A cash-out refinance can swap your card interest for a mortgage rate, but it saves money only if you stop charging and pay off the cash-out about as fast as you’d have paid the cards. Before you apply, price the closing costs and the new rate on your entire mortgage.
Paying off $30,000 of card debt at 24% over five years costs about $22,000 in interest, and the same five-year payoff at a 7% mortgage rate costs about $5,600, by our math. Leave that $30,000 in the mortgage for the full 30-year term, though, and it costs about $42,000 in interest, nearly twice what the cards would have charged.
The bigger catch is that a cash-out refinance replaces your entire mortgage, so its costs land on your old balance too. Say you owe $200,000 on a 3% mortgage. Closing costs, which Freddie Mac puts at 3% to 6% of the loan, come to $6,900 to $13,800 on the new $230,000 loan. Moving the $200,000 to 7% also adds about $40,000 in interest over five years, more than twice the roughly $16,000 you’d save on the cards.
The debt also gets riskier. Card debt is unsecured, so falling behind damages your credit, and bankruptcy can erase the balance. Inside the mortgage, it’s secured by the house, like any loan against your home equity. Missed payments can cost you the home, and bankruptcy won’t remove the lender’s claim on it.
The swap makes sense only when all three of these hold:
- The cards stay at zero. Charge them back up, and you owe the $30,000 twice, once on the cards and once in the mortgage.
- You’ll pay extra principal to clear the cash-out portion about as fast as you’d have cleared the cards. For $30,000 at 7% over five years, that’s about $400 a month on top of the new payment.
- The card interest you’d save beats the closing costs plus the extra interest on your existing balance.
Choose the month you’ll finish paying off the cash-out before you apply. If you can’t name one, the refinance just moves your card debt onto your house.
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