House-rich, cash-poor homeowners are tapping their record-high equity to cut their debts

She had one recent client with a home in Northern New Jersey who used his home equity to pay off $155,000 of consumer debt. Though he gave up a 3.125% mortgage rate to do so, he ultimately ended up paying $2,500 less each month overall.

John Cola Jr. and his husband didn’t have to give up an ultra-low mortgage rate when they refinanced the mortgage on their home earlier this year — they had already gone from a 2.3% rate to a 6.9% rate when they moved from Florida to Connecticut in 2023. After “watching interest rates like a hawk,” they refinanced when mortgage rates briefly dropped in April, pulling some cash from the home to reduce credit card debt with 24% interest they had accrued from a series of unexpected home repairs, and lowering their mortgage rate to 5.8%.

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“Things broke, and we racked up quite a bit of debt,” said Cola Jr., 36. But thanks to Connecticut’s hot housing market, their home outside of Hartford had appreciated around $150,000 in just two years. Even after taking out cash, their monthly mortgage payment fell by around $200.

“We were able to get a jump-start to pay some other stuff off,” he said.

It’s a similar story for most cash-out refinancers. Between 2014 and 2021, homeowners who pulled cash from their homes dropped their credit card debt by an average of $4,500 and saw their auto loan debt decline by almost $3,000 in the months immediately following their transactions, according to a Consumer Financial Protection Bureau study released in January. Their credit scores got an immediate boost too.

There are other methods of pulling cash out of a home, and mortgage brokers say many of those are popular right now as well. Home equity lines of credit, which are revolving loans that work similarly to credit cards, are one such option. Another is a home equity loan. Both preserve a homeowner’s current mortgage rate, but are considered forms of second mortgages and carry higher interest rates because they’re higher risk. Average HELOC and home equity loan rates hover in the 8% to 9% range today — still far lower than credit card rates but higher than a first mortgage.

No matter which option a homeowner chooses, many financial experts advise caution around using a home for debt consolidation. While cashing out can help cut monthly debt payments and free up cash, they also say it’s important for borrowers to address how they got into debt in the first place — and how they’ll avoid doing so again in the future.

The CFPB study found that many refinancers’ credit card balances crept up again in the year following a refinance, though they remained below pre-refi levels.

Rich Flanery, the broker-owner and financial planner at Peak Capital Mortgage in Estes Park, Colo., said he’s seen cases where people use their homes to help pay off debt, only to end up back in a hole a few years later. He tries to counsel prospective refinancers on their long-term goals and assess if tapping equity will help them get there.

“It’s not financially wise to use your house as an ATM that way and keep repeating it,” Flanery said. “You have to break that cycle.”

Claire Boston is a Senior Reporter for Yahoo Finance covering housing, mortgages, and home insurance.

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