Should you use a cash-out refinance for debt consolidation? Here’s what to know

One strategy that may help is a cash-out refinance, which allows you to tap into your home’s equity to pay off other debts.

At Westerra Credit Union, we help Colorado homeowners explore smart ways to manage their finances. A cash-out refinance could be one of them, but it’s important to understand how it works and whether it’s the right fit for your goals.

What is a cash-out refinance?

A cash-out refinance replaces your current mortgage with a new one, typically at a different interest rate or loan term. The key difference is that you borrow more than you currently owe and take the difference in cash. That cash can be used for things like:

• Paying off high-interest credit card debt

• Consolidating personal loans

• Covering medical bills

• Funding home improvements

• Funding college tuition

Pros of using a cash-out refinance for debt consolidation

1. Lower interest rates

Mortgage rates are often significantly lower than credit card or personal loan rates. By consolidating your debt into your mortgage, you could reduce the overall interest you pay.

2. Simplified payments

Instead of managing multiple bills each month, you’ll have one mortgage payment. This can make budgeting easier and reduce the risk of missed payments.

3. Improved cash flow

Lower monthly payments and reduced interest can free up money for savings, emergencies or other financial goals.

4. Potential tax benefits

Mortgage interest may be tax deductible, depending on how the funds are used. Consult a tax adviser to understand your specific situation.

Cons to consider

1. You’re increasing your mortgage balance

You’re borrowing more against your home, which means it could take longer to pay off your mortgage and you’ll owe more overall.

2. Closing costs apply

Refinancing comes with fees like appraisals, title insurance and credit reports. These costs can sometimes be rolled into the loan, but they still impact your total expense.

3. Risk to your home

Unlike unsecured debt, your mortgage is tied to your home. If you’re unable to make payments, you could risk foreclosure.

4. Long-term cost

Even with a lower interest rate, stretching debt over a 15- or 30-year mortgage term could mean paying more in total interest over time.

Is it right for you?

A cash-out refinance might be a good fit if:

• You have significant equity in your home

• Your credit score has improved since you first bought your home

• You’re paying high interest on other debts

• You want to simplify your finances and reduce monthly payments

Westerra’s mortgage specialists can help you evaluate your current mortgage terms, credit profile, and financial goals to determine if refinancing makes sense.

What you’ll need to get started

To begin the process, you’ll typically need:

• Pay stubs and tax returns

• Bank statements

• Information about your current mortgage

• A clear understanding of your debt and financial goals

Westerra offers both fixed-rate and adjustable-rate refinance options, and our team is here to help you choose the best fit for your situation.

You’ve got options

Debt consolidation through a cash-out refinance isn’t one-size-fits-all. It’s a strategy that can work well for some, but it’s important to weigh the pros and cons carefully. At Westerra, we’re here to help you make informed decisions and find the path that works best for you.

Explore your refinance options here and connect with a mortgage specialist to see what’s possible.