How to Use a Home Mortgage Loan Option to Consolidate Debt

10.31.2024 | Category: Article

Homeowners are currently sitting on a significant amount of equity in their homes - an impressive $17.6 trillion in the second quarter of 2024 - according to CoreLogic. In fact, CoreLogic analysis shows U.S. homeowners with mortgages (roughly 62% of all properties*) have seen their equity increase by a total of $1.3 trillion since the second quarter of 2023, a gain of 8.0% year over year.

By tapping into the equity built in a home, borrowers can consolidate high-interest debt, fund large projects, or invest in their future—all while potentially securing a lower interest rate. Cash-out refinancing is one option that can be a practical financial solution for homeowners seeking to reduce debt and gain access to capital for significant expenses. 

Given the steady rise in home values, homeowners have more opportunities than ever to use their equity wisely and potentially improve both their financial position and quality of life. With so much untapped equity, now could be the perfect time for homeowners to explore ways to put it to work. 

Real-Life Ways to Use Cash-Out Refi

Paying Off Student Loans

For homeowners with student debt, cash-out refinancing offers an opportunity to combine student loan balances with their mortgage. By using equity to pay off loans, borrowers can reduce the number of monthly payments they juggle—and potentially benefit from a lower overall interest rate compared to unsecured student loans. This approach also makes it easier to manage personal finances with one consistent mortgage payment.

Remodeling or Renovating a Home

Thinking about updating the kitchen or adding more living space? Cash-out refinancing can provide the funds needed for home improvements, boosting the home’s value and enhancing your lifestyle. Home renovations can often increase property value, making this a smart investment for long-term homeowners.

Consolidating Credit Card Debt

Credit cards often come with high-interest rates, which can make it difficult to pay off balances. With cash-out refinancing, homeowners can eliminate multiple credit card payments by consolidating those debts into their mortgage. This simplifies monthly bills and offers the possibility of saving money on interest over time.

Building an Emergency Fund

Unexpected expenses—like medical bills or car repairs—can be stressful. A cash-out refinance allows homeowners to pull from their home’s equity to build an emergency savings fund, providing peace of mind during life’s uncertainties.

Things to Consider

While cash-out refinancing can be a powerful tool, it’s not without risks. Borrowers need to weigh the costs, including closing fees, and consider whether extending the term of their mortgage aligns with their financial goals. Additionally, using a home’s equity requires careful planning; borrowing too much can reduce long-term financial flexibility.

Is Cash-Out Refinancing Right for You?

If you have significant home equity and are looking to consolidate debt or finance important life goals, a cash-out refinance might be the right move. 

To determine if a cash-out refinance is the right fit, start by evaluating your personal finances. Take a close look at your monthly income, expenses, and any outstanding debts to ensure you can comfortably manage a new mortgage payment. Refinancing typically extends the loan term, so it’s important to confirm that the new payment aligns with your budget, even if you secure a lower interest rate.

Next, check your credit score, as it plays a crucial role in determining the interest rate and terms you'll qualify for. A higher credit score could mean better rates, making the refinance more beneficial. If your credit needs improvement, consider waiting a few months to boost your score by paying down debt or correcting any reporting errors.

Finally, assess your long-term financial goals. Are you hoping to eliminate high-interest debt, finance a renovation, or build a safety net for the future? Knowing how you’ll use the funds and setting clear priorities will help you stay on track and avoid unnecessary spending. Remember, a cash-out refi taps into your home equity, so it's essential to balance immediate needs with your future financial stability.

It’s important to consult with a mortgage advisor to evaluate all the details, including interest rates, fees, and potential risks, before moving forward. Working with a trusted lender like Mutual of Omaha Mortgage ensures you’ll receive expert guidance tailored to your financial situation, helping you make informed decisions. Their team can walk you through every step of the process, from reviewing your equity to securing the best possible terms, so you can confidently move toward your financial goals.

Cash-out refinancing isn’t just about reducing debt—it’s about creating new financial opportunities. Whether it’s tackling student loans, remodeling your home, or getting rid of credit card debt, tapping into home equity provides a path toward greater financial freedom and peace of mind.