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Mortgage  Question?
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How low should rate be for debt consolidation refinance?

Should I do a debt consolidation refinance if I can lower my interest rate by .625%? I would use the proceeds to pay off a HELOC and $10,000 in other debt.

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

We typically do not recommend that you refinance your existing mortgage unless you can reduce your interest rate by at least .750%. In your case, however, it may make sense to refinance because you have the opportunity to pay off your home equity line (HELOC) and $10,000 in other debt, especially if the average interest rate on your other debt is higher than the rate on your HELOC.

Based on the information you provided, if you can do a true no-cost refinance and reduce your mortgage rate by .625% or more it likely makes financial sense to refinance your mortgage and pay off your home equity line and other debt. We provide a comprehensive overview of a no-cost refinance on FREEandCLEAR. It may also be financially feasible for you to pay a small amount of closing costs to refinance into a mortgage with an even lower interest rate. As a rule of thumb, when you refinance your new lower mortgage payment should allow you to recover your closing costs, or breakeven, within 30 months of closing.

In addition to potentially paying closing costs, the other downsides to refinancing are that you effectively extend the length of your original mortgage, unless you reduce your mortgage term.  Another factor when you are considering a debt consolidation refinance is that using long-term debt such as a mortgage to pay off shorter term debt such as a car loan or credit card bill usually means you pay more in total interest expense over the life the mortgage, even if the car loan and credit card debt have higher interest rates. If your priority is to reduce your total monthly debt payments, then this is a less important factor but it is something to consider.

Because your situation is right on the border in terms of if it makes financial sense to refinance, we recommend that you use our Debt Consolidation Refinance Calculator to evaluate different scenarios and calculate your potential monthly savings. The calculator also enables you to determine how long it takes to breakeven when you refinance.

Additionally, we recommend that you contact multiple lenders to understand the interest rate and closing costs, if any, for your refinance. You can review rates and fees for lenders in your area by clicking INTEREST RATES We advise you to contact three-to-four lenders as comparing multiple lenders is the best way to save money on your mortgage.

Finally, if you decide to not refinance, assuming your $10,000 in other debt has a higher average interest rate than your HELOC or mortgage, we recommend that you pay down this debt first. After you pay-off the debt with the highest interest rate, then you can start paying down your home equity line. This approach will save you money in the long run.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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