Refinance to Pay Off Debt? Here Is the Math Before the Pitch

Sometimes. It is a good idea when the total monthly relief is large, you would keep the house for years anyway, the new mortgage is at least as good as the old one, and the cards stay closed or empty afterward. It is a bad idea when your current mortgage is far better than today's market, when the debt is small enough to clear another way, or when the spending that built the balance has not changed. Art tells you which one you are, in writing.

Because the risk is real and one-directional: you convert debt you could walk away from into debt that can take your house, and you stretch a two-year problem over a thirty-year loan. The warnings are right for the person who does it without a plan. They are wrong for the person with a stable income, real equity and a payoff discipline, for whom the monthly relief is the difference between sinking and stable.

A balance-transfer card with a promotional period, if you can clear the balance before it ends and the transfer fee is worth it. A personal loan, unsecured, at a shorter term. A debt management plan through a nonprofit credit counseling agency, which negotiates with your card issuers. Or a call to each issuer asking for a lower rate on a long, on-time history. Art will say so when one of these beats the refinance.

Usually helps within a cycle or two, because cards paid to zero lower your utilization, which is one of the largest factors in the score. The new inquiry and the new account are small dips. What hurts is running the cards back up, or a late payment on the bigger mortgage, which weighs more than a late card payment ever did.

A car with years left and a high payment, maybe; a car with a few payments left, no, because you would pay interest for decades on money that was almost free. Student loans are a special case: one conventional program has a cash-out version built to pay student loans directly through closing with better pricing than standard cash-out, but you give up any federal protections on those loans forever. Art runs it both ways.

Start with your current mortgage. If it is far better than anything available today, do not replace it; a home equity loan or a HELOC sits behind it and leaves it alone. If your current loan is ordinary or worse, a cash-out refinance can improve the first loan and pay the debt in one move. A home equity loan is fixed and predictable; a HELOC is flexible and variable. Art puts all three side by side in dollars.

Closing costs commonly run 2 to 6 percent of the loan amount: appraisal, title, escrow, recording, lender fees and prepaid taxes and insurance. On $340,000 that is $6,800 to $20,400. You can pay them at closing or add them to the loan, and either way they are part of the math. Your Loan Estimate shows the exact figure before you commit to anything.

Usually much cheaper and faster, because the first mortgage is untouched and the loan is smaller. The trade is a variable payment on most lines, a draw period followed by a repayment period, and a second lien that has to be paid or subordinated if you refinance the first loan later. For a defined, one-time payoff, a fixed home equity loan often beats both.

Yes, both have cash-out programs. FHA cash-out is generally capped at 80 percent of value with its own mortgage insurance; VA cash-out can go higher for eligible veterans and has its own funding fee. Which one is cheapest depends on your equity, your credit and whether you already have one of them. Art compares all three before recommending.

Fewer lenders offer it and the ceilings are lower, but yes. Cash-out on an investment property is also available with lower loan-to-value limits than a home you live in. The rental income counts with the lease and the tax returns.

Up to the program's share of the appraised value, minus what you owe. On a home you live in, conventional and FHA cash-out are commonly capped at 80 percent of value; VA allows more. In the example above, 80 percent of $500,000 is $400,000, minus the $300,000 balance leaves room for the $40,000 payoff and the costs. Your income and credit then decide whether the payment fits.

Often not, and this is the part people miss. When the cards are paid through closing, the underwriter removes those payments from your ratio, so the file is judged on the new mortgage payment alone. A borrower who fails on today's numbers can pass on the after-payoff numbers. The payoff has to happen through escrow for that to count.

Conventional cash-out generally requires at least six months on title, with no wait for a home you inherited or were awarded in a divorce, and the mortgage being paid off has to be at least 12 months old. FHA has its own occupancy and payment-history requirements. If you bought recently with cash, a delayed-financing rule may let you pull your own money back out sooner. Art checks the dates before the appraisal is ordered.

You can take cash on a cash-out refinance; the loan does not care where it goes. But if you need the payments removed from your ratio to qualify, they have to be paid through escrow with the statements in the file. And in Art's experience, money that goes through escrow reaches the debt; money that lands in checking sometimes does not.

High balances alone are fixable, and paying them through escrow fixes them. Late payments on the mortgage are the harder problem, because cash-out programs want a clean housing history. FHA is more forgiving on scores than conventional. Bring the report and Art tells you which door is open, and when the closed ones open.

Yes; that is what a divorce buyout is. With a signed decree or settlement that states the amount, most programs treat it as a rate-and-term refinance rather than cash-out, which is priced better and allows a larger loan relative to the value. Your ex signs the deed at closing, not before. The divorce guide on this site covers every step.

Yes, once the deed is in the heirs' names and all of you have signed an agreement that says who keeps the house and what each share is worth. The refinance pays the siblings at one closing, usually with no ownership waiting period. The inherited-home guide walks the paperwork, including what to do while probate is still open.

Yes. If their loan was recorded against the house it is paid off through escrow like any lien and the file needs the note and a payoff letter. If it was never recorded, paying them is cash-out and the underwriter wants a written explanation of what the money was for. Either way the money goes through closing, so both of you have the record.

Yes, as a cash-out refinance on an investment property, with the lower ceilings that come with it, or on some programs as a co-owner buyout with a written agreement. The partner signs the deed at closing against payment through escrow. If the property is held in an LLC, title usually has to move to you personally before a conventional loan will close.

For an ex or an estate, yes, and you already have one. For a partner or a relative, a short written agreement drawn up by an attorney costs far less than the argument it prevents, and the lender will ask for it anyway. Art does not pay for or receive attorney referrals.

Under current federal law, interest on the part of a home loan used for something other than buying, building or substantially improving the home is generally not deductible, and that includes paying off cards or a person. Ask your tax preparer; Art is not one and says so. Nevada has no state income tax, so there is no state side to the question.

That is the risk the whole page is about. A missed card payment costs you your credit; a missed mortgage payment can cost you the house. Which is why Art sizes the new payment against your income with room to spare, and why he says no when the numbers only work if nothing goes wrong. The hardship guide on this site covers the options if trouble comes anyway.

A cash-out refinance closes in the usual 30 to 45 days, and on a home you live in there is a three-day waiting period after signing before the money moves. A HELOC or home equity loan is often faster. The debt statements and payoff letters are the part that slows people down, so gather them first.

Not automatically. The lender may require some accounts to be closed as a condition when the file is tight; otherwise they stay open at zero. Open cards at zero help your score; open cards that fill back up are how this goes wrong. Decide what you will do with them before closing, not after.

Sometimes. If your current mortgage is far better than today's market, waiting or using a second loan beats replacing it. If the card interest is bleeding you every month, waiting has a cost too, and it is usually larger than people think. Art puts the cost of waiting next to the cost of acting, in dollars, and never quotes a rate on a page.

Usually, yes, compared with a rate-and-term refinance of the same amount: cash-out carries pricing adjustments on most programs, and they rise with the share of the value you borrow. That is why a buyout with a signed agreement, which some programs treat as rate-and-term, and a HELOC that leaves the first loan alone both deserve a look before a full cash-out. Art shows you all three before you choose.