Sep 3, 2025
Refinancing can look like an easy fix for overwhelming debt. You roll everything into one monthly payment, often at a lower interest rate than credit cards. But whether it’s the best move depends on your financial situation.
Take Ankit, a 45-year-old with a 20-year $200,000 mortgage at 3.5% interest, and $150,000 in additional debts from credit cards and a HELOC. He has about $250,000 in a 401(k), but feels stuck, and his retirement savings are stalled while debt payments eat up his budget. He’s considering refinancing his mortgage to wipe the slate clean, but will that actually help? Let’s break down the numbers.
How refinancing can restructure your debt
On paper, refinancing looks like a way to simplify Ankit’s situation. By rolling his $150,000 in credit card and HELOC debt into his $200,000 mortgage, he’d owe one monthly payment instead of juggling several.
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While the benefits of refinancing may be attractive, it has downsides, too.
A refinance can cost between five and seven percent of the value of your home, as the process requires an application fee, an appraisal and a title search, just like with your original mortgage. According to Construction Coverage, only 16.3 out of 1,000 mortgages were refinanced in the U.S. per year.
For Ankit, the new mortgage would come with today’s rates, around 6.7%, compared with the 3.5% he currently pays.
That change is huge. His mortgage payment would jump from about $1,125 a month to about $2,400. Over time, he’d also end up paying much more interest on the entire $350,000 balance, not just the new debt.
Would it still be cheaper? In some ways, yes:
Credit cards often carry interest rates of 20% or higher, and even a HELOC could charge 8% to 10% in today’s market. Refinancing at 6.7% would lower those interest costs.
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But the price of that lower rate on the consumer debt is giving up the 3.5% mortgage and paying almost double or triple his current housing cost every month.
In other words, refinancing would save him interest compared with keeping high-rate credit card balances, but it would also strain his cash flow and make his home far more expensive to carry. For someone already struggling to pay down debt, that’s a risky tradeoff.
Ankit might consider trying to refinance his consumer debt to get a lower interest rate, and pay down his debts while keeping his mortgage interest rate and monthly payment low. Considering the cost of refinancing, which could include $5,000 in attorney fees and other expenses, it may be worthwhile to explore.
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Considering a HELOC to pay down debt
A Home Equity Line of Credit (HELOC) could seem like a middle-ground option for Ankit. Instead of refinancing his entire mortgage into a higher interest rate, he could keep his current 3.5% loan and roll his credit card debt into the HELOC.
A HELOC works like a credit card, but it’s backed by your home. You only pay interest on what you borrow, and rates are usually lower than credit cards.
Here’s the problem: in today’s market, HELOC rates often hover between 8% and 10%. That’s lower than the 20% or higher he may be paying on his credit cards, but still higher than his current mortgage. If Ankit draws the full amount, he’ll have two major payments to juggle: his $1,125 mortgage plus hundreds or even thousands more on the HELOC. That may not leave him in a stronger position overall.
There’s also the risk factor. Because the HELOC is tied to his home, falling behind on payments could put his house at risk: a much bigger consequence than missing a credit card bill.
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So while a HELOC might cut the cost of his credit card interest, it doesn’t reduce his overall debt load, and it still leaves him stretched thin every month. It’s a tool that works best for smaller balances or short-term needs, not six-figure debt on top of an existing mortgage.
Why downsizing might be smarter than refinancing
Ankit can also consider downsizing his home. While there may be an emotional cost to giving up a home he loves, it’s more important to live within his means, which includes paying down debt and saving for a secure retirement.
Downsizing may be his best option. If Ankit decides to downsize, he will take on a higher mortgage rate than he currently has, but he will release the equity built up in his home, which he can use to pay down his debt.
Investing in a smaller, cheaper home will allow him to keep his monthly mortgage payment a little closer to the current monthly payment. Living with less debt will also allow him to make healthy contributions to his retirement account.
Unlike a refinance or HELOC, downsizing actually shrinks his overall debt load instead of reshuffling it.
Living on a smaller scale may also help him to rein in his budget in other areas of his life, and ensure that he can meet his long-term financial goals, as well as living a lower-stress, debt-free lifestyle.
When you’re buried in debt, refinancing can seem like a clean solution. For Ankit, though, the numbers tell a different story. Whatever path he chooses, running the numbers carefully, and seeking advice from a financial professional, will help him make a decision that balances today’s challenges with tomorrow’s goals.
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Rebecca Holland is dedicated to creating clear, accessible advice for readers navigating the complexities of money management, investing and financial planning. Her work has been featured in respected publications including the Financial Post, The Globe & Mail, and the Edmonton Journal.
