Your home is likely your most valuable asset, providing not only shelter but a significant investment. According to the March 2025 Intercontinental Exchange Mortgage Monitor report, the average homeowner has $313,000 of equity. As you pay down your mortgage and the home appreciates, the more equity you own – this is the difference between the value of your home and the remaining mortgage owed. You can turn this equity in your home into cash by refinancing your mortgage.
If you want to use your equity for loan consolidation, such as paying off credit card debt and student loans, you’ll need at least 20% equity in your home. The more equity, the more you can borrow. Most lenders will allow you to use up to 80% of your equity in a refinance. But should you?
The answer depends on your individual financial situation, so it’s important to weigh the benefits and drawbacks of using a mortgage refinance to pay off debt.
Key Takeaways:
- If you have at least 20% equity in your home, you could refinance your mortgage to make a consolidated payment on your debts.
- Refinancing a home loan may mean a higher monthly mortgage payment and longer terms.
- If you refinance your mortgage, you will be responsible for paying closing costs (usually 2% – 5% of the loan) and other fees.
- Mortgage interest rates are low compared to many other forms of loan debt, like credit cards and personal loans, making a refinance an attractive option for loan consolidation.
Can You Refinance A Mortgage To Pay Off Debt?
Yes. You can use a cash-out refinance to pay off debts by tapping into your home’s equity. Because mortgage rates are typically lower than those for other loans or lines of credit, using a cash-out refinance to pay off debt may save you money. For example, as of October 2025, the average interest rate on a refinanced 30-year fixed mortgage loan is around 6.625%, and the average interest rate on a 15-year fixed mortgage is 5.875%. These rates are significantly lower than the average credit card rate, which hovers between 20% – 24%, about three to four times the interest.
If you want to use a cash-out refinance to consolidate and pay off your debts, first determine your home’s equity using an online home equity calculator. Tally up your debts to find the number needed to bring them all current. Then you can decide how much equity you need to tap to pay off that debt.
Homeowners have been taking advantage of their home equity by cashing it in of late, according to a new report from ICE Mortgage Technology, a home loan data tracker. It shows that cash-out refinancing activity between April and June 2025 reached a near three-year high, even as 30-year fixed mortgage rates remained above 6%.
Mortgage Refinance Options
Beyond cash-out refinances, there are other refinancing options that can help you decrease your high-interest financial obligations. Here’s a quick comparison of all the types:
Cash-Out Refinance
As previously mentioned, a cash-out refinance involves borrowing money from the equity you have in your home and using it to pay off other debts, like credit cards, student loans, car loans and medical bills.
Essentially, you’re paying off those existing balances by transferring them to your new mortgage. This places all the balances into one debt, so you’ll only have to make one monthly payment, at a much lower interest rate for the transferred amounts.
Rate-And-Term Refinance
With a rate-and-term refinance, the balance of your original loan is paid off and a new loan is opened to secure a new interest rate or a new loan term. You will then make all your future payments to this new loan. This type of refinance is for borrowers seeking a lower interest rate. You can put the money you save on the interest toward paying down other high-interest debts over time.
Streamline Refinance
Qualifying government-insured mortgages may be eligible for either an FHA Streamline refinance or a VA Streamline refinance. With these options, a new appraisal is not required, which can help keep closing costs down. This makes them affordable consolidation options for those who qualify.
Keep in mind that FHA and VA Streamline refinance options won’t let you consolidate any debt into the loan. Instead, like a rate-and-term refinance, they can simply help you lower your monthly payments, thereby giving you access to more of your monthly income to pay down existing debts. You also need to be in an existing FHA or VA loan to qualify.
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Pros And Cons Of Using Home Equity To Pay Off Debt
| Pros | Cons |
|---|---|
| Lower interest rates | Likely longer repayment term |
| Simplified payments (one payment versus many) | Possible higher mortgage balance |
| Possible monthly savings over time | Risk of foreclosure if you can’t repay |
| A good option if you are not planning to move |
Should You Refinance Your Mortgage To Consolidate Debt?
When mortgage rates drop, refinancing to consolidate debt may be appealing. As with any financial decision, you’ll want to do your research and consider all your options.
When determining if a cash-out mortgage refinance is best for you, ask yourself the following questions.
Will I Qualify For A Mortgage Refinance?
To qualify for a mortgage refinance, you’ll need to meet the following criteria in most cases:
- A credit score above 620 (580 for FHA non-Streamline loans)
- At least 20% equity in your home (excepting VA loans)
- A 50% or lower debt-to-income (DTI) ratio
- Enough money to cover the closing costs
Also be prepared to provide proof of income and tax documents.
Do I Have Enough Equity?
As we mentioned, there are several factors impacting your home’s equity, including your down payment, the number of mortgage payments made and your home’s current appraised value. A cash-out refinance allows you to borrow against this equity, so you’ll need to have sufficient equity available – enough to take cash out while still leaving some in the home.
Most lenders require you to keep at least 20% equity in your home after a cash-out refinance, which usually means your new loan balance can’t exceed 80% of your home’s equity. Lenders calculate your loan-to-value (LTV) ratio by comparing the loan amount to the appraised value of your home to determine how much equity you have. LTV is a key factor lenders use when deciding whether to approve your loan, and you can use it to determine if you have enough equity for a refinance.
How To Calculate Your Loan-to-Value Ratio
To see how a cash-out refinance could affect your LTV, follow the formulas below to calculate your numbers and compare. To calculate your LTV before refinancing, divide your loan balance by the appraised value of your property.
Formula: Loan Balance / Appraised Property Value = LTV
Let’s say your home is worth $200,000 and your loan balance is $140,000. Your LTV would be 70%.
- Property value = $200,000
- Loan balance = $140,000
- 140,000 / 200,000 = 0.70
To figure out how much your LTV would be with a cash-out refinance, simply add the amount of equity you want to borrow to your current loan balance, then divide that by the appraised value of your property.
Formula: (Equity Borrowed + Current Loan Balance) / Appraised Property Value = LTV
Using the example above, we’ll add on $16,000, which you could borrow to pay off your credit card debt. Your new loan balance would then be $156,000, and your new LTV after your cash-out refinance would be 78%.
- Property value = $200,000
- Original loan balance = $140,000
- Cash-out amount borrowed = $16,000
- New loan balance = $156,000
- 156,000 / 200,000 = 78%
With a 78% LTV, you could do a cash-out refinance with enough equity left over to satisfy your lenders.
Put your actual loan amounts and home value into this formula to calculate what your LTV would be after a refinance. If it’s higher than 80%, you may want to seriously consider whether taking out equity would give you enough money to accomplish your goals.
Can I Afford A Higher Monthly Mortgage Payment?
Refinancing doesn’t eliminate your debt. It simply shifts it to a new loan – your mortgage. When you do a cash-out refinance, you’re borrowing against the equity in your home, which increases your mortgage balance by the amount you take out.
For example, if you owe $300,000 on your current mortgage, and you do a cash-out refinance to access $30,000 of your home equity, your new mortgage will be for $330,000. You’ll receive the $30,000 in cash, but now you owe that amount as part of your new loan, and you’ll repay it over time with interest.
As noted above, no matter how much debt you transfer, increasing your mortgage balance will increase your monthly mortgage payment. Depending on the terms of your refinance, the new loan could raise your monthly payment by a few dollars to a few hundred dollars, or even more if you take out a lot of equity.
Keep this in mind when you’re considering your budget and financial goals. If you’re having trouble making your monthly payments now, a refinance may not help. It could even put you at risk of foreclosure and losing your home.
Is The Cost Of The Mortgage Worth It Compared To Other Options?
You’ll need to pay closing costs on a mortgage refinance, just like you did on your original mortgage. Borrowers who refinance can expect to pay 2% – 6% of the total loan amount in closing costs. Underwriting and origination fees are typical closing costs associated with a refinance, but they’re not the only ones you’ll have to pay.
Additional closing costs may also include:
- Application fee ($75 – $500)
- Appraisal fee ($250 – $650)
- Title fee ($75 – $200)
The total closing costs of a refinance will depend on the amount you borrow, your lender and the type of refinance mortgage you take out.
If the cost of a cash-out mortgage refinance is too high, another option to consider is getting a personal loan to consolidate debt. Certain types of personal loans may be a better fit for your financial goals if:
- You want to keep your equity or don’t have enough equity to refinance
- You want to take out a smaller loan amount
- You want to avoid high closing costs
- You want to avoid using your home as collateral on a new loan
Though closing costs may be significantly lower for a personal loan, the trade-off is that you’ll be paying a higher interest rate than you would by refinancing your mortgage, though it won’t be as high as credit card interest rates. You also won’t be able to deduct the interest paid on a personal loan, unlike the potential tax benefits of mortgage interest.
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The Bottom Line: Using A Mortgage Refinance For Debt Consolidation
The decision to refinance a mortgage to pay off debt is a big step. If you have enough equity and your LTV ratio doesn’t change drastically when you tap it, a cash-out refinance could help you get rid of high-interest debt and better manage your finances. Of course, when you refinance a mortgage to pay off debts, you are swapping one form of debt for another – and if you can’t pay the refinance loan back, you could lose your home.
With any big financial decision, you should speak with a financial advisor who understands your individual needs and financial goals. Ready to take the next step? and explore your options with confidence.
Maya Dollarhide
Maya Dollarhide is a freelance writer with over a decade of experience covering personal finance topics. Her writing credits include AARP, Bankrate, Investopedia, CNN.com, Yahoo Finance and Lending Tree. She enjoys writing articles and producing multimedia content that helps individuals and families make informed decisions about their money, from mortgages and home loans to reducing credit card debt and saving for retirement. She has also created educational materials for use in schools to teach young people about personal finance, from opening up a bank account to saving for college and beyond.
