The Refinance Conundrum

Is it counterintuitive to refinance to a higher rate to consolidate debt?

Some sobering statistics.

We are facing challenging times. Some sobering statistics in this high inflation economic environment.

1.13 Trillion in outstanding credit card debt in Q4 2023, up from 770 Billion in Q1 2021.

35% of US adults have more credit card debt than money saved in an emergency savings account.

56 Million US adults have outstanding credit card debt.

78% of Americans are living pay check to pay check.


One solution may be for homeowners to tap into their home equity to consolidate high rate credit card debt, reduce overall monthly payments, and create some much needed breathing room in the monthly budget.

Which option is better; a Home Equity product, which is a second mortgage, or a Cash Out refinance, which is a first mortgage?

Let’s dive in.



The HELOC – home equity line of credit is a revolving debt like a credit card. It is an interest only (I/O) repayment, and a variable rate repayment.

The benefit of I/O repayment is that it is a low monthly repayment, but in the same thread, the negative to that is you are only paying the interest. The balance will never decrease unless you proactively pay extra.

Like a credit card, you can pay the HELOC balance down, and then borrow from it again. Also similar to a credit card, the ‘utilization’ is factored into your credit score calculation. In layman’s terms that means if your HELOC line is $50,000 and you have borrowed the file $50,000, that is considered to be ‘maxed out’, and may impact your credit score negatively.

Out of the two second mortgage products, HELOCS and HELOANS, which we will cover next, HELOC may offer a better introductory rate. Some banks may offer ‘Prime Minus’ for a short period of time. As of today, the prime rate is 8.5%. What happens after that introductory period expires? The rate, and I/O payment, increases. The average HELOC rate across America is higher than the prime rate.

In our household, we have a HELOC set up for emergency purposes. However in this economic environment, we have had to utilize it to reduce high rate credit card debt. This is not tax deductible, but it certainly helps with our budget. If you are disciplined with your finances, and able to set a goal to pay down your HELOC balance, I find it to be a great solution, especially for short term, lower balance needs.


A Home Equity loan is a fixed rate repayment.

If you have a larger project, or difficulty budgeting, a HELOAN may be a great fit for you. A Home Equity loan is a fixed rate repayment. Terms range from 5 years to 30 years, with payments decreasing the longer you pay. What increases the longer you pay? Interest. HELOAN rates are generally higher than the introductory HELOC rates.

With a HELOAN you have a fixed rate, and a fixed repayment. You will know exactly what is due each month, and what the maturity date of the loan is.

A HELOAN impacts your credit scores as an installment loan. Compared to the 'maxed out' HELOC example, you do not have to worry about utilization with a HELOAN.

Debt Consolidation Refinance

Lastly, let’s chat about the first mortgage, cash out refinance, rate conundrum. Americans are sitting on more home equity than an other time in history. This is fabulous if your plan is to sell, take that equity and perhaps retire someplace warm where you can spend your days selling smoothies on the beach to supplement your income. Have I day dreamt about that? Maybe! For most folks, we are ‘house rich, cash poor’ and all that equity isn’t helping the every day American, except, what if it can?

Let's compare the Numbers

The conundrum is most people feel it is counterintuitive to refinance out of the historically low interest rates and double, or more, their rate with a refinance. For those with high rate debt, or payments and expenses exceeding their income, reviewing your refinance estimates and comparing a blended rate calculation may provide you an answer based on facts.

Below is a sample payment comparison analysis:

Mortgage $300,000 @ 3.5% (balance was $350,000 initially 30 year P&I - principal and interest - repayment) $1,571.66

Auto Loan $40,000 @ 6% (balance was $50,000, 7 year P&I) $730.43

Credit Card A $15,000 @ 25% repayment $437.50

Credit Card B $10,000 @ 29% repayment $512.50

Credit Card C $5,000 @ 12% repayment $300

For cash outlay monthly, this homeowner is spending $3,552.09 leaving them strapped, and instead of reducing credit card debts, the balances rise.

This sample homeowner should consider consolidating their debts ($300,000 + $40,000 + $15,000  + $10,000 + $5,000 = $370,000 plus their estimated Closing Costs $3,200 + their estimated Escrow Set Up and Prepaid Items $3,000).  

The Cash Out Refinance would be for a new loan of $376,200, and due to those rising values, they may not have to pay PMI – private mortgage insurance.

Rates move daily, and the estimate to follow is purely hypothetical. Contact me for your free refinance analysis. With that being said, for a sample client qualified at 7.25% via 30 year fixed, the new total Principal and Interest (P&I) repayment would be $2,566.35.

The refinance eliminates debt, frees up $985.74 per month, and allows the client to start improving credit scores. With New American Funding, we currently offer a 5 Year Refinance Pledge, which allows our existing clients to refinance with no duplicate lender fees, and as your Servicer a refinance is easy as we can simple roll over your existing escrow account.

Nicole's Expertise

Of course there is no crystal ball, and it is wrong when people say 'rates will drop by xx/xx/xxxx date'. It IS typical, and expected that rates fluctuate, and rates will drop at some point in the future.

Our sample homeowner will be in the best position possible with higher credit scores to take advantage of a refinance. My recommendation would be for that homeowner to consider placing that $985.74 savings delta first into the creation of a six month emergency fund buffer, and then perhaps paying additional to principal to get used to a higher repayment. When the rates drop, refinancing to a lower loan term is the ultimate win for your long term financial freedom.

I love sharing mortgage calculators, AKA amortization schedules, with my clients, and showing the savings when you opt for a lower mortgage loan term, or pay additional towards principal.

Nicole's Closing Advice

We help clients determine if a refinance makes sense with an up front, free, no credit check review. You will receive a a clear cost versus savings analysis, and it usually jumps right off the page if a refinance may make sense for you. Everything we review is confidential, as it should be. You can protect the integrity of your credit, and your stress level, by asking a mortgage professional for a review before you apply.

Many clients start with a HELOC to consolidate debt, make home improvements, and in an economic environment like this, find a cash out refinance to roll everything into one, lower, easy payment can be life changing. THAT is what makes me excited to help.

Lastly, a Financial Advisor is always a great expert to have in your corner. Seek their expert advice. Andy Joyce, of Bay State Financial, is a wealth of information.

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"Nicole is the consummate mortgage professional, and I’m thrilled to have her in my corner."

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