{"id":26357,"date":"2023-06-16T05:20:05","date_gmt":"2023-06-16T12:20:05","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=26357"},"modified":"2023-07-12T10:24:57","modified_gmt":"2023-07-12T17:24:57","slug":"cash-out-refinance-to-pay-off-debt","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/cash-out-refinance-to-pay-off-debt\/","title":{"rendered":"Should You Pay Off Debt With a Cash-Out Refinance? What to Consider"},"content":{"rendered":"

The average American household credit card debt is $5,315<\/a>, the average student loan debt is almost $39,000<\/a>, and the average car loan for a new vehicle is around $44,140<\/a>.<\/p>\n

If you\u2019re a homeowner with consumer or student debt, it\u2019s tempting to tap into your home\u2019s equity<\/a> with a cash-out refinance to pay down these balances. In some instances, prioritizing paying off your high-interest debt<\/a> over your fixed-rate mortgage can expedite your journey to financial freedom.<\/p>\n

For insight into the strategy to use cash-out refinance to pay off debt, we interviewed two industry experts: Anjali Jariwala, CFP\u00ae, founder of FIT Advisors,<\/a>\u00a0and Jordan Bennett<\/a>, a CPA\u00ae and top real estate agent in Orange County, CA.<\/p>\n

We\u2019ll break down how cash-out refinance to pay off debt works and what to consider before committing to this strategy.<\/p>\n

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How cash-out refinance to pay off debt works<\/h2>\n

When you refinance your home<\/a>, you take out a new mortgage to pay off your existing mortgage. Homeowners may refinance to secure a lower interest rate, change their loan terms, or, as in this case, tap into their home equity. With a cash-out refinance, you replace your existing mortgage with a new home loan for more than you owe on the house. This allows you to withdraw equity from your house as liquid cash.<\/p>\n

Some homeowners opt to use cash-out refinance to pay off other higher interest debt such as credit cards and car loans. They take out a new loan that\u2019s large enough to cover the existing mortgage and their additional debt, withdraw the difference in cash from their home equity, and pay off the additional debt with the cash.<\/p>\n

A cash-out refinance to pay off debt won\u2019t instantly reduce your debt. It simply scoops up your debts and folds them into one mortgage loan that\u2019s easier or more affordable to pay down \u2014 thanks to the lower interest rate \u2014 than the debts were separate. Most conventional lenders limit your cash-out loan amount to 80% of your home value<\/a>.<\/p>\n

Example:
\n<\/i><\/b>Frankie wants to use cash-out refinance to save on her car loan interest. She withdraws $30,000 in cash from her equity to pay off her car loan. Her refinance effectively consolidates her $320,000 former mortgage balance and her $30,000 car loan into a new mortgage totaling $350,000. Her new mortgage has a 2.75% interest rate and a 30-year term.\u00a0<\/i><\/p>\n

Note that when you use a cash-out refinance, your new mortgage will be more than what you previously owed on your house since you\u2019re converting some of your home equity into cash. When you go to sell your home, you\u2019ll need to pay off the new mortgage in full before you can transfer the title<\/a> to your buyer.<\/p>\n

This strategy takes advantage of mortgages\u2019 relatively low interest rates<\/h3>\n

Since your mortgage is a secured debt<\/a> \u2014 using your home as collateral if you default on payments \u2014 it typically has a lower interest rate than unsecured debts like credit cards and student loans.<\/p>\n

For example, in the past year, the average interest rate for a 30-year fixed-rate mortgage ranged between 4.99% and 7.08%<\/a>, while the average interest rate for a 15-year fixed-rate mortgage ranged between 4.26% and 6.38%. Compare this to the average credit card interest rate for 2022, which was 17.91%<\/a>.<\/p>\n

There are several reasons to use a cash-out refinance to pay off debt<\/h2>\n

Homeowners may try a cash-out refinance to pay off debt and use these lower mortgage interest rates to their advantage. By consolidating your debt into a single lower interest rate loan (the new mortgage), you can reap one or more of these benefits:<\/p>\n