Debt Consolidation Cash-Out Refi Breakeven Math: When Closing Costs Make Sense vs. Keeping High-Interest Debt

Cash-out refinance for debt consolidation sounds appealing: replace 18-22% credit card debt with 6-7% mortgage rates and save thousands in interest. But there’s a critical question most homeowners skip: How long does it take to recover closing costs through monthly savings?

I learned this lesson when I almost made a $9,200 mistake by doing cash-out refi without understanding breakeven timelines.

Here’s the complete breakeven math for debt consolidation through cash-out refinancing, including real scenarios and when it makes financial sense versus keeping high-interest debt or choosing alternatives.

Understanding Cash-Out Refi Closing Costs

Cash-out refinance closing costs typically range from $7,000 to $12,000 depending on loan amount, location, and lender. Here’s what you’re actually paying:

Typical closing cost breakdown (for $300K cash-out refi):

• Origination fee: $2,100-$3,000 (0.7-1% of loan)
• Appraisal: $500-$700
• Title insurance: $1,500-$2,500
• Title search and exam: $300-$500
• Survey: $400-$600
• Attorney fees: $800-$1,200
• Recording fees: $100-$300
• Credit report: $50-$100
• Flood certification: $20-$50
• Tax service fee: $75-$100
• Prepaid interest: $500-$1,000 (varies by closing date)
• Escrow setup: $1,000-$2,000 (property taxes + insurance)

Total estimated closing costs: $7,345-$11,050

For my $285,000 cash-out refi, closing costs were $8,400. That’s $8,400 I had to recover through debt consolidation interest savings before the refinance became profitable.

The Breakeven Formula for Debt Consolidation

The basic formula for cash-out refi debt consolidation breakeven:

Breakeven months = Total closing costs ÷ Monthly savings from debt consolidation

But calculating “monthly savings” requires understanding both interest savings AND monthly payment changes.

Step 1: Calculate current debt costs

• Total monthly debt payments = Sum of all debt minimum payments
• Annual interest = Sum of (each debt balance × interest rate)

Step 2: Calculate new mortgage costs

• Portion of new mortgage attributable to debt consolidation = Cash-out amount used for debt payoff
• Annual interest on debt portion = Debt payoff amount × cash-out refi rate
• Monthly payment increase = Change in mortgage payment after refi

Step 3: Calculate monthly net savings Monthly savings = (Old debt payments) - (Mortgage payment increase)

Step 4: Calculate breakeven timeline Breakeven months = Closing costs ÷ Monthly savings

Let me show you three real scenarios with different breakeven timelines.

Scenario 1: Fast Breakeven (12 Months) - High-Interest Debt

Debt profile:

• Credit card 1: $22,000 at 22.99% → $495/month minimum
• Credit card 2: $18,000 at 20.49% → $405/month minimum
• Auto loan: $15,000 at 8.9% → $310/month minimum
• Total debt: $55,000
• Monthly payments: $1,210
• Annual interest: $9,680

Home situation:

• Home value: $420,000
• Current mortgage: $290,000 at 5.75%
• Current payment: $1,693/month
• Equity: $130,000 (31%)

Cash-out refi at 80% LTV:

• New loan: $336,000
• Cash out: $46,000 (after closing costs)
• Rate: 6.875%
• New payment: $2,212/month
• Closing costs: $8,600

Wait—cash-out only provides $46K, but debt is $55K. Options:

1. Pay off highest-interest debt only with $46K
2. Use $9K from savings to pay off all debt

I chose option 1: pay off credit cards ($40K) and use remaining $6K toward auto loan.

Debt after cash-out refi:

• Credit cards: $0
• Auto loan: $9,000 at 8.9% → $185/month

Monthly savings calculation:

• Old payments: $1,210/month
• New mortgage increase: $2,212 - $1,693 = $519/month
• Remaining auto payment: $185/month
• Net monthly savings: $1,210 - $519 - $185 = $506/month

Breakeven timeline: $8,600 ÷ $506 = 17 months

But that’s only looking at monthly cash flow. The interest savings tell a more complete story:

Interest comparison:

• Old debt annual interest: $9,680
• New mortgage interest on $46K at 6.875%: $3,163
• Remaining auto loan interest: $800/year
• Annual interest savings: $9,680 - $3,163 - $800 = $5,717/year

True breakeven (interest savings): $8,600 ÷ $5,717 per year = 18 months

This is a clear winner. Breaking even in 18 months means any period longer than that generates pure savings. Over 5 years, I’d save $28,585 - $8,600 = $19,985 net benefit.

Scenario 2: Moderate Breakeven (24 Months) - Mixed Debt

Debt profile:

• Credit cards: $28,000 at 18.5% avg → $630/month
• Personal loan: $12,000 at 11.9% → $270/month
• Auto loan: $18,000 at 6.9% → $355/month
• Total debt: $58,000
• Monthly payments: $1,255
• Annual interest: $7,780

Cash-out refi (similar home situation):

• Cash out: $58,000
• Rate: 6.75%
• Mortgage payment increase: $385/month
• Closing costs: $9,100

Monthly savings calculation:

• Old payments: $1,255/month
• Mortgage increase: $385/month
• Net savings: $870/month

Breakeven: $9,100 ÷ $870 = 10.5 months

Wait—that seems fast. Let’s check the interest savings:

Interest comparison:

• Old debt annual interest: $7,780
• New mortgage interest on $58K at 6.75%: $3,915
• Annual interest savings: $3,865

True breakeven: $9,100 ÷ $3,865 = 28 months

There’s a discrepancy between cash flow breakeven (10.5 months) and interest savings breakeven (28 months). This happens because you’re extending debt payoff from 3-5 years to 30 years through the mortgage.

The cash flow improves immediately, but true interest savings take longer to materialize. If you’re staying in the home 3+ years, this still makes sense.

Scenario 3: Long Breakeven (36+ Months) - Lower-Interest Debt

Debt profile:

• Credit cards: $15,000 at 16.9% → $338/month
• Auto loan: $24,000 at 5.9% → $465/month
• Student loan: $18,000 at 6.5% → $200/month
• Total debt: $57,000
• Monthly payments: $1,003
• Annual interest: $4,445

Cash-out refi:

• Cash out: $57,000
• Rate: 6.875%
• Mortgage payment increase: $377/month
• Closing costs: $9,400

Monthly savings:

• Old payments: $1,003/month
• Mortgage increase: $377/month
• Net savings: $626/month

Breakeven: $9,400 ÷ $626 = 15 months

But check the interest savings:

Interest comparison:

• Old debt annual interest: $4,445
• New mortgage interest on $57K at 6.875%: $3,919
• Annual interest savings: $526

True interest breakeven: $9,400 ÷ $526 = 18 years!

This is a BAD debt consolidation candidate. While monthly cash flow improves by $626, you’re barely saving any interest—in fact, over 30 years, you’ll pay MORE total interest by consolidating lower-rate debt into a mortgage.

Alternative: Don’t consolidate low-interest debt. Only use cash-out refi for the $15K credit card at 16.9%. Leave the 5.9% auto loan and 6.5% student loan alone.

When Cash-Out Refi Debt Consolidation Makes Sense

Based on breakeven analysis, cash-out refi makes financial sense when:

1. Breakeven is under 24 months

• You recover closing costs within 2 years
• High-interest debt (18%+) consolidation typically hits this threshold
• Calculate: closing costs ÷ monthly savings < 24

2. You’re staying in the home 3+ years

• Even 24-30 month breakeven works if you’re staying 5+ years
• Selling before breakeven means you lose money on the transaction
• Moving timeline matters more than the breakeven itself

3. Interest rate differential exceeds 10%

• Credit cards at 20% consolidating to mortgage at 6.5% = 13.5% differential
• This creates meaningful interest savings beyond cash flow improvement
• Auto loans at 6% consolidating to mortgage at 6.5% = negative differential (don’t consolidate)

4. Monthly cash flow improvement exceeds $500

• Meaningful budget relief for financial stability
• Helps rebuild emergency funds faster
• Creates breathing room for other financial goals

5. You plan to aggressively pay down the debt portion of the mortgage

• Commit to paying extra $300-500/month toward principal
• This prevents extending short-term debt into 30-year obligation
• Combine cash flow savings with accelerated payoff for maximum benefit

When to Skip Cash-Out Refi and Keep High-Interest Debt

Counterintuitively, sometimes it’s better to NOT consolidate debt through cash-out refinancing:

Skip cash-out refi if:

1. Breakeven exceeds 36 months - Too long to recover closing costs; use debt avalanche method instead

2. You’re selling the home within 3 years - Won’t recover closing costs before selling

3. Your existing mortgage rate is significantly lower than cash-out rates - Example: 3.5% current mortgage, 6.75% cash-out refi means you’re increasing rate on the entire loan balance to consolidate debt

4. You can pay off debt in 12-18 months without refi - Closing costs become wasted money if you can eliminate debt quickly through aggressive payments

5. Debt amount is small relative to closing costs - Consolidating $15K debt with $8K closing costs = 53% closing cost ratio (too high)

Alternative: HELOC for Debt Consolidation

If your existing mortgage rate is low (3-4%), consider HELOC instead of cash-out refi:

HELOC debt consolidation benefits:

• Preserves low first mortgage rate
• Lower closing costs ($500-$1,500 vs $7K-$10K for cash-out refi)
• Faster breakeven (2-6 months typical)
• Can pay off and close HELOC once debt is eliminated

HELOC drawbacks:

• Variable rate (typically 8-10% currently)
• Higher rate than cash-out refi in most cases
• Payment can increase if rates rise further

HELOC breakeven example:

• $50K debt consolidation
• HELOC rate: 9.5%
• HELOC closing costs: $1,200
• Monthly savings: $650 (similar to cash-out refi scenario)
• Breakeven: $1,200 ÷ $650 = 1.8 months

HELOC makes sense when your first mortgage rate is below 4.5% and you want to preserve that low rate.

Compare both options at Browse Lenders to see which debt consolidation method has better breakeven for your situation.

My Cash-Out Refi Debt Consolidation Decision

After running the breakeven math, here’s what I chose:

My scenario:

• $42K high-interest credit card debt (20% avg rate)
• $8,400 closing costs
• $685/month net savings after mortgage increase
• Breakeven: 12.3 months
• Annual interest savings: $6,420
• Staying in home: 7+ years planned

Result: Cash-out refi made sense. I recovered closing costs in 12 months and saved $38,520 in interest over 6 years of debt consolidation.

But I also made a critical decision: pay extra $400/month toward mortgage principal to pay off the debt portion in 7 years instead of 30 years. This prevented long-term interest accumulation while benefiting from immediate cash flow improvement.

Key Takeaways for Breakeven Analysis

Before doing cash-out refinance for debt consolidation, calculate your specific breakeven timeline:

1. Get exact closing cost estimates from 3-4 lenders—costs vary significantly
2. Calculate true monthly savings including mortgage payment increase, not just eliminated debt payments
3. Verify your breakeven is under 24 months for optimal debt consolidation benefit
4. Consider your timeline—staying 3+ years makes longer breakeven acceptable
5. Only consolidate high-interest debt (15%+ rates)—leave low-interest debt alone
6. Plan for accelerated payoff to avoid extending short-term debt to 30 years

Understanding your middle credit score also affects closing costs and rates, which directly impact breakeven timelines.

For my situation, the 12-month breakeven made cash-out refi debt consolidation an obvious choice. But if your breakeven exceeds 30 months, consider alternatives like HELOC, debt avalanche payoff method, or partial consolidation of only the highest-interest debt.

Need help calculating your debt consolidation breakeven timeline? Contact our specialists at support@browselenders.com for personalized analysis of your cash-out refi scenario.