compare My Options,” you’ll see how your total monthly payment would change, the interest cost over time, and how much you could borrow up to 80% loan-to-value (LTV).
There’s also a tile that shows what each dollar of monthly payment relief costs you in extra interest.
That’s the real price of the lower payment if you’re exchanging a lower rate for a higher one.
You might get a lower payment, but pay a lot more interest over the life of the new loan as a result.
Debt Consolidation Cash-Out Refinance Questions
How Does Debt Consolidation with a Cash-Out Refinance Work?
You replace your existing mortgage with a new, larger one. The extra amount borrowed goes toward paying off your other debts.
That could be credit cards, auto loans, personal loans, or whatever else you owe.
Then you’re left with one monthly payment, instead of your mortgage plus a bunch of other bills to keep track of.
Closing costs are usually rolled into the new loan as well, so you don’t have to pay them out of pocket.
A lender credit can also be utilized so you don’t pay anything, in exchange for a slightly higher interest rate.
Is It a Good Idea to Consolidate Credit Card Debt Into a Mortgage?
Paying off credit cards with a cash-out refinance usually lowers your monthly payment, but it can cost you a lot more in the long run.
Credit card interest rates are much higher than mortgage rates, so on paper it looks like a no-brainer.
Who wouldn’t want to swap a 25% APR for a 6-7% APR?
But you’re also stretching the debt out over another 15 or 30 years. Cards that might have taken five years to pay off now take decades to pay down.
Here’s an example:
Say you have a $400,000 mortgage from 2021 set at 3.25%, plus $50,000 in credit card and some auto loan debt. Refinancing at 6.75% could cut your monthly payments by about $400.
But total interest would jump from roughly $177,000 to $551,000 over the full loan term. That’s a lot to pay for a slightly lower payment.
Perhaps it can make sense if you’re drowning in debt and need breathing room. But it’s important to know the (potentially massive) tradeoff going in.
What Happens to My Low Mortgage Rate If I Refinance to Pay Off Debt?
You lose it.
A cash-out refinance doesn’t just apply the new rate to the extra amount borrowed. It replaces your entire mortgage balance with a brand-new loan at today’s market rates.
So if you’ve got a 3% mortgage and refinance at 6.75%, not only do you lose your old low rate, but you’re paying all the debt at the higher rate.
In reality, your old rate could be worth a lot more than the debts you’re trying to get rid of, even if the APRs seem sky-high.
Is a Home Equity Loan or HELOC a Better Option?
It certainly might be, assuming you have a low rate on your first mortgage.
Lots of homeowners today locked in 30-year fixed mortgages with interest rates in the 2s, 3s, and 4s.
Instead of giving that up to pay off some credit card debt, you can target it with a home equity loan or HELOC instead.
This is a second mortgage. Your first loan stays put, untouched, interest rate intact, and you only borrow what you need to pay off those other debts.
The interest rate is typically higher than a first mortgage, but you’re only paying it on a smaller amount.
In many cases, that costs a lot less than refinancing everything, especially since some second mortgages have zero or near-zero closing costs.
And the loan terms are often shorter, so less interest accrues in total.
Of course, it’s a second payment to worry about, and rates on HELOCs can change whenever the prime rate does.
But this calculator lets you compare both side by side.
You can also give my home equity loan calculator or HELOC calculator a whirl to see how those work.
How Much Can I Borrow With a Cash-Out Refinance?
Most lenders cap it at 80% of your home’s value (80% LTV).
On a $650,000 home, that means a maximum loan of $520,000. Your new loan has to cover your current mortgage, the debts you’re paying off, and any applicable closing costs.
Whatever is left is how much you can take out. The calculator shows this number as the max cash-out.
If you’re curious where you stand, you can use my LTV calculator to check your current borrowing capacity/home equity.
What Are the Risks of Using Home Equity to Pay Off Debt?
The big one is that your home becomes the collateral.
Credit card debt is unsecured. Miss payments and your credit takes a hit. Miss payments on a mortgage and you could eventually lose your home.
There’s also the risk of running the cards right back up. If that happens, you’re stuck with the old debt and a bigger mortgage to boot.
And potentially a much higher mortgage rate if you gave up a 2-4% rate for a 6-7% rate.
Lastly, be careful with student loans. Federal loans come with protections and repayment options you give up once they’re paid off with a mortgage.
So not all debt consolidation is treated the same. For many these days, a second mortgage might make a lot more sense, but run the numbers to be sure!
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