Should I Use Cash-Out Refinancing to Pay Off My Credit Cards?

April 7, 2021

The FHA Cash-Out refinance loan is a way homeowners can tap into the equity built up in their homes and take it out in cash once the original loan and the closing costs of the new loan have been dealt with. There are many uses for the money you get in a cash-out refinance transaction.

You can use an FHA cash-out refi to do home improvements with no restrictions on how the cash gets used; compare that option to the FHA Rehabilitation loan which allows a refinance and improvements but that renovation work must be lender-approved and be on the list of approved projects. Some borrowers want more freedom to remodel and take the cash-out option instead.

The money from your cash-out refinance can also be used to pay down student loans, go on vacation, supplement a college fund for a college-age student, etc. And yes, the money from an FHA cash-out refinance loan can also be used to pay off credit card debt.

But SHOULD you use cash-out refi money to pay off a credit card? The answer depends on your financial goals but when researching this you will find many mortgage blogs and finance blogs encouraging this. One popular real estate/mortgage blog writes, “For the right person, a cash-out refi can have huge benefits” which include, quote, “Using a 3.25% mortgage loan to pay off credit card debt with a 20% interest rate.”

What this blogger does NOT talk about is what happens when you use the money from a cash-out refinance to pay off a credit card and get yourself free of that debt, only to find yourself BACK in debt with the same credit card a year or two later. For this reason, paying off credit card debt with a home loan refinance is a VERY bad idea.

It SOUNDS like a good idea to eliminate your credit card debt with a cash-out loan. But human nature being what it is, if you can’t guarantee to yourself that the same credit cards WON’T get used in the same way after the loan, you haven’t helped yourself, you have only experienced a “bump in the road” where that credit card debt is concerned--the “bump” in this case being the temporarily paid-off credit card. The “road” of your debt before and after that payoff often lead to the same place--more debt.

In other words, don’t borrow money to pay off a creditor that you will only wind up owing MORE money to. Some read this advice and feel tempted to pay off and close a credit card to avoid the temptation to use it again. But closing your credit accounts can actually hurt your credit--the total age of your credit accounts is an important factor.

And even if you DO pay off that original credit card, you still run the risk of running up additional credit card debt on a different card. Paying off revolving debt with a home loan is in general not as helpful for borrowers as getting rid of a different kind of debt (if you must) with a cash-out refinance.

The short answer to the question posed by this article is, if you must pay off debt with a cash-out refinance loan, find debt to get rid of that is not likely to recur later on. Knocking down your student loans with the same money might be a more effective use of the funds from a cash-out loan if you need to reduce the amount of debt you carry.

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