Debt Consolidation Mortgage Refinances

Learn About Your Debt Consolidation Loan Choices

When you want a debt consolidation loan, refinancing your home’s mortgage is one option available to you. You can use your home’s equity to get cash and then you can apply that cash to pay off higher interest debts via a cash out refinance.

There are other kinds of debt consolidation loans you can choose as well, including home equity loans and credit card balance transfers. Read on to learn more!

Can You Consolidate Debts with Cash Out Refinances?

Yes. One way to consolidate debts is with a cash out refinance. These refinances let you replace your current mortgage with a new mortgage for a higher amount and get the difference in cash at closing. You can use this cash to pay off smaller debts. After paying off smaller debts, you’ll theoretically only have to make a single payment each month on your mortgage. Since you start with several debt payments and transition to just your monthly mortgage payment, this can be considered consolidating your debt.

Consolidating your debt with a cash out refinance has several benefits. Cash out refinances can often save you money on interest because the rates on mortgage refinances are typically much lower than the rates on debts like credit card balances. Making a monthly mortgage payment instead of several payments on smaller debts allow you to take advantage of this lower interest rate.

You can also make your monthly interest payments more predictable by refinancing your mortgage at a fixed rate. A cash out refinance allows you to get a new interest rate and change the number of years you have to pay off the mortgage, too.

Keep in mind that you don’t need to use all the cash from mortgage refinancing to consolidate debts. You could use some of the money to consolidate debts and the rest to pay for home improvements, education, or other investments. For example, if you receive $50,000 from a cash out refinance, you could use $25,000 to consolidate your debts and $25,000 to pay for home improvements.

Can You Consolidate Debts with Home Equity Loans and HELOCs?

Yes. You can use home equity loans and HELOCs to consolidate debts. Home equity loans are also called “second mortgages” and give you a lump sum of cash at closing. HELOCs are a type of second mortgage. HELOCs give you a line of credit you can tap to consolidate debts and pay for other investments. Learn more about home equity loans and HELOCs.

Home equity loans and HELOCs might have higher interest rates than cash out refinances because they are second mortgages, which lenders may consider riskier compared to cash out refinances. The rate you might be offered on debt consolidation loans depends on current market rates, your credit, income, finances, and other factors.

Can You Consolidate Debt with Personal Loans?

Yes. You can use personal loans to consolidate debts. One disadvantage of personal loans is that they typically have higher interest rates than mortgage refinances and the other kinds of home equity loans discussed above. That’s because these loans are not secured by collateral like your home.

Can You Consolidate Debt with Balance Transfer Credit Cards?

Yes. You may be able to transfer the balance from your current credit cards to consolidate debt when the new credit cards have low or 0% interest rates. It’s important to understand these credit cards typically have a low rate for a limited period of time—often between 12 and 21 months. After this period, the interest rate can increase significantly which will increase your interest payments. These cards also might have transfer fees or other costs you might need to pay.

Freedom Mortgage is not a financial advisor. The ideas outlined above are for informational purposes only, are not intended as investment or financial advice, and should not be construed as such. Consult a financial advisor before making important personal financial decisions and consult a tax advisor regarding tax implications and the deductibility of mortgage interest.

Last reviewed and updated February 2024 by Freedom Mortgage.