Should You Refinance Your Home to Pay Off Debt? - Experian (2024)

In this article:

  • How Can Refinancing Help You Pay Down Debts?
  • How to Decide Whether to Refinance
  • Can You Use Your Home Equity to Consolidate Debt?

If you're carrying substantial debt, it may be difficult to pay off your balances without taking some significant action. Refinancing your home to pay off your debt is one option, but it's a move that comes with significant benefits and potential downsides that should be considered beforehand.

Generally, refinancing your house to pay down debts might not be a good idea if you'll struggle to afford your new payments or you're unable to get a better rate on your mortgage.

How Can Refinancing Help You Pay Down Debts?

The primary benefit of refinancing your mortgage to pay down debt is saving money in interest: Mortgage rates are generally lower than other types of consumer credit like credit cards and personal loans.

For example, the average interest rate on 30-year fixed-rate mortgages was 6.39% in early May. By contrast, the latest Federal Reserve data lists average interest rates of 20.92% for credit cards and 11.48% for 24-month personal loans. With Americans carrying an average credit card and personal loan balance of $5,910 and $18,255, respectively, according to Experian data, it's plain to see how high interest rates on these balances can add up.

You can refinance your home to pay down debt in one of two ways:

  • Rate-and-term refinance: A rate-and-term refinance involves replacing your current loan with a new one that, ideally, carries a lower interest rate. The new loan may also introduce a new repayment term and monthly payment amount, but the principal balance remains the same. A lower payment can provide you with extra cash you can use to pay down debt.
  • Cash-out refinance: A cash-out refinance also works by replacing your current mortgage with a new one, but in this case, the refinance loan is larger than the remaining balance on your mortgage. You can use the difference to pay off debts, fund a home renovation project or for virtually any legal purpose. One important distinction is that the larger loan balance usually raises the overall cost of your loan, even if you secure a lower rate.

In summary: When interest rates are low, a rate-and-term refinance can free up room in your budget to make higher debt payments without adding more principal debt to your mortgage. By comparison, a cash-out refinance provides you with a lump sum of cash to pay off debts, but can increase your monthly payments.

How to Decide Whether to Refinance

Refinancing can have serious implications on your finances, so you should proceed carefully before deciding whether to refinance to pay down debt. The most critical detail to consider is the current interest rates on your mortgage and other debts and the new mortgage rate you'll receive if you refinance. After all, it makes little sense to refinance if you'll end up with a considerably higher interest rate.

Here are some factors to weigh as you make your decision:

  • Your interest rate: If you qualify for a rate at least 1% lower than your current mortgage rate, a rate-and-term refinance may make sense. However, a minimal rate drop of less than 1% may be too negligible to make a meaningful difference, especially when you factor in closing costs.
  • Your current debt level: Refinancing could be worth it if your existing debt and interest rate are so high that the balance is increasing significantly due to interest charges. Conversely, a refinance may not be your best option if your debt level is relatively low—say, a few thousand dollars or less. In that case, following a debt repayment strategy may suffice to tackle your debt.
  • Your monthly budget: A cash-out refinance can help you pay off high-interest debt, but it may leave you with a higher mortgage payment. Project your budget post-refinance to ensure you can afford the larger payment, taking into account the debt accounts you plan to settle.
  • Refinance closing costs: Closing costs can range from 2% to 5% of a new mortgage loan. These closing costs usually represent thousands of dollars in upfront expenses. Since it takes time to recoup closing costs, refinancing may not be worth it if you plan on moving soon.
  • Likelihood you will accrue new debt: Refinancing to pay off your debt isn't a great idea unless you have a plan in place to avoid new debt from building up in the future. Having zeroed-out credit cards can increase the temptation to spend, and it can take some serious planning to avoid ending up right back where you started.

Can You Use Your Home Equity to Consolidate Debt?

Instead of refinancing, you could take out a second mortgage, such as a home equity loan or home equity line of credit (HELOC). These options may provide lower interest rates than other forms of credit. And they can also simplify your financing by consolidating your debt into a single account with one payment, making it easier to manage your debt.

However, home equity loans and HELOCs come with risks to consider, such as:

  • Putting your home on the line: Home equity loans and HELOCs require you to put your home up as collateral to secure the loan. If you default on the loan, your lender could foreclose on your home. This risk isn't present with unsecured loans and credit cards.
  • Increasing your overall debt: In addition to your primary mortgage, you must make monthly payments on a home equity loan or a new line of credit. In either case, your overall debt is higher, which reduces your disposable income.
  • Lowering your home equity: Home equity lending products allow you to tap into your home's equity for funds, effectively reducing your home equity by the amount you borrow.
  • Increasing the risk you could end up underwater on your home loan: If you've significantly reduced your mortgage loan balance or your home's value has increased substantially, you may be able to borrow a large sum of money (often up to 85% loan-to-value ratio). However, if you borrow a large amount and home prices fall, you could end up owing more than the house is worth.

The Bottom Line

Ultimately, the decision to refinance your home to pay off other types of debt is a personal one. Refinancing can be a good option if you qualify for a lower rate and you can substantially save on interest costs. It's also important to resist the temptation to take on more debt in the future, which could offset or even negate any financial benefits of refinancing.

Snagging a low interest rate on a refinance will depend on your credit score and other factors. As a general rule, the higher your credit score, the higher your odds of being approved for a refinance with favorable terms. If you haven't done so already, check your credit report and credit score for free with Experian to see where your credit stands. Then, take the time to improve your credit score, if needed, to help you secure a lower interest rate and more favorable terms overall.

Should You Refinance Your Home to Pay Off Debt? - Experian (2024)

FAQs

Is it good to refinance your house to pay off debt? ›

Lenders typically prefer to see a credit utilization ratio of 30 percent or lower. So, using the funds from your refinance to pay off debt can lower your utilization ratio and, in turn, may help improve your credit scores over time. You may improve the terms of your mortgage.

Should I take money out of my house to pay off debt? ›

Using home equity to consolidate and pay off debt may help you lower the interest you pay, but you could lose your home to foreclosure if you fail to make your payments.

What is the downside of refinancing your home? ›

Refinancing allows you to lengthen your loan term if you're having trouble making your payments. The downsides are that you'll be paying off your mortgage longer and you'll pay more in interest over time. However, a longer loan term can make your monthly payments more affordable and free up extra cash.

When should you not refinance? ›

Moving into a longer-term loan: If you're already at least halfway through the loan term, it's unlikely you'll save money refinancing. You've already reached the point where more of your payment is going to loan principal than interest; refinancing now means you'll restart the clock and pay more toward interest again.

Is it worth remortgaging to pay off debt? ›

It could be a good option for you if mortgage rates are low and you have plenty of equity in your property. If you are eligible for a low remortgage rate, then your monthly repayments may work out to be less than if you chose to take out a personal loan.

Should I take out equity on my home to pay off debt? ›

Using a home equity loan for debt consolidation will generally lower your monthly payments since you'll likely have a lower interest rate and a longer loan term. If you have a tight monthly budget, the money you save each month could be exactly what you need to get out of debt.

Is it a good idea to use home equity to consolidate debt? ›

Experts recommend that you only use your home's equity for emergency situations, such as unexpected medical bills or emergency debt consolidation. Think carefully about the loan's purpose down the line. Consider your future goals, other financial aspirations and whether you plan to stay in your home for the long term.

Why is not good to pay off your mortgage? ›

Using your extra funds to pay off your mortgage reduces the amount of money you have for other expenditures. For example, you may need to build an emergency fund, pay off other high-interest debt, or buy a new car.

Is it better to put more money down on a house or pay off debt? ›

For some, it may make more sense to pay off debt before saving for a down payment, especially considering the ways in which having debt can impact your mortgage application You may want to prioritize paying off debt if you: Have a significant amount of consumer debt.

What is the downfall of refinancing a home? ›

A longer-term loan could result in lower monthly payments, but higher overall costs. For instance, if you have 10 years left to pay on your current loan and you refinance to a 30-year loan, you could end up paying more in interest overall to borrow the money and have 20 extra years of mortgage payments.

What is not a good reason to refinance? ›

Refinancing to lower your monthly payment is great unless you're spending more money in the long-run. Moving to an adjustable-rate mortgage may not make sense if interest rates are already low by historical standards. It doesn't make sense to refinance if you can't afford the closing costs.

What do you lose when you refinance your home? ›

The bottom line

You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.

Is it a good idea to refinance to pay off debt? ›

When you refinance a mortgage to pay off debt, one of the main benefits is you'll pay less in interest costs. Mortgage rates are much lower than rates on other consumer products like credit cards, personal loans, and private student loans.

Is 2024 a good time to refinance? ›

You might want to consider refinancing your mortgage in 2024, especially if you got your mortgage in the last year and interest rates fall, or your specific circ*mstances call for a new loan.

How to know if refinancing is worth it? ›

Historically, the rule of thumb has been that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance. Using a mortgage calculator can help you see how much you might save.

Is it smart to refinance your home? ›

Refinancing can be a smart financial move if it reduces your mortgage payment, shortens the term of your loan, or provides cash for necessary expenses. However, it can also involve significant closing costs and fees, so you may not realize savings for several years.

Can I take money out of my mortgage to pay off debt? ›

Yes, you can use a mortgage to pay off debt.

Is it worth selling your house to pay off debt? ›

Selling your house could free up funds to pay off your mortgage and other debt, but it's not the right move for every homeowner. Before selling your home, consider how much equity you have and what expenses would take away from your overall profit.

What is the risk of refinancing debt? ›

Refinancing risk refers to the possibility that a borrower will not be able to replace an existing debt with new debt at a critical point in the future. Any company or individual can experience refinancing risk, either because their own credit quality has deteriorated or as a result of market conditions.

Top Articles
Encrypt your data - Pixel Phone Help
Ensuring low latency at the app, platform and infra levels
Evil Dead Movies In Order & Timeline
Radikale Landküche am Landgut Schönwalde
55Th And Kedzie Elite Staffing
Craigslist St. Paul
Craigslist Portales
Craigslist Mexico Cancun
Slmd Skincare Appointment
Regal Stone Pokemon Gaia
Craigslist Alabama Montgomery
Fairy Liquid Near Me
Craiglist Tulsa Ok
Sound Of Freedom Showtimes Near Cinelux Almaden Cafe & Lounge
10-Day Weather Forecast for Santa Cruz, CA - The Weather Channel | weather.com
How pharmacies can help
Healthier Homes | Coronavirus Protocol | Stanley Steemer - Stanley Steemer | The Steem Team
Craigslist Clinton Ar
Sussur Bloom locations and uses in Baldur's Gate 3
Violent Night Showtimes Near Century 14 Vallejo
Ford F-350 Models Trim Levels and Packages
Highmark Wholecare Otc Store
Celina Powell Lil Meech Video: A Controversial Encounter Shakes Social Media - Video Reddit Trend
Lacey Costco Gas Price
John Deere 44 Snowblower Parts Manual
lol Did he score on me ?
Korg Forums :: View topic
Transformers Movie Wiki
Edward Walk In Clinic Plainfield Il
Goodwill Houston Select Stores Photos
Federal Student Aid
School Tool / School Tool Parent Portal
Gold Nugget at the Golden Nugget
In Polen und Tschechien droht Hochwasser - Brandenburg beobachtet Lage
Mydocbill.com/Mr
Mckinley rugzak - Mode accessoires kopen? Ruime keuze
5 Tips To Throw A Fun Halloween Party For Adults
Valls family wants to build a hotel near Versailles Restaurant
Dr Mayy Deadrick Paradise Valley
What Is The Optavia Diet—And How Does It Work?
Doe mee met ons loyaliteitsprogramma | Victoria Club
Phmc.myloancare.com
Sandra Sancc
Sacramentocraiglist
Dobratz Hantge Funeral Chapel Obituaries
Union Supply Direct Wisconsin
Pas Bcbs Prefix
Bf273-11K-Cl
Star Sessions Snapcamz
Santa Ana Immigration Court Webex
Swissport Timecard
Latest Posts
Article information

Author: Msgr. Refugio Daniel

Last Updated:

Views: 5686

Rating: 4.3 / 5 (74 voted)

Reviews: 81% of readers found this page helpful

Author information

Name: Msgr. Refugio Daniel

Birthday: 1999-09-15

Address: 8416 Beatty Center, Derekfort, VA 72092-0500

Phone: +6838967160603

Job: Mining Executive

Hobby: Woodworking, Knitting, Fishing, Coffee roasting, Kayaking, Horseback riding, Kite flying

Introduction: My name is Msgr. Refugio Daniel, I am a fine, precious, encouraging, calm, glamorous, vivacious, friendly person who loves writing and wants to share my knowledge and understanding with you.