Using a Home Equity Loan for Debt Consolidation


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Sometimes it makes sense to put all your eggs in one basket.

Consolidating your debt can help streamline your repayment plan and hopefully save you money in the long run. But when using your home as collateral to secure your existing debt, there are a few other factors to consider, starting with the fact that a default could end up costing you your home.

How to Consolidate Debt Using Home Equity

Debt can add up quickly, and you can find yourself facing multiple payments per month for things like your mortgage, credit cards, and student loans.

“Most consumers face some type of unsecured debt, and COVID has definitely made it more difficult to manage,” says Jeffrey Arevalo, financial wellness expert at GreenPath Financial Wellness.

Consolidating your debt means taking out a big loan and using it to pay off your other existing debt. This way, you will only have one loan repayment to make each month, ideally with a lower interest rate on that one loan than you have on your other existing loans.

For example, if your credit card charges you 16% interest on your persistent credit card debt and you consolidate that loan into a home equity line of credit with a rate of around 4%, then you will save a lot of money on interest.

“For someone who is struggling to pay off their debt, who is not progressing fast enough, who pays high interest rates, or who is just overwhelmed, I would consider a debt consolidation,” Arevalo says.

For those with decent equity in their home, a home equity loan or home equity line of credit (HELOC) can be good tools to consider – if you can benefit from it. Home equity loans have tightened over the past year, making it more difficult to obtain these loans if your credit score and home equity are lower.

A home equity loan is similar to a traditional loan – you’ll receive a lump sum at the start of your term, then you’ll have monthly payments (plus interest) until you pay off what you’ve borrowed. A home equity line of credit is more like a credit card. This is a revolving line of credit, which means you choose how much you spend on the line as you go and then have a repayment period to pay off what you borrow (plus interest) .

Is It A Good Idea To Use Home Equity To Consolidate Debt?

You should seriously consider your repayment plan and determine if the underlying behaviors that led to your debt will continue before you take out a home equity loan or a debt consolidation line of credit.

“You want to be very careful not to turn unsecured debt into secured debt,” says Arevalo. “If you were to default on a home equity loan or home equity line of credit, you could risk things like foreclosure. ”

Yes, you could lose your home if you don’t make your payments.

“I think it’s a dangerous world to borrow from home to pay off your credit cards, because a lot of times we don’t change our behavior. We end up putting all of our piles of debt into one massive pile, ”says Craig Lemoine, director of the Academy for Home Equity in Financial Planning at the University of Illinois.

But if you do it right and make diligent payments, it can be a way to save money on paying down your debt.

Taking high interest loans and consolidating them into a HELOC or home equity loan “could save you thousands of dollars a month,” says Darren Q. English, manager of development loans at Quontic.

Again, just make sure you’ve addressed the underlying circumstances that led to your debt in the first place.

“If it turns out that they can save a lot more money on interest and are okay with turning unsecured debt into secured debt, that’s when a home equity loan takes all its meaning ”, explains Arevalo. “But any behaviors or circumstances that led to the accumulation of debt in the first place must be addressed.”

You’ll want to take a holistic approach to your situation to see if this strategy makes sense. Think about all your income and debts, other bills you pay regularly, and your cash flow.

“Sometimes getting a loan or a consolidation won’t solve that underlying problem. It could just be a bandage, ”Arevalo explains.

Home equity loan vs HELOC for debt consolidation

The principles of using either of these products for debt consolidation are the same: you will take out your HELOC loan or home equity loan, use it to pay off existing debt, and then you don’t. will have to worry about that one existing loan.

A home equity loan is a more structured traditional loan. You’ll withdraw a lump sum, against your home, and typically consumers can use it to pay off their debts “pretty quickly,” according to Arevalo.

You will have a fixed interest rate for a home equity loan. This means that you will lock in your interest rate at the start of your loan term and it will not change.

A HELOC, on the other hand, offers a bit more flexibility. It’s similar to a credit card, so your payments will vary depending on how much you spend on your line. Your interest rate will also be variable with a home equity loan, which means if the rates go up you will be subject to higher interest payments.

With a home equity loan in particular, you’re more likely to have to pay closing costs and get your home appraised, although some lenders require the same metrics for HELOCs. These will be personal expenses.

Pros and Cons of Using Home Equity for Debt Consolidation


  • Combine multiple debts into one payment
  • Save money on interest
  • Simplify repayment (one payment you need to worry about, instead of several)

The inconvenients

  • Converting unsecured debt to secured debt
  • Could lose your home if you don’t make your payments
  • May not qualify for an ideal interest rate
  • Need to have good credit and a decent amount of home equity to qualify for a home equity loan

Alternative debt consolidation options

If you’re considering debt consolidation, but you’re not sure if it’s right for you, contact a free counseling agency who can help you with your decision.

If you’re worried about turning your unsecured debt into secured debt, a balance transfer credit card may make sense. You can also get a personal loan depending on the amount of debt you owe. Both of these options have their own pros and cons, so do your research before you get started.

Whatever you choose to do, “just be careful not to move your debt to different places instead of dealing with it head-on,” Arevalo says.

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Debt Consolidation