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If you’re trying to pay down debt and you own a home, you may be wondering whether it makes sense to use a cash-out refinance to pay off debt.

There are pros and cons to going this route, and it’s important to understand how the process works to help decide if it’s the right option for you.

Read on to find out how to use a cash-out refinance to pay off debt, the costs involved, the benefits and drawbacks, and other options for repaying debt you owe.

Using a Cash-Out Refi to Pay Off Debt

In mid 2023, household debt (not including mortgages) in the U.S. exceeded $4.7 trillion dollars, according to a report released by the Federal Reserve Bank of New York. It’s no wonder then that individuals are looking for ways to get out from under the debt they owe.

A cash-out refinance for debt consolidation allows you to use the equity in your home to pay off debt by taking on a new mortgage. The new mortgage pays off your old mortgage and it comes with new terms, including a new interest rate that’s potentially lower, and length of time to repay the loan. The new mortgage terms may be better than your original mortgage, but it’s also possible they may not be as favorable.

Here’s a quick course in cash-out refinancing 101 and how it works:

Determine How Much Cash You Need

When you’re considering a cash-out refinance to pay off debt, first figure out how much money you’ll need. To do this, add up all the debts you want to pay off. Include things like credit card and personal loan debt and medical bills.

Determine How Much You Can Borrow

The amount you can borrow with a cash-out refinance depends on how much equity you have in your home. Equity is how much your home is worth compared to how much you owe. Typically, you can borrow up to 80% of your home’s market value.

Here’s an example of how cash-out refinancing works: Let’s say your home is worth $500,000 and you owe $300,000 on your current mortgage. That means your home equity is $200,000. With a cash-out refinance loan, a lender might let you borrow up to 80% of your equity (as long as you qualify for that amount), which is $400,000.

You’ll need to use that $400,000 to pay off the $300,000 you owe on your mortgage and also closing costs. That leaves you with about $100,000 in a cash out refinance for debt consolidation.

Prepare Your Cash-Out Refinance Application

Your cash-out refinance application is much like the mortgage application you filled out when you bought your house. Lenders will look at and evaluate such factors as your:

•   Credit score: Many lenders look for a minimum credit score of 620 for a cash-out refinance

•   Debt-to-income (DTI) Ratio: DTI compares your monthly debts to your gross monthly income. In order to qualify for a cash-out refinance, lenders typically look for a DTI of less than 50%.

•   Home equity: As mentioned above, you’ll likely need at least 80% equity in your home.

You may need to provide the lender with documents such as bank statements and W-2s.


💡 Quick Tip: Thinking of using a mortgage broker? That person will try to help you save money by finding the best loan offers you are eligible for. But if you deal directly with an online mortgage lender, you won’t have to pay a mortgage broker’s commission, which is usually based on the mortgage amount.

Complete the Closing and Pay Closing Costs

If the cost to refinance a mortgage makes sense for you, and you qualify with a lender, you’ll pay closing costs to cover such fees as credit reports and appraisals. Closing costs may be wrapped into the refinanced loan amount. After you close on the loan you’ll receive your funds.

If You’re Consolidating Debts, Let The Lender Know

It’s possible that your debts may be high enough to preclude you from qualifying for a cash-out refinance. However, if the lender knows you’ll be consolidating debts, they can include those debts in your loan amount for consolidation.

That way you’ll be paying off the debts in one payment with the new interest rate (ideally, a lower one) you received with your cash-out refinance.

Benefits of Cash-Out Refinancing to Pay Off Debt

When you consolidate debts with a cash-out refi, you have just one monthly payment to make. That’s usually more manageable than trying to pay multiple bills all at once.

There are other potential benefits as well.

Consolidating Debts Can Lead to Savings

High-interest debt can be difficult to pay back. Credit card APRs can reach 29.99% or higher, which adds to the amount you need to pay each month. When you consolidate debt with a cash-out refinance, you may save money on interest costs.

Cash-Out Refinancing Can Pay Debts Quickly

When you take out a cash-out refi to tackle the debt you owe, you may be able to pay off certain debts faster than you would have otherwise. You’ll likely be paying less in interest, which could allow you to put more money toward the debt balance.

Impact On Credit Score

Paying off high-interest debts with a cash-out refi could lower your credit utilization rate, which is the amount of credit you’re using. Credit utilization is an important factor in your credit score.

Should You Use a Cash-Out Refinance to Pay Off Credit Card Debt?

Interest rates on credit cards are typically high, and can be more than 30%. The interest rate on a mortgage tends to be much lower. If you can get a lower interest rate to repay your debt, a cash-out refinance could be worth it. However, if you choose this method, be careful to avoid overspending and running up credit card debt again. Changing your spending habits can be critical to staying out of debt.

Drawbacks of Using a Cash-Out Refinance to Pay Off Debt

A cash-out refinance also has some significant disadvantages to consider. These include:

Increased Monthly Mortgage Payment

When you take out a bigger loan amount, you may also end up with a higher monthly mortgage payment. You’ll be responsible for paying that higher amount each month.

Turning Unsecured Debt Into Secured Debt

Another factor to consider is that if you can’t pay back everything you borrow with a cash-out refinance, you could be in danger of losing your home. That’s because a mortgage is secured debt, and your home is collateral for the loan. While that’s true with any mortgage, with a cash-out refinance you are likely borrowing even more money since you’re using the extra cash to tackle debt, which means there’s more for you to repay.

Closing Costs

When you refinance a mortgage, including a cash-out refinance, you need to pay closing costs. These costs can be around $5,000 according to Freddie Mac. However, the size of your loan and where you live can affect how much your closing costs may be.

Cash-Out Refinance vs. Debt Consolidation

With a cash-out refinance, you take out a new mortgage to repay your old mortgage and also get cash you can use for a variety of purposes, including paying debt. With debt consolidation, you combine all your debts into one loan. A debt consolidation loan is not secured by your home; a cash-out refinance loan is.


💡 Quick Tip: Because a cash-out refi is a refinance, you’ll be dealing with one loan payment per month. Other ways of leveraging home equity (such as a home equity loan) require a second mortgage.

Alternatives to Cash-Out Refinance Loans

A cash-out refi isn’t your only option for paying off debt. Here are some other methods to consider.

Home Equity Line of Credit (HELOC)

A home equity line of credit is secured by the equity in your house. It’s similar to a line of credit, so you borrow just what you need when you need it, and you only pay interest on what you borrow. However, if you don’t pay off a HELOC you may be in danger of foreclosure.

Home Equity Loan

With a home equity loan, you receive a lump sum of money and make regular fixed payments. Interest rates tend to be higher than they are for a cash-out refinance, and you will need to pay closing costs.

Personal Loan

A personal loan is an unsecured loan that you can use for almost any purpose, including debt consolidation. These loans generally come with higher interest rates than a cash-out refinance, HELOC, or home equity loan. They also have a shorter term, which means you’ll need to make higher monthly payments. But that also means the loan will be paid off sooner.

Balance Transfer Credit Card

A balance transfer credit card typically offers a 0% introductory rate for a number of months (up to about 21 months) on debt you transfer from another source, which is usually another credit card. There is a balance transfer fee of around 3%, but you won’t won’t owe interest on the balance you transfer. If you have a lower debt amount that you can pay off in a relatively short amount of time, this option might make sense. However, to qualify for the 0% rate, you’ll typically need a strong credit score.

The Takeaway

If you need to pay off high-interest debt and you have sufficient equity in your home, a cash-out refinance can be an option worth exploring. It can give you a lower interest rate, as long as you qualify, which could help you save money. However, keep in mind that you will need to pay closing costs when refinancing, and the terms of the loan, including the length of the loan, will change.

Turn your home equity into cash with a cash-out refi. Pay down high-interest debt, or increase your home’s value with a remodel. Get your rate in a matter of minutes, without affecting your credit score.*

Our Mortgage Loan Officers are ready to guide you through the cash-out refinance process step by step.

FAQ

Can I use a cash-out refinance to pay off both secured and unsecured debts?

Yes. A cash-out refinance can be used to pay off a variety of debts, including secured debts as well as unsecured debts, like credit cards.

Are there any tax implications of using a cash-out refinance for debt repayment?

If you use a cash-out refinance for debt repayment, you won’t owe taxes on the money you receive from the cash-out refi. That’s because the money is considered a loan that needs to be paid back, and not income. At the same time, per IRS guidelines, you typically can’t deduct the interest on a cash-out refinance if you use the money to pay off debt.

What factors should I consider when deciding whether to use a cash-out refinance for debt repayment?

If you have high-interest credit card debt, and you can get a lower interest rate to repay your debt with a cash-out refinance, it may be worth it for you. But first make sure you can change your spending habits to avoid overspending and running up credit card debt all over again.

Also, consider the fact that your monthly mortgage payment will likely be higher with a cash-out refinance. Can you afford that higher amount? And you’ll also have to pay closing costs. Calculate to be sure that the amount of cash you’ll get from the cash-out refi is sufficiently more than what you’ll spend on closing costs.

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Photo credit: iStock/fizkes

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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How long you should keep bank statements will depend on several factors, such as whether you need them for tax filing purposes or as proof of financial transactions.

Typically, it’s best to keep them until you’ve successfully filed your taxes or no longer need them as a form of financial proof. That could mean hanging onto them for a year or considerably longer, though keep in mind it is often possible to access bank statements online vs. keeping a paper copy.

Here, you’ll learn more about:

•  What is in a bank statement

•  How long you should keep bank statements

•  Why you should keep bank statements

•  What you should do with older bank statements.

What’s in a Bank Statement?

A bank statement is a document created by your bank that shows you details about your banking activity — such as for a savings or checking account — for a specific account over a specified period of time, like a month.

Information you’ll find on your bank statement can help you manage your bank account and may include:

•  The reporting or length of your statement period

•  Personal details such as your name and bank account number or type

•  The interest rates, or annual percentage rate (APY), you earn for that particular account

•  The amount of interest earned

•  Any fees you may have paid during the reporting period

•  Deposits, withdrawals, and other transfers (including the amounts) during the reporting period

•  Ending balance at the end of the reporting period.

The purpose of a bank statement is to help you understand exactly what is happening with your bank account and keep track of what is going in and coming out.

How Do You Receive Bank Statements?

You can receive paper or electronic bank statements.

With paper bank statements, your financial institution will mail you a copy each month, or you can head to your local branch (if you have the option) and request one. Electronic statements are either sent via email or secure messaging.

Or you can log into your online account and look at or download a copy for your files.

Recommended: What Is a Debit Card?

Benefits of Keeping Bank Statements

The main benefit of keeping bank statements is that you have a record of any income, deductions, or other forms of transactions ready for tax time or when applying for a loan. It’s also helpful for you to track your banking activity to help spot any potential fraud. How long do you keep bank statements? Typically, at least a year or until tax time.

Here, more specifics about why doing so is a good idea.

Refer to Them at Tax Time

You want to be sure you have accurate numbers when it comes to filing your taxes, and having bank statements makes it easier to do your calculations. It can be especially helpful if you’re self-employed and are reporting income and business expenses.

Though you may not need to hang onto your bank statements after 12 months, it may make sense to hold onto them for three years (or even up to seven) in case you get audited or need information so you can file an amended tax return. In fact, there are IRS guidelines on how long you should hang onto your bank statements depending on your financial and tax scenario.

Provide Proof of Payment

You can use your bank statements to track any payments you’ve made in case there are any issues. For example, if your lender believes you missed your monthly mortgage payment, you can provide them with a copy of your bank statement to show the transaction went through.

Or, if you’re unsure whether your employer paid out your semi-annual bonus, you can look at your bank statement to make sure they did. If not, you can show this documentation when you contact your payroll department.

Some lenders for various loan applications may also want to take a look at your bank statements for proof of income purposes.

How long should your bank statements be kept for this specific reason is up to you. Keep in mind that banks are only legally required to keep them on record for at least five years. If you want to hang onto them for longer, it’s best to download or save a copy for your own records.

Spot Fraud or Identity Theft

If you’re concerned about fraudulent transactions or just want to keep an eye on your bank account, regularly reviewing your bank statements gives you insights into your account. It can help you spot any suspicious activity. The sooner you can see these types of transactions, the sooner you can report them to your bank and get matters resolved.

Recommended: How Many Bank Accounts Should You Have?

Where to Keep Bank Statements

It may seem like it’s not necessary to keep your own copies of statements since your bank is legally required to keep them for at least five years. However, it may make sense to have your own copies in case you need them quickly or you want to be able to access them whenever you want. As mentioned above, how many years of bank statements you keep is up to you, but at least a year’s worth can be a wise move.

Paper Bank Statements

You’ll need to find physical space if you want to store paper statements. Depending on how many you have, you can use a small filing folder or filing cabinet. Consider separating them by the type — such as a personal savings account vs. checking account statements — and year.

To help make papers easier to find, file your statements in chronological order.

Electronic Bank Statements

Electronic statements don’t require as much physical space, which can be an advantage of online banking, but you will need a device to house them. Yes, you can simply store them on your computer or laptop’s hard drive, but it may be worth considering having a backup just in case your computer crashes or gets lost. You can purchase portable hard drives; there are many affordable options out there.

Otherwise, you could consider storing statements on one device and also confirming with the bank how long it keeps bank statements as a backup plan. You can then download bank statements as needed for as long as the bank still has them on file.

What to Do With Older Bank Statements

If you no longer need your bank statements, you’ll want to dispose of them safely and securely. That’s because they contain sensitive information that you don’t want going into the wrong hands.

Shredding Your Documents

You can shred your documents to protect your sensitive information by either purchasing your own shredder or heading to your local office supply store and paying for professional shredding. (Some communities may offer free paper shredding days at credit unions and local organizations, often around tax time.)

Completely Delete Electronic Copies

If you have electronic copies, make sure to delete them from your computer and any backup sources. Check your computer’s recycle bin or other folders to ensure they’re completely wiped from your device.

The Takeaway

Keeping bank statements is an important part of your overall financial health. It can help you with tasks such as accurately filing tax returns and providing proof of payment. Whether you keep hard copies or electronic statements securely, they can enhance your personal finance management.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

How many months’ worth of bank statements do you need to keep?

It’s generally recommended that you hold onto your bank statements for 12 months or longer if you need them for auditing purposes.

Is it OK to throw away old bank statements?

You can get rid of old bank statements that you no longer need. However, you want to dispose of them securely (often by shredding them) since they contain sensitive information.

Do banks destroy records after 7 years?

Banks are legally required to keep records for at least five years, and they may not hang onto them for seven years. If you’re unsure, contact your bank to find out if you would have access to your statements after seven years.

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Photo credit: iStock/fizkes

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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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