Using Home Equity to Consolidate Debt: Is Refinancing Right for You?
Explore how using home equity to consolidate debt could work for you. Weigh the pros and cons to find out what's right for you.
8 Min
Refinancing your mortgage in 2025 can be one of the smartest financial decisions you make this year—but only if you know when it’s the right time. The average rate for fixed-rate mortgages is expected to fluctuate throughout 2025, which can significantly impact the cost of refinancing and your overall repayment timeline. With mortgage rates expected to stabilize and possibly drop slightly (Fannie Mae predicts a decline to approximately 6.2% by the end of 2025), many homeowners are considering replacing their existing loans with more favorable options. Recent policy decisions by the Federal Reserve, including rate cuts and pauses, have significantly influenced the current mortgage rates and overall borrowing costs. Additionally, ongoing trends in the housing market are influencing homeowners' decisions to refinance in 2025.
Whether you’re hoping to lower your monthly payments, remove costly insurance premiums, or access your home’s equity, understanding these signs can help you make an informed decision about refinancing.
Mortgage markets are shifting in 2025, creating new opportunities for homeowners. Those who secured higher rates in previous years may now qualify for better financial terms. If you’ve been on the fence about refinancing, here’s why this year might be a great time to act. Take time to explore refinancing options with different mortgage lenders to find the best fit for your needs.
Mortgage rates have started to stabilize, with predictions for further reductions later this year. Many homeowners may now access lower rates than those locked in during the 2021–2023 rate surge. Mortgage lenders are offering competitive rates on new mortgages, especially for rate and term refinances.
Refinancing can help you reduce your monthly payments, shorten your loan term, or eliminate additional costs such as mortgage insurance. Lower interest rates are a primary reason many homeowners choose to refinance their mortgages.
If you’ve built equity in your home, refinancing can provide an opportunity to convert it into cash for debt consolidation, renovations, or even investments. Homeowners can refinance a mortgage to replace their existing loan with a new mortgage through refinancing.
Before you dive into mortgage refinancing, it’s crucial to get a clear picture of your current mortgage. Start by reviewing your loan documents to identify your current interest rate, monthly payment, and loan term. Knowing whether you have a fixed-rate mortgage or an adjustable-rate mortgage can make a big difference in your refinancing decision—fixed-rate loans offer stability, while adjustable rates may expose you to future payment increases.
Take a close look at your credit score as well. A stronger credit score can help you qualify for a lower interest rate, which means lower monthly payments and more money saved over the life of your loan. If you currently have an FHA loan, check if you’re paying private mortgage insurance (PMI) or other mortgage insurance premiums. Homeowners with at least 20% equity may be able to refinance into a conventional loan and eliminate these extra costs, freeing up more room in their monthly budget.
Understanding these details about your current mortgage will help you determine if refinancing is the right move and what kind of savings you can expect.
One of the clearest signs that refinancing is worth considering is the opportunity to secure a lower interest rate. Even a reduction of 0.5–1% in your mortgage rate can lead to significant savings over the life of your loan. Comparing your current loan's mortgage interest rate to today's mortgage rates is essential to determine potential savings.
Lower rates mean reduced monthly payments and less interest paid overall. Securing a lower mortgage rate can also reduce the total interest paid over the life of the loan. This also helps build equity faster if you continue paying the same amount.
Use online refinance calculators or consult a trusted mortgage broker to determine your potential savings. Refinancing can also help you pay down your loan principal more efficiently.
A higher credit score unlocks access to better financial opportunities, including improved refinancing terms. Reviewing your credit report and addressing any errors can help you qualify for more favorable refinancing options. If you previously had a low credit score, improving it can strengthen your financial position and open up additional refinancing opportunities. If your credit has strengthened since your original loan, you could benefit significantly.
Those with FHA loans may now qualify to refinance into a conventional loan, eliminating the lifetime mortgage insurance premiums FHA loans require.
Want to avoid common pitfalls while refinancing? Read our guide on 5 Mistakes to Avoid When Refinancing Your Home Loan.
If you’re carrying unnecessary costs like private mortgage insurance (PMI), refinancing can remove this burden.
Many FHA borrowers are required to carry mortgage insurance for the life of their loan unless they refinance. By comparing your existing mortgage terms to a new conventional loan, you can determine if you have enough home equity—typically at least 20%—to eliminate this cost.
PMI often adds hundreds of dollars to monthly payments. Removing it can free up funds for other financial priorities.
Refinancing can offer access to your home’s built-up equity through a cash-out refinance, allowing you to tap equity by refinancing into a larger loan and taking out a significant amount of cash. This is a popular way to fund key expenses like home renovations, college tuition, debt consolidation, or other expenses.
Compare different lenders to ensure favorable interest rates, but also account for associated fees, other expenses, and potential tax implications to confirm the move makes financial sense when deciding to tap equity through refinancing.
Need help deciding between refinancing options? Explore our guide on Cash-Out Refinance vs. HELOC.
Switching from a 30-year mortgage to a 15-year loan can significantly reduce the amount of interest you’ll pay overall.
Many homeowners choose a fixed-rate loan when refinancing to a shorter term, as it provides predictable payments and long-term financial stability. Although your monthly payment may increase slightly, you’ll own your home outright much sooner. This option is great for those nearing retirement or planning to sell their home within the next 10–15 years.
If your income has become more predictable (or increased), now might be a good time to refinance. A fixed-rate mortgage provides payment stability, while refinancing can also allow you to consolidate debt by rolling high-interest debts into your mortgage if you have enough equity. This can result in a single monthly mortgage payment that may be easier to manage.
Homeowners juggling multiple loan payments can simplify their finances by consolidating debt and replacing them with one monthly mortgage payment at a lower interest rate.
Sometimes, refinancing isn’t the only option. A mortgage recast offers an alternative for reducing monthly payments without securing a completely new loan.
A recast involves making a lump-sum payment toward your mortgage principal. Your lender recalculates your monthly payments based on the reduced balance while keeping your loan terms intact.
Mortgage recasting is significantly less expensive than refinancing, often costing only $200–$500, and it doesn’t require requalification. However, not all loans are eligible.
Curious if recasting is right for you? Learn more in our guide on Mortgage Recast vs. Refinance.
If you’re carrying high-interest debt—like credit card balances or personal loans—refinancing your mortgage could be a smart way to consolidate that debt and save money. By using a cash-out refinance, you can tap into your home’s equity to pay off high-interest debt, rolling it into a single, lower-interest monthly payment. This strategy can simplify your finances and reduce the total interest payments you make each month.
However, it’s important to weigh the potential benefits against the costs. Refinancing your mortgage comes with closing costs, and extending your loan term could mean paying more interest over time, even if your monthly payments are lower. Before moving forward, carefully assess your financial situation and long-term goals. Compare the savings from debt consolidation with other options, such as a personal loan or a balance transfer credit card, to ensure you’re making the best choice for your needs.
Debt consolidation through mortgage refinancing can be a powerful tool for reducing financial stress and achieving your financial goals—just make sure it aligns with your overall plan.
One of the most important steps in deciding whether refinancing makes sense is calculating your break-even point. This is the moment when your monthly savings from a new, lower monthly payment add up to cover the closing costs of your new loan. To find your break-even point, subtract your new monthly payment from your current monthly payment to determine your monthly savings. Then, divide your total closing costs by your monthly savings.
For example, if your closing costs are $4,800 and you save $200 each month, your break-even point is 24 months. If you plan to stay in your home longer than that, refinancing could lead to significant savings. Use a refinance calculator to estimate your new monthly payment and break-even point, and remember to factor in your credit score and current interest rates, as these can impact your potential savings.
Understanding your break-even point helps ensure that refinancing your mortgage is a financially sound decision that supports your long-term goals.
Refinancing your home loan involves several key steps, but with the right preparation, you can navigate the process smoothly and start saving money on your monthly payments. First, you’ll apply for a new loan, providing documentation about your income, assets, and credit history. Be prepared to pay closing costs, which typically range from 2% to 5% of your loan amount and may include origination fees, appraisal fees, and title insurance.
It’s wise to shop around and compare offers from multiple lenders to find the best mortgage refinance rates and terms. Working with a licensed real estate agent or mortgage broker can help you understand your options and negotiate the best deal. Before you sign, carefully review your new loan documents and ask questions about anything you don’t understand.
By exploring refinancing options and understanding the process, you can make informed decisions that align with your financial goals—whether that’s lowering your monthly payments, tapping into your home’s equity, or simply saving money over the life of your loan.
While refinancing can be a smart financial move, there are a few factors to consider before committing.
Refinance closing costs typically range from 2–5% of the loan balance. Calculate your break-even point (how long it takes for savings to outweigh these costs) before moving forward.
If you’re resetting a 30-year mortgage, be mindful of increasing your overall interest payments unless you plan to stay in the house long enough to reap long-term benefits.
Refinancing your mortgage in 2025 could lower your monthly payments, help you eliminate unnecessary costs, or give you cash to achieve your goals.
Are you ready to crunch some numbers and see how much you could save? Apply now and get expert refinance advice tailored to your situation.
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