It’s common to hear of people using home equity loans to help pay off higher-interest loans and credit cards. However, if the idea of taking on yet another loan isn’t an option, refinancing your mortgage for a “cash-out” may be a good option.

What’s the Difference Between Cash-Out Refinancing and a Home Equity Loan?

To begin with, a home equity loan is an entirely separate loan that you take out in addition to your current mortgage; a cash-out is a replacement of your mortgage. As such, refinancing your mortgage will often result in lower interest rates than a home equity loan.

Lower interest rates don’t guarantee savings, though. Refinancing you mortgage can—and usually does—involve closing costs and related fees that run in the thousands of dollars. Home equity loans, on the other hand, usually don’t involve any closing costs.

When to Refinance Your Mortgage to Consolidate Debts

If interest rates have dropped since you first financed your home, and you’ve built up a substantial amount of equity, refinancing your mortgage to consolidate other debts may kill the proverbial two birds with one stone.

First, you’ll (potentially) save thousands of dollars in interest on your home while using your hard-earned equity to pay off other debts with a tax-deductible loan. Second, you’ll appreciate the peace of mind that comes with only making one loan payment a month.

Additionally, many lenders periodically offer very low—or completely free—closing costs. This, combined with lower interest rates (compared to a standard home equity loan) can make refinancing a very wise financial decision.

When NOT to Refinance Your Mortgage to Consolidate Debts

If it will only take you five or ten years to pay off your current debt, consolidating it into a mortgage for the next thirty years doesn’t make much financial sense unless the interest rates are low enough to still save you money.

In addition, the type of debt you have may help you decide whether or not to refinance. For example, refinancing your mortgage to pay off credit card debt that you’ll only run up again may not be worth risking your home over. However, if you want to cash out to make improvements to your home—thereby raising its value and protecting your investment—then refinancing may be the way to go.

Finally, if interest rates aren’t lower than when you first financed, you may want to reconsider. Although you might save money by consolidating other debts in the short term, you may be hurting your long term financial future. Keep in mind that high closing costs can take a long time to recoup. If you’re saving $100 a month by refinancing—but closing costs add up to $2000—it will take you 20 months to notice any savings.

Despite any potential downfalls, refinancing your mortgage to consolidate debts can make more sense than a home equity loan. You’ve earned the equity in your home, so why not use it?