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Mortgage Cash-out Refinance

Refinancing your original home mortgage to free up cash to pay off other creditors may not be the best option for paying off secondary debt, especially in higher interest rate environments.

Pros

Possibility of lower interest rates on your debt

If interest rates are lower at the time of refinance than your original mortgage rate, you may be able to recover your refinance costs over several years and save money on your debts over the life of the loan.

Potentially lower payments

Merging your non-mortgage debts with a refinanced home loan can allow you to amortize all your debt over 15–30 years, possibly lowering your overall monthly debt payments.

One single payment on all your debt

Consolidating multiple debts to one loan with one monthly payment can have a positive financial and psychological effect, allowing you to focus on saving and managing your budget to stay within your means.

Improved credit score

Consolidating consumer debt with equity from your home zeroes out credit card balances, improving your credit utilization ratio (the amount you owe on credit cards vs. your available credit). Unused available credit represents responsible borrowing habits and can increase your credit score.

Cons

Potentially high closing costs

In most cases you will need to pay all closing costs, which, depending on the size of your loan, could be thousands or tens of thousands of dollars.

Possibly higher interest rates

If mortgage rates are higher at the time of refinance than your original loan rate, your entire home loan will be financed at the new rate, potentially increasing the total cost of borrowing over the life of your loan.

Home at risk

Wrapping all your ancillary debt into your home mortgage through a cash-out refinance means there is no longer any distinction between your mortgage debt and all previous secondary debt (credit cards, car loans, etc.). If your financial situation worsens and you default on your payments, you could lose your home.

Longer payback period

If you merge your non-mortgage debts into a mortgage loan with a 15- to 30-year amortization by refinancing, it may take you longer to pay off your debt. It may also extend the time it takes you to pay off your home.