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Quick answer: Absolutely you can. It’s called a cash-out refinance and it’s a great option for some people. Here’s what it boils down to: home loans typically have lower interest rates compared to credit cards, which typically have high interest rates. In order to take advantage of mortgage rates, cash-out refinances allow you to “cash out” equity in your home to pay off credit card debt and the amount that’s cashed out becomes part of your mortgage. So, instead of paying a bunch of high-interest credit card debt, you would be paying one lower-interest home loan. (This process can also be described as consolidating credit card debt into your mortgage.)
This could free up a lot of money each month depending on your debt and how your loan is structured. For the twelve-month period of June 2021 to May 2022, we saw our customers lower their monthly debt payments by $590 per month on average.* Here’s more on how they work.
How to tap into your home equity through a cash-out refinance
When you do a cash-out refinance, you take out a new home loan to replace your old one and you receive a portion of your home equity as cash after the new loan closes. If your goal is paying off credit card debt, you can put that cash directly toward your card balances.
That said, using home equity to consolidate credit card debt into your mortgage won’t reduce your total debt. You’ll have less of a balance on your cards, but more on your home loan. The equity you took out as cash will be added back into your home loan’s balance.
Home equity loans offer lower interest rates
One of the biggest benefits of consolidating debts into your mortgage is taking advantage of mortgage rates. Typical credit cards today carry interest rates from 10% to 20% or more, with “penalty rates” being even higher for late-payers or those with poor credit. In comparison, typical home loan rates are closer to the 4% to 6% range.
Of course, rates vary among borrowers depending on their individual financial situation, but any home loan will likely have a lower rate than the average credit card.
Crunch your numbers before tapping into home equity
All that said, there are also tradeoffs to consider. Cashing out the equity in your home means you’re essentially using up that equity. You’re also increasing your mortgage debt and most likely extending the length of your loan. These factors can vary depending on your situation, but they’re generally what borrowers can expect.
There are many other factors involved in choosing your strategy for consolidating credit card debt into your mortgage. For example, many lenders require you to leave 20% equity in your home after cashing out. They will also want to ensure that your new monthly payment works within your debt-to-income ratio. If you want to explore what leveraging your home equity could mean for you, crunch the numbers on our refinance calculator.
*Average monthly debt payment reduction figures based on Mr. Cooper refinances from June 2021–May 2022 in which a customer paid off at least one non-mortgage debt. Comparison between total minimum monthly payments before and after refinance. Individual results will vary.
Note: A debt consolidation refinance increases your mortgage debt, reduces equity, and extends the term on shorter-term debt and secures such debt with your home. The relative benefits you receive from debt consolidation will vary depending on your individual circumstances. You should consider that a debt consolidation loan may increase the total number of monthly payments and the total amount paid over the term of the loan. To enjoy the benefits of a debt consolidation loan, you should not carry new credit card or other high interest rate debt.
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