Can Refinancing Your Mortgage Help Consolidate Debt? 

As a homeowner, your home equity may be a helpful tool for adjusting your finances, especially when handling debt. Under the right circumstances, you can refinance your mortgage and consolidate debt to meet your financial needs. 

How refinancing can help consolidate debt  

Refinancing means opening a new mortgage while taking out additional money to close your original loan. Often, you refinance your mortgage to obtain a lower interest rate, lower monthly payments, or receive funds for major expenses, but you can also refinance to consolidate debt. 

In the case of a cash out refinance, you could use additional home equity to take out a larger sum of money to pay off your credit card or other debt. Then, instead of paying that debt plus your old mortgage, you’re only making one new monthly payment. 

When refinancing is most helpful

Consolidating with a mortgage refinance might be beneficial if you use the refinance to obtain a lower interest rate on outstanding credit card or loan debt.  

Once you consolidate your debt, you would ideally pay a lower interest rate for your refinanced mortgage than you would for the average interest rate of your current debt. However, even if you don’t obtain your ideal interest rate, refinancing can simplify your finances by paying one bill instead of multiple monthly payments. 

If you qualify for a mortgage refinance but don’t have significant debt, it may still be beneficial if you can access lower rates or find a timeline that better fits your needs. For debt consolidation, it’s important to assess whether the monthly payments on the refinanced mortgage would be lower than your current monthly payments on your mortgage, credit cards, and other loans. 

Refinancing and the current market

Whether you choose to refinance or not, may also depend on the current economic climate. As the economy changes, so will the mortgage rates. And though the state of the economy can be difficult to predict, experts like Fannie Mae and Mortgage Bankers Association say that rates will close out the year between 6-7%. If those numbers mean lower monthly payments, then this rate range might be the time to refinance. 

Your credit card interest rate is also tied to the economy. Many credit cards have annual variable interest rates that change based on a target interest rate set by the Federal Reserve. If the Federal Reserve sets a higher number, you will likely pay a higher interest rate for your credit card debt.  

Choosing to refinance could depend on the overall economic outlook. Experts predict that credit card interest rates may drop over the next year, but not by very much. If you find that your credit card payments are too high, then opting to convert that debt into a mortgage payment could be a sound choice for your financial future.  

Still, if the drop in rates isn’t sufficient enough to make your payments more manageable, then maybe now isn’t the best time for you to refinance.