Can you refinance your mortgage to consolidate debt?

If you have enough home equity, you can refinance for more than you owe and use the extra to pay off other debts. It suits homeowners with large high-interest balances, steady income and equity. Fees, lost equity, and a longer payoff can outweigh the interest savings, so check the numbers first.

What a debt-consolidation refinance is

A cash-out refinance is a new loan for more than your current mortgage. It repays your current mortgage, and the remainder goes to your other debts at closing.

Paying off high-interest balances this way can lower your interest costs, but only if the new rate, fees and term come out ahead of what you pay now.

A home equity line of credit is a different route. It gives you a credit line to draw on as needed, with no lump sum up front.

Refinancing doesn't erase the debt, and it won't stop you from charging more in the future.

What you need before you start

• Equity: your home's value minus your mortgage balance.
• More equity means more room.
• Regular income and a credit score that meets the lender's minimum. Requirements vary by lender, and no approval is guaranteed.
• A list of every debt with its balance, rate and payment.
• Your current mortgage terms, including any prepayment penalty. Paying off a mortgage early can trigger one.

Steps to decide and apply

1. List your debts and total them. This kind of consolidation is typically only an option when balances are extensive, thousands of dollars rather than a few hundred.
2. Estimate your equity and check it against the 80% maximum loan-to-value.
3. Find your prepayment penalty by asking your current lender or checking your mortgage documents.
4. Add up the costs. Add them to any prepayment penalty when you compare the totals.
5. Compare your monthly cash flow now with what it would be after the refinance, and compare total interest over the full term.
6. Compare alternatives such as a HELOC or a separate consolidation loan. A consolidation loan generally can't be used to pay off a credit card from the same lender that provides the loan.
7. Apply. Lender availability and guidelines depend on your application, and no approval is guaranteed.

A simple way to test your own case

Compare two totals. The first is what you'd pay on your current debts and mortgage until they're cleared. The second is the new mortgage payments plus the penalty and fees over that same period.

Refinancing helps when the second total is lower and the monthly payment is manageable. It doesn't help when fees and extra years erase the rate gap. Use your own balances and quotes, since no figures here apply to every borrower.

Risks and when it doesn't help

• A longer term can mean more total interest, even at a lower rate.
• You give up some or all of your equity, and you could end up owing more than the home is worth.
• Unsecured debt like credit cards becomes debt secured by your home, so missed payments put the home at risk.
• Tax treatment of mortgage interest tied to other debts can differ from what you'd expect. Confirm it with a tax professional.
• If your spending habits haven't changed, card balances can build up again.

FAQ

What if my credit is only fair?

Fair credit doesn't rule out a refinance, but it can narrow your options. Lenders weigh credit alongside steady income and home equity, and minimum scores vary, so ask about their criteria and expect no approval to be guaranteed.