Cash-out refinance vs. paying off a credit card
Rolling a 27% credit card into a mortgage lowers the rate on that debt. It can also stretch the debt over decades and put your home behind it. Enter your numbers to see what each path costs in total.
What each path costs in total
On these numbers the lowest interest and costs are in “Keep the mortgage, pay the card” ($211,073) and the highest are in “Cash-out refinance, pay the new payment” ($472,539). That is arithmetic on the inputs, not advice about what to do.
| Keep the mortgage, pay the card | Cash-out refinance, pay the new payment | Cash-out refinance, keep paying the same total | |
|---|---|---|---|
| Monthly payments | $2,155.00 | $2,187.61 | $2,187.61 |
| Debt-free after | 25.0 years | 30.0 years | 30.0 years |
| Total paid | $526,073 | $787,539 | $787,539 |
| Interest and closing costs | $211,073 | $472,539 | $472,539 |
- Keep the mortgage, pay the card. Nothing changes. You keep the mortgage as it is and keep paying the card the same amount each month.
- Cash-out refinance, pay the new payment. The card balance is rolled into a new mortgage. You pay only the required mortgage payment from then on.
- Cash-out refinance, keep paying the same total. The card balance is rolled into a new mortgage, and you keep spending what you spend today on the mortgage and the card combined. Anything above the required payment goes to mortgage principal.
Totals are every dollar paid until both debts are gone, minus the $315,000 owed today. They are not adjusted for the time value of money or taxes.
What to check on your numbers
- The card charges about $337.50 in interest this month at 27%. Of your $487.50 payment, $337.50 is interest and the rest reduces the balance.
- The new rate is higher than your current mortgage rate. Moving your existing $300,000 from 4.5% to 7.24% adds about $499 a month on its own, before the card balance is counted. The higher rate applies to your whole balance, not just the card debt, which is often what makes a cash-out refinance cost more in total than leaving a low-rate mortgage alone.
- Paid on its own at $487.50 a month, the card balance is gone in about 4.4 years. Rolled into the new mortgage and paid at the required payment, the same balance is repaid over 30 years.
- The new loan would be $321,000, or 71% of a $450,000 home. Lenders commonly limit how much of a home's value a cash-out refinance can reach, often around 80%, so confirm the limit with any lender you talk to.
- Credit card debt is unsecured. A mortgage is secured by your home, so if payments are missed the lender can foreclose. Rolling a card into a mortgage moves that debt behind your house.
- Your current combined payments are lower than the new required payment, so the third column matches the second.
- Closing costs on a refinance commonly run a few percent of the loan. Get a Loan Estimate from each lender and use the real figure.
How to work this out yourself
You need no special tool. A spreadsheet will do, and each step below uses the numbers you entered.
- Interest the card charges each month is balance × APR ÷ 12. $15,000 × 27% ÷ 12 = $337.50 If your payment is no larger than this, the balance does not go down.
- How long the card takes to pay off at a fixed payment. In a spreadsheet: =NPER(27%/12, -487.5, 15000) At $487.50 a month your card alone takes about 4.4 years.
- The new loan is your mortgage balance plus the card balance, plus closing costs if you roll them in: $300,000 + $15,000 + $6,000 = $321,000
- The new monthly payment comes from the standard loan formula, with r as the monthly rate and n as the number of months: M = L × r ÷ (1 − (1 + r)^−n) =PMT(7.24%/12, 360, -321000) → $2,187.61
- Total cost of a path is the monthly payment × the number of payments (plus closing costs you pay in cash). Subtract what you owe today to see the interest and costs. $2,187.61 × 360 = $787,539
- Compare with the do-nothing path by doing the same for the mortgage you have now and the card, then adding the two. If you would keep spending the same total each month after refinancing, the extra over the required payment shortens the new loan, which is the third column.
Other options, such as a balance transfer, a personal loan, a home equity line, or a repayment plan with the card issuer, have their own rates, fees, and risks. They are not modeled here.