Should You Pay Off Debt With a Cash-Out Refinance? What to Consider

How cash-out refinance to pay off debt works

When you refinance your home, you take out a new mortgage to pay off your existing home loan. 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.

Some homeowners opt to use a cash-out refinance to pay off other higher-interest debts, such as credit cards and car loans. In this setup, they take out a new mortgage for more than what they currently owe on the home, pay off the old mortgage, and receive the remaining difference as cash. That cash is then used to eliminate the other debts, rolling everything into one monthly payment.

A cash-out refinance to pay off debt won’t instantly reduce your debt. It simply scoops up your debts and folds them into one mortgage loan that’s easier or more affordable to pay down, thanks to the lower interest rate, compared to the debts being separate. Most conventional lenders limit your cash-out loan amount to 80% of your home’s value.

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’re converting some of your home equity into cash. When you go to sell your home, you’ll need to pay off the new mortgage in full before you can transfer the title to your buyer.

How cash-out refinance leverages mortgages’ low interest rates

Since your mortgage is a secured debt, meaning it’s backed by your home as the collateral, lenders typically offer lower interest rates than they do for unsecured debts like credit cards and student loans.

For example, from 2020 to 2025, the average interest rate for a 30-year fixed-rate mortgage ranged between 2.96% and 6.81%, depending on market conditions. Meanwhile, the average interest rate for a 15-year fixed-rate mortgage ranged between 2.27% and 6.11%. Compare this to the average credit card interest rate for the same timeframe, which fell between 14.5% and 21.5%.

Why use a cash-out refinance to pay off debt

Some homeowners use a cash-out refinance to pay off debt by swapping high-interest debt for a mortgage with a lower interest rate. Combining everything into one monthly payment can make managing debt easier and may offer benefits like these:

• Pay less total interest over time thanks to the lower interest rate of a mortgage compared to consumer debt
• Lower your monthly debt payments if the new mortgage payment is less than the total minimum payments were when your debts were separate

“A cash-out refinance may be something to explore to get out of debt that may otherwise be difficult to come out of,” Jariwala comments on this second benefit.

Let’s see how this strategy works in action.

Use case #1: Reduce the amount of interest you pay on your debt

As mentioned above, one strategy behind using a cash-out refinance to pay off debt is to reduce the amount of interest you pay over time. If you consolidate your high-interest debt into a low-interest mortgage, you could pay less interest on your collective debt over time.

But there’s a caveat: It’s possible you could end up paying more in interest depending on the loan term.

Just remember, the longer your loan term, the more interest you’re likely to pay. For example, if you wrap a five-year debt into a 30-year refinance loan, you’re stretching a five-year debt across 30 years of payments with interest. Your minimum monthly payment and interest rate may drop, but the interest accumulated over 30 years could cost you more in the long run if you don’t make prepayments.

Use case #2: Lower your monthly debt payments

Some homeowners use a cash-out refinance to lower their monthly debt payments and free up cash in their budget. With a cash-out refinance, your minimum monthly payment on your new mortgage may be lower than the combined minimum payments across your debts were before you consolidated them.

Refinancing your loan also resets the payment schedule since you’re taking out a new loan with a 30-year or 15-year term. As long as your new interest rate is lower and you don’t shorten your loan term (refinancing your 30-year loan to a 15-year loan, for example), you may end up with a lower monthly payment than you had when paying your mortgage and consumer debt separately.

You may use this strategy if you want to divert part of your monthly budget to other expenditures, such as building an emergency fund or starting an investment account.

Pros of using a cash-out refinance to pay off debt

In a nutshell, a cash-out refinance can be a strategic way to manage high-interest debt by leveraging your home’s equity to secure a lower overall borrowing cost. For many homeowners, it also offers a simpler, more predictable way to stay on top of monthly payments. Here are the benefits of using cash-out refinance:

Cons of using a cash-out refinance to pay off debt

While a cash-out refinance can provide financial relief, it also turns unsecured debt into debt tied to your home, which raises the stakes if payments become difficult. It’s important to understand the long-term costs and risks before using your home equity this way. Beware of these cash-out refinance disadvantages:

What are the eligibility requirements for a cash-out refinance?

Lender requirements for cash-out refinance differ, and there are limits to how much of your home equity you can tap into. Most conventional lenders limit your cash-out loan amount to 80% of the home’s value. And you’ll still need to qualify for the higher loan amount, just as you did when you first bought your home.

Most lenders also require title seasoning, which means you’ll need to have owned your property for at least six months to be eligible for a cash-out refinance.

What to consider before using a cash-out refinance to pay off debt

Just because you can use cash-out refinance to pay off debt doesn’t mean that you should. Consider the following factors to determine if this strategy could work for your financial situation. 

New mortgage closing costs

Closing costs for a cash-out refinance range between 3% and 6% of the new loan amount. You’ll want to factor in the interest savings versus the cost of a new cash-out refinance to decide if a cash-out refinance to pay off debt is worth it for your situation. If your primary goal is to use a cash-out refinance to lower your overall interest, make sure you aren’t spending more on closing costs than you’re saving. 

Risk tolerance

With a cash-out refinance, you convert a portion of your home equity into cash, thereby lowering the equity you have in your home. Since you need to take out a larger mortgage to cover your existing mortgage and the amount of equity you withdrew, you’ll have a higher loan-to-value ratio than you did previously.

It’s important to understand the risk of a high-balance secured loan. If you lose your job or unexpected expenses crop up and you can’t make your mortgage payments, your lender can foreclose on your home. 

With unsecured debt, like most credit cards, lenders have to take legal action if you stop making payments, and they may not be able to go after certain assets, including your home equity. If your finances become overwhelming, filing for bankruptcy may erase many types of unsecured debt. But a mortgage is different. Bankruptcy may delay foreclosure, but it usually won’t eliminate your obligation to pay the loan.

»Learn more: Before moving forward with a refinance, it helps to understand how your new loan could change your monthly payments. Use a Mortgage Payment Calculator to see how different rates and loan amounts may affect your budget and decide if refinancing truly works for you.

Credit score impact

Refinancing your mortgage may cause your credit score to dip for a while, but it’s usually temporary. That’s because applying for a new loan triggers a credit check, and taking on new debt can affect your score in the short term.

On the flip side, using a cash-out refinance to pay off credit card debt could actually help your credit score, especially if you keep those credit card accounts open. That’s because credit scores look at more than just how much you owe. They also consider how much of your available credit you’re using.

According to myFICO, payment history, and the amount you owe are the most important factors when calculating your credit score. Making your monthly payments on time accounts for 35% of your credit score calculation, while keeping credit card balances low accounts for 30%. 

Your overall financial health and habits

Take an honest look at how you manage your finances and how you incurred the debt you want to pay off. 

“If the debt is due to poor spending habits, [it’s] best for someone to first develop better spending habits and a budget before considering the cash-out refinance,” says Jariwala. “The cash-out refinance may eliminate the debt, but that debt could come back pretty quickly if the person hasn’t addressed the underlying problem of overspending.” 

Use cash-out refinance to pay off debt wisely

Ultimately, the goal of using cash-out refinance to pay off debt is to improve your overall financial situation. You may use a cash-out refinance to take advantage of lower interest rates, lower your monthly debt payments, and consolidate your debts into one fixed payment.

While Bennett points out that there are situations when a cash-out refinance makes sense, “what you don’t want to do is have that cash-out refinance be a habit or a Band-Aid,” he advises. “Have your emergency fund, pay down your debt, and have the goal of eventually arriving at a place where you’re debt-free.” 

Jariwala echoes this sentiment and advises homeowners to carefully consider their options before using a cash-out refinance to pay off debt. “Using the equity [in your home] to pay off debt is like taking your hard-earned savings to pay off debt. It isn’t a decision that should be made lightly,” she notes.

Every homeowner’s financial situation is different, so there’s no one-size-fits-all answer when it comes to using a cash-out refinance to pay off debt. Taking the time to compare your options can help you avoid turning a short-term solution into a long-term financial burden. 

Since the amount you can borrow depends largely on your home’s value, it’s important to understand where you stand before making any decisions. Start by using HomeLight’s Home Value Estimator to get a clearer picture of your home’s current value and your borrowing potential.