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Quick answer: Yes, you can through a cash-out refinance and it’s a great option for some people. Here’s what it boils down to: home loans typically have lower interest rates compared to credit cards, which typically have high interest rates. In order to take advantage of mortgage rates to pay off credit card debt, cash-out refinances allow you to “cash out” equity in your home. The amount that’s cashed out becomes part of your refinanced mortgage.
So, instead of paying a bunch of high-interest credit card debt, you pay one lower-interest home loan. (This process can also be described as consolidating credit card debt into your mortgage.)
This could free up a lot of money each month depending on your debt and how your loan is structured. For the twelve-month period of June 2023 to May 2024, we saw our customers lower their monthly debt payments by $548.29 per month on average.* Here’s more on how they work.
How to roll credit card debt into a mortgage
When you do a cash-out refinance, you take out a new home loan that replaces your old one, and you receive a portion of your home equity as cash after the new loan closes. If your goal is paying off credit card debt, you can put that cash directly toward your card balances.
The amount of equity you can turn into cash will depend on your loan’s terms:
- Most cash-out refinances allow homeowners to draw up to 80% of their home equity.
- Others, such as FHA loans, allow up to 85%.
- VA loans allow up to 100%, depending on the state.
That said, using home equity to consolidate credit card debt into your mortgage won’t reduce your total debt. You’ll have less of a balance on your cards, but more on your home loan. The equity you took out as cash will be added to your new mortgage’s balance.
Home equity loans offer lower interest rates
One of the biggest benefits of consolidating debts into your mortgage is taking advantage of mortgage rates.
- The average interest rate on credit cards today is well over 20%. “Penalty rates” are even higher for late-payers or those with poor credit.
- In comparison, average 30-year fixed mortgage rates are closer to the 6 and 7% range, as of mid-2024.
Of course, rates vary among borrowers depending on their individual financial situation, but any home loan will likely have a lower rate than the average credit card.
Crunch the numbers before tapping into home equity
All that said, there are also tradeoffs to consider:
- Cashing out the equity in your home means you’re essentially using up that equity.
- You’re also increasing your mortgage debt and most likely extending the length of your loan.
- You’ll risk foreclosure if you default on your refinanced loan.
- These factors can vary depending on your situation, but they’re generally what borrowers can expect.
There are other things to consider in choosing your strategy for consolidating credit card debt into your mortgage. For example:
- Many lenders require you to leave 20% equity in your home after cashing out.
- They will also want to ensure that your new monthly payment works within your debt-to-income ratio.
If you want to explore what leveraging your home equity could mean for you, crunch the numbers on our refinance calculator. Watch for the field where you can enter the “Cash-Out Amount.” You can also review additional tips from the Consumer Financial Protection Bureau.
Ready for personalized advice? Talk to one of our experienced mortgage experts at 833-702-2511 to learn more about your options or get started online.
Disclaimers
Note: Debt consolidation refinances increase mortgage debt, reduce equity, and extend the term on shorter-term debt and secure it with your property. The relative benefits received from debt consolidation will vary. A debt consolidation loan may increase the total number and amount of monthly payments and the total amount paid over the term of the loan. To enjoy the benefits of a debt consolidation loan, borrowers should not carry new credit card or high interest rate debt.
*Average monthly debt payment reduction figures based on Mr. Cooper refinances from June 2023 – May 2024 in which a customer paid off at least one non-mortgage debt. Comparison between total minimum monthly payments before and after refinance. Individual results will vary.
Any third party trademarks and tradenames used on the Mr. Cooper® Blog are the property of their respective owners. Nationstar Mortgage LLC d/b/a Mr. Cooper is not affiliated, associated, or sponsored by any of these owners. Use of these names and trademarks is not intended to and does not imply endorsement, but is for identification purposes only. Information provided does not necessarily represent the views of Mr. Cooper. Information is subject to change without notice.
