I Had 3.5% Mortgage Rate—Here's Why I DIDN'T Use Cash-Out Refi for Debt Consolidation

I have $48,000 in high-interest credit card debt at an average 21% APR costing me $10,080/year in interest. My home has $145,000 in equity. Cash-out refinance seems like the perfect debt consolidation solution, right?

Wrong. At least for my situation.

I have a 3.5% mortgage rate on $265,000 borrowed in 2020. Replacing that with a 6.75% cash-out refi to consolidate debt would cost me $67,000 more in total interest over the life of the loan compared to using a HELOC at 9.5%.

Yes, you read that correctly: A HELOC at 9.5% was cheaper than cash-out refi at 6.75% for my debt consolidation.

Here’s the complete math, when to preserve a low mortgage rate instead of doing cash-out refi, and the alternative I chose that saved tens of thousands of dollars.

My Debt and Home Situation

Debt to consolidate:

• Credit card 1: $18,500 at 22.99% → $416/month minimum
• Credit card 2: $15,200 at 21.49% → $342/month minimum
• Credit card 3: $9,800 at 18.99% → $220/month minimum
• Personal loan: $4,500 at 12.5% → $128/month minimum
• Total debt: $48,000
• Monthly payments: $1,106
• Annual interest: $10,080

This debt was killing my budget. I was making progress on principal, but slowly—most of my payments went to interest. At current payment rates, I’d be debt-free in 5-6 years but would pay an additional $18,000 in interest.

Home equity position:

• Home value: $410,000 (recent appraisal)
• Current mortgage: $265,000 at 3.5% (locked in 2020)
• Current payment: $1,190/month (P&I only)
• Remaining term: 26 years
• Equity: $145,000 (35%)

I had plenty of equity for debt consolidation. The question was: cash-out refi or HELOC?

Cash-Out Refi Option: The Tempting but Expensive Choice

I got quotes from three lenders through Browse Lenders for cash-out refinance:

Best cash-out refi quote:

• New loan amount: $313,000 (includes $48K debt payoff)
• Interest rate: 6.75%
• New monthly payment: $2,030 (P&I)
• Closing costs: $8,200
• Term: 30 years

Monthly impact:

• Old mortgage + debt payments: $1,190 + $1,106 = $2,296/month
• New mortgage payment: $2,030/month
• Monthly savings: $266/month

This looks attractive on the surface. My monthly payment drops by $266, and I eliminate all high-interest debt. The closing costs recover in 31 months ($8,200 ÷ $266 = 31).

But there’s a massive hidden cost I almost missed.

The Hidden Cost: Replacing 3.5% Rate with 6.75% Rate

Here’s what my loan officer helped me understand: Cash-out refi replaces your ENTIRE mortgage balance at the new, higher rate—not just the cash-out portion.

Interest cost comparison on the EXISTING $265,000 mortgage:

Current mortgage (3.5% for remaining 26 years):

• Principal: $265,000
• Interest rate: 3.5%
• Monthly payment: $1,190
• Remaining interest (26 years): $106,280

New cash-out refi mortgage ($265,000 portion at 6.75% for 30 years):

• Principal: $265,000 (same balance)
• Interest rate: 6.75%
• Portion of new $2,030 payment: $1,720/month
• Total interest (30 years): $354,200

Additional interest on existing mortgage balance: $354,200 - $106,280 = $247,920

Wait—replacing my 3.5% rate with 6.75% costs me an extra $247,920 in interest over 30 years, just to consolidate $48,000 in debt?

Let me calculate the full picture including debt consolidation benefits:

Total interest with cash-out refi (30 years):

• Interest on full $313,000 loan: $417,800
• Less closing costs recovered through debt payoff: $8,200
• Net total interest: $409,600

Total interest if I keep current mortgage + pay off debt separately:

• Remaining interest on $265K mortgage at 3.5%: $106,280
• Interest on $48K debt at 21% avg if paid off in 5 years: $18,000 (estimated)
• Total interest: $124,280

Cash-out refi costs me an extra $285,320 in interest over 30 years.

Even accounting for monthly savings and improved cash flow, this was financial suicide for my situation. The low 3.5% mortgage rate was too valuable to give up.

HELOC Option: Higher Rate, But Much Lower Total Cost

My loan officer suggested an alternative: Keep the 3.5% mortgage and use a HELOC for debt consolidation.

HELOC quote:

• Credit line: $50,000 (up to 80% LTV minus first mortgage)
• Interest rate: 9.50% variable
• Draw period: 10 years (interest-only payments allowed)
• Repayment period: 20 years after draw period
• Closing costs: $1,400

HELOC interest calculation (if I borrow $48,000):

• $48,000 at 9.5% = $4,560/year interest
• Monthly payment (interest-only during draw): $380/month
• Or principal + interest payment: $450/month to pay off in 10 years

Wait—9.5% is higher than 6.75% cash-out refi rate. How is HELOC cheaper?

The key difference: HELOC only applies high rate to the $48K debt portion. Cash-out refi applies higher rate to the ENTIRE $313K loan balance.

Side-by-Side Total Interest Comparison (10-Year Payoff Timeline)

Let me compare three scenarios over 10 years assuming I pay off the debt within that period:

Scenario A: Keep current debt, pay off aggressively in 5 years

• Mortgage interest (10 years at 3.5%): $82,700
• Debt interest (5 years at 21% avg): $18,000
• Total interest: $100,700

Scenario B: Cash-out refi at 6.75%

• Mortgage interest (10 years on $313K at 6.75%): $198,500
• Total interest: $198,500

Scenario C: HELOC at 9.5%, pay off in 7 years

• Mortgage interest (10 years at 3.5%): $82,700
• HELOC interest (7 years at 9.5%): $17,920
• Total interest: $100,620

HELOC saves me $97,880 compared to cash-out refi over 10 years, despite the 9.5% rate being 2.75% higher than the cash-out refi rate.

The math is counterintuitive but clear: Preserving the low first mortgage rate and using HELOC only for debt consolidation results in dramatically lower total interest.

My Monthly Payment Comparison

Current situation:

• Mortgage: $1,190/month
• Debt payments: $1,106/month
• Total: $2,296/month

With cash-out refi:

• New mortgage: $2,030/month
• Total: $2,030/month
• Savings: $266/month

With HELOC (paying off in 7 years):

• Mortgage: $1,190/month (unchanged)
• HELOC payment: $710/month (P+I to pay off $48K in 7 years)
• Total: $1,900/month
• Savings: $396/month

Not only does HELOC save me $97,880 in total interest over 10 years, but it also provides $130/month MORE cash flow than cash-out refi.

This was a complete reversal of my initial assumption. I thought cash-out refi was always the better debt consolidation option due to lower rates. Wrong.

When to Keep Your Low Mortgage Rate (Avoid Cash-Out Refi)

Based on my experience and analysis, avoid cash-out refi for debt consolidation if:

1. Your existing mortgage rate is 4.5% or lower

• Current cash-out refi rates (6.5-7.5%) are 2-3% higher
• The rate increase on your full mortgage balance outweighs debt consolidation savings
• Calculate: (New rate - Old rate) × Existing mortgage balance × Remaining years

2. You have significant remaining mortgage term (20+ years)

• More years = more interest paid at the higher rate
• Short remaining term (5-10 years) reduces the penalty of rate increase
• My 26 years remaining made rate increase extremely expensive

3. HELOC rate is within 3% of cash-out refi rate

• Example: Cash-out refi at 6.75%, HELOC at 9.5% = 2.75% difference
• The HELOC rate premium is small enough to justify preserving low mortgage rate
• If HELOC were 12%+, cash-out refi might make more sense

4. Your debt amount is less than 25% of mortgage balance

• My $48K debt was 18% of my $265K mortgage balance
• Smaller debt proportion = less benefit from cash-out refi
• Larger debt amounts (50%+ of mortgage) shift the math toward cash-out refi

5. You can pay off HELOC in 7-10 years

• Aggressive HELOC payoff limits total interest despite higher rate
• If you’ll only make minimum payments, cash-out refi might be better
• I committed to $710/month HELOC payment for 7-year payoff

When Cash-Out Refi DOES Make Sense for Debt Consolidation

Cash-out refi is the better choice when:

1. Your existing mortgage rate is 5.5% or higher

• Smaller rate differential between old and new mortgage
• Example: 5.75% old rate, 6.75% new rate = only 1% increase
• The debt consolidation benefit outweighs minimal rate increase

2. HELOC rates significantly exceed cash-out refi rates (4%+ difference)

• If HELOC is 11-12% and cash-out refi is 6.75%, the HELOC premium is too high
• Dramatically higher HELOC rates make cash-out refi more attractive

3. Your remaining mortgage term is short (under 10 years)

• Less time for higher rate to accumulate extra interest
• Example: 8 years remaining means only 8 years of 6.75% vs 3.5%
• Short timeline reduces penalty of rate increase

4. Debt amount is large (40%+ of mortgage balance)

• Larger debt consolidation creates bigger interest savings
• Interest savings on debt can offset mortgage rate increase
• My 18% ratio was too small; 50%+ ratio shifts the calculation

5. You can’t qualify for HELOC (credit/DTI issues)

• HELOC typically requires 680+ credit and lower DTI than cash-out refi
• If HELOC isn’t available, cash-out refi might be the only equity-access option

My Final Decision and Results

I chose the HELOC debt consolidation strategy:

What I did:

• Opened $50,000 HELOC at 9.5% variable rate
• Used $48,000 to pay off all credit cards and personal loan
• Kept $2,000 available for emergencies
• Committed to $710/month HELOC payment (7-year payoff)
• Preserved my 3.5% mortgage rate on $265,000 balance

12 months later:

• HELOC balance: $41,200 (paid down $6,800 in first year)
• Monthly payment: $1,900 total ($1,190 mortgage + $710 HELOC)
• Monthly savings vs old situation: $396/month
• Credit score: 682 → 728 (utilization dropped from 84% to 2%)
• Total interest paid: $4,180 on HELOC + $9,275 on mortgage = $13,455

If I’d chosen cash-out refi:

• Mortgage balance: $310,600 (after 12 months payments)
• Total interest paid: $20,850 in first year
• Extra interest cost: $7,395 in first year alone

The HELOC strategy is working exactly as planned. I’m saving $396/month in cash flow, paying down debt aggressively, and most importantly, preserving my valuable 3.5% mortgage rate for the remaining $265,000 balance.

Over the full 7-year HELOC payoff period, I’ll save approximately $97,880 in total interest compared to cash-out refi, while also improving monthly cash flow by $130.

Key Considerations for HELOC Debt Consolidation

If you’re considering HELOC instead of cash-out refi:

HELOC advantages:

• Preserves low first mortgage rate
• Lower closing costs ($500-$2,000 vs $7K-$10K)
• Faster access to funds (2-3 weeks vs 30-45 days)
• Only pay interest on amount borrowed
• Can pay off and close HELOC once debt is eliminated

HELOC drawbacks:

• Variable rate (can increase if Fed raises rates further)
• Higher rate than cash-out refi in most cases
• Requires discipline to pay off aggressively
• Risk of re-accumulating credit card debt

HELOC success requires:

• Commitment to aggressive payoff (7-10 years max)
• Not using paid-off credit cards to rack up new debt
• Building emergency fund while paying down HELOC
• Understanding your middle credit score affects HELOC approval

The Bottom Line: When to Preserve Your Low Rate

If your mortgage rate is below 4.5%, do the math before doing cash-out refi for debt consolidation:

1. Calculate total interest on your existing mortgage for remaining term at current rate
2. Calculate total interest on new cash-out refi loan at higher rate
3. Compare the difference to the interest savings from debt consolidation
4. Consider HELOC as an alternative that preserves your low first mortgage rate

For me, keeping my 3.5% mortgage and using a 9.5% HELOC for debt consolidation saved $97,880 over 10 years compared to cash-out refi at 6.75%. The higher HELOC rate only applied to $48,000, while cash-out refi would have replaced my entire $265,000 balance at 3.25% higher rate.

This was counterintuitive—I initially assumed cash-out refi was always better due to lower rates. But when you have a low mortgage rate locked in (especially from 2020-2021), preserving that rate and using HELOC for debt consolidation is often the smartest financial decision.

Connect with specialists at Browse Lenders who can model both scenarios for your specific situation and help you understand whether cash-out refinance or HELOC makes more sense for your debt consolidation goals.

Have questions about HELOC vs cash-out refi for debt consolidation? Contact our team at support@browselenders.com for personalized guidance on preserving your low mortgage rate.