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Should I refinance to pay off credit card debt?
Trading a 24% card rate for a 7% mortgage rate looks obvious. The arithmetic that decides it is the blended rate and the schedule, and there is a tax rule most borrowers get backwards.
The pitch is simple and the arithmetic behind it is real: card balances cost 20% or more, mortgage money costs a fraction of that, and moving the balance from one to the other cuts the rate by two thirds. Monthly outgoings drop immediately, often by several hundred dollars.
What makes this decision harder than it looks is not the rate. It is the schedule, and one tax rule that works the opposite way from how most people assume.
The rate is not the whole comparison
A $20,000 card balance at 24% costs about $4,800 a year in interest. The same $20,000 rolled into a mortgage at 7% costs about $1,400 in the first year. That is a genuine $3,400 improvement, and it is why this move gets made.
The catch is the term. You were probably going to clear that card in three or four years if you kept pushing at it. Rolled into a 30-year mortgage, the same $20,000 is now on a 30-year schedule. At 7% over 360 months, $20,000 costs about $27,900 in interest across the full term — more than the card would have cost you if you had stayed the course.
So the honest framing is: a lower rate over a much longer time can cost more total money while costing less every month. Both of those things are true at once, and which one matters depends entirely on what you do with the monthly relief.
If the freed-up $300 a month goes toward the new balance, this is one of the better moves in personal finance. If it goes into the general household budget and the cards fill back up, you have converted a four-year problem into a thirty-year one.
The blended rate
The number to look at is not the mortgage rate. It is the blended rate across the whole new loan.
If you owe $280,000 at 4.5% and roll in $20,000 of card debt at a new rate of 7%, you are not paying 7% on $20,000. You are paying 7% on all $300,000 — including the $280,000 that was costing you 4.5% this morning. The extra 2.5% on that existing balance is $7,000 a year, and it swamps the interest you saved on the cards.
This is the single most common miss. A cash-out refinance reprices the entire mortgage, not just the new money. When your existing rate is well below today's market, the arithmetic usually fails no matter how expensive the cards are — and a separate loan, or a payoff plan on the cards themselves, does better.
The debt consolidation refinance calculator shows the blended rate alongside the monthly saving, which is the pair that decides this.
The tax rule that runs backwards
A lot of borrowers believe that moving consumer debt onto a mortgage makes the interest tax-deductible. It does not.
The IRS limits the home mortgage interest deduction to acquisition debt — money used to buy, build, or substantially improve the home that the loan relates to. Publication 936 is explicit: no matter when the debt was incurred, you cannot deduct the interest to the extent the proceeds were not used to buy, build or substantially improve the home.
Paying off a credit card is none of those three. So the $20,000 you rolled in produces interest that is not deductible, and you now have to track it separately from the rest of the loan for as long as you hold it.
Two further points that catch people out. Most homeowners take the standard deduction and get no mortgage interest benefit at all, so the question is often moot. And the deduction on acquisition debt is capped at $750,000 of balance for debt incurred after 15 December 2017 — $375,000 if married filing separately.
What to ask
Before you commit, get answers to four things:
- What is my current rate, and what is the new rate on the whole balance? If the spread is against you on the existing portion, stop here.
- What does the rolled-in amount cost over the full term, not per month?
- What happens to the cards after closing? A plan that does not answer this is not a plan.
- What are the closing costs, and are they being added to the balance too?
The move can be a good one. It is good when your existing rate is at or above today's market, when the freed-up payment has somewhere specific to go, and when the term is not stretched further than it has to be. It is a poor one when it reprices cheap debt at an expensive rate to solve a cash-flow problem that will come back.
Sources: IRS Publication 936, Home Mortgage Interest Deduction, for the acquisition-debt requirement and the $750,000 limit on debt incurred after 15 December 2017.