Mortgage Refinance to Pay Off Debt

Some homeowners refinance to pay off debt, such as credit card balances. There are multiple benefits to this approach — for starters, it combines your debts into a single loan, which may make them easier to manage. Refinancing allows you to pay off high-interest debt, replacing the balance with a lower-interest mortgage. Additionally, you can give yourself a longer repayment timeline, since you’re restarting the clock on your debt.

You have several options for using your mortgage to consolidate and pay off debt, and the best path for you depends on your goals and circumstances.

Cash-out refinance

✅ Good for: Borrowers with equity who can lower their rate

🤓 How it works: A cash-out refinance replaces your current mortgage with a new, larger loan, with the ability to use your equity — the difference between the value of the home and what you owe — to pay off your debt. Because your cash-out refinance loan is fixed to an asset — your home — the interest rate is likely to be lower than unsecured debt like personal loans or credit cards.

📋 How to qualify: In order to qualify for a cash-out refinance, you’ll typically need to retain at least 20% equity in your home. For example, if your home is worth $400,000 and you have a remaining mortgage balance of $200,000, you may be able to access $120,000 of your equity (80% of your $200,000 stake in your home) to pay off your other debts.

🤔 Things to consider: A cash-out refinance can be a good option if today’s interest rates are lower than your current mortgage rate. If your rate will go up by refinancing, you’ll want to be sure that the interest savings from consolidating your other debts are enough to offset the higher mortgage costs.

» MORE: Shop current cash-out refinance rates

Rate-and-term refinance

✅ Good for: Borrowers who want to lower monthly payments

🤓 How it works: A rate-and-term refinance replaces your mortgage with one of the same size, but with a different interest rate and new repayment terms. If current mortgage rates are lower than yours, refinancing can reduce your monthly payment.

You can also extend your repayment timeline. For example, refinancing from a 20-year mortgage to a 30-year term can further lower monthly payments and free up additional cash each month that could go toward paying down your outstanding debts, without sacrificing any equity in your home.

📋 How to qualify: To qualify for a rate-and-term refinance, you typically need to meet standard lender requirements, including having a credit score of around 620 or higher and demonstrating adequate income to support the new loan. Additional requirements can vary by lender, and approval depends on your overall financial profile and current market conditions.

» MORE: Use NerdWallet’s refinance calculator

🤔 Things to consider: Lenders and service providers charge hundreds or thousands of dollars in closing costs when you refinance a mortgage. That's money you could otherwise use to pay down debt.

» MORE: Closing costs calculator