Home Equity Loan for Debt Consolidation: Is It Right for You?
How a home equity loan for debt consolidation works
Home equity is the part of your home's value that you own outright: the current market value minus everything you still owe on it. When you consolidate with equity, you borrow against that value and use the money to pay off other debts, most often credit cards, personal loans, medical bills or auto loans. You end up with one loan, one due date and one payment in place of several.
Lenders look at how much you would owe on the home in total, including the new loan, compared with what the home is worth. That figure is the combined loan-to-value ratio, or CLTV. Each lender and program sets its own maximum, so the amount available varies from one homeowner to the next. The Federal Trade Commission's guide to home equity loans and lines of credit explains the basics and the protections you have as a borrower.
The process usually looks like this:
- Add up your debts. List each balance, its interest rate and the monthly payment.
- Estimate your equity. Compare your home's value with what you owe. Our home equity calculator does the math.
- Compare options. A home equity loan, a HELOC and a cash-out refinance each work differently (see the table below).
- Apply. The lender reviews your credit, income, debts and the home's value, which may be checked with an appraisal or, with some programs, an automated valuation.
- Close and pay off the debts. Some lenders pay your creditors directly at closing; others give you the funds to pay them yourself.
- Make one payment. Keep the old accounts at a zero balance so the debt doesn't return.
Home equity loan vs. HELOC vs. cash-out refinance for debt
| Home equity loan | HELOC (home equity line of credit) | Cash-out refinance | |
|---|---|---|---|
| How you get the money | One lump sum | A credit line you draw from as needed | A new, larger first mortgage; you receive the difference |
| Your current mortgage | Stays in place | Stays in place | Is paid off and replaced |
| Rate type | Usually fixed | Often variable; fixed-rate HELOCs also exist | Fixed or adjustable |
| Payments | Set payment from day one | Often interest-only during the draw period, then principal and interest | One new mortgage payment |
| Often a fit when | You know the exact payoff amount | You want flexibility or will pay debts in stages | Your current mortgage rate is higher than today's rates |
If your first mortgage has a low rate, a home equity loan or HELOC lets you keep it untouched. A cash-out refinance replaces it, which can make sense when rates have moved in your favor, but it resets the rate on your whole mortgage balance. The Consumer Financial Protection Bureau's guide to home equity lines of credit walks through how line-of-credit terms work, including draw and repayment periods.
An example with sample numbers
This example is for illustration only. It uses a hypothetical 9.00% rate to show the math. It is not a quote or an offer. Actual rates and terms depend on your credit, equity, income, property and the market.
Say a homeowner has $35,000 spread across four credit cards and pays about $1,050 a month in combined minimum payments. They take a $35,000 home equity loan for debt consolidation over 10 years at the hypothetical 9.00% rate.
| Before | After (example) | |
|---|---|---|
| Number of payments | 4 | 1 |
| Monthly payment | About $1,050 | About $443 |
| Payoff timeline | Depends on card rates and payments | 10 years |
| Secured by the home? | No | Yes |
The monthly payment drops sharply, but the loan runs for 10 years. If the homeowner kept paying about $1,050 a month toward the new loan instead of $443, it would be paid off in roughly 3 years and cost far less in interest. Always compare the total cost, not just the monthly payment. You can run your own numbers in the calculator further down this page.
Pros and cons of using home equity to pay off debt
| Pros | Cons |
|---|---|
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What you need to qualify
Every lender sets its own guidelines, but applications are generally judged on the same four areas:
| Factor | What lenders look at | How to prepare |
|---|---|---|
| Equity | Combined loan-to-value after the new loan | Estimate your home's value and total balances |
| Credit | Credit score and payment history | Check your reports for errors at AnnualCreditReport.com |
| Income | Stable, verifiable income | Gather pay stubs, W-2s or tax returns; some programs accept other documentation |
| Debt-to-income (DTI) | Monthly debts compared with gross monthly income | Learn how it's calculated from the CFPB's DTI explainer |
Our site is built for homeowners with credit scores of 600 or higher. Minimums vary by lender and program, so a quick look at your options is the fastest way to see what may fit. Check your options here; it takes about a minute and doesn't affect your credit.
Who it tends to fit, and who it doesn't
Often a good fit
- You own a home with meaningful equity
- You have steady income and can comfortably make the new payment
- Most of your debt is high-interest credit cards or personal loans
- You have a plan to keep card balances at zero afterward
- You want to keep a low-rate first mortgage in place
Think twice if
- Your income is unstable or you may need to sell the home soon
- The debt came from spending that hasn't changed
- You would only lower the payment by stretching small balances over many years
- You're already behind on your mortgage
Costs and fees to expect
Home equity loans and HELOCs can come with costs such as an origination fee, appraisal or valuation fee, title and recording fees, and in some cases an annual fee on a line of credit. Some lenders roll costs into the loan or offer reduced-fee options in exchange for a slightly different rate. Ask every lender for a written estimate of all costs so you can compare the total, not just the rate. Federal rules require lenders to give you disclosures before you're committed; the FTC's home equity guide explains your right to cancel certain home equity loans within three business days.
Alternatives to a home equity loan for debt consolidation
| Option | How it works | Watch out for |
|---|---|---|
| Personal loan | Unsecured fixed-rate loan, no home involved | Rates are usually higher than home-secured loans; amounts may be smaller |
| Balance transfer card | Move card balances to a card with a promotional rate | Transfer fees and a rate that jumps when the promotion ends |
| Debt management plan | A nonprofit credit counselor negotiates lower rates and one payment | Accounts are usually closed; choose a reputable agency |
| Cash-out refinance | Replace your mortgage with a larger one | Resets the rate on your whole mortgage |
The FTC's How to Get Out of Debt guide covers these options and how to spot debt-relief scams.
Common mistakes to avoid
- Looking only at the monthly payment. Compare total interest over the full term.
- Running the cards back up. Consider closing or freezing the cards you pay off, or setting a strict budget.
- Borrowing more than you need. Borrow for the debts you're paying off, not extra spending.
- Ignoring fees. Ask for all costs in writing and compare the full picture.
- Choosing a variable rate without a plan. If you pick a variable-rate HELOC, test what a higher rate would do to your payment with our HELOC payment calculator.
Taxes: is the interest deductible?
Under IRS rules, interest on home equity debt is generally deductible only when the money is used to buy, build or substantially improve the home that secures the loan, and only if you itemize. Money used to pay off credit cards typically does not qualify. See IRS Publication 936 and talk to a tax professional about your situation.
Debt consolidation calculator
Enter your own numbers. Nothing is saved or sent, and you don't need to give contact information to see your result.
Estimate only, based on the rate and term you entered. Not a loan offer. Excludes fees, taxes and insurance.
Frequently asked questions
Is it smart to use home equity to pay off debt?
It can be, when it lowers your interest cost, you can comfortably make the payment, and you won't run the old balances back up. Because the new debt is secured by your home, it's a bigger commitment than a credit card, so compare the total cost and your other options first.
Is a home equity loan or HELOC better for debt consolidation?
A home equity loan gives you one lump sum, usually at a fixed rate, which suits paying off a known set of debts at once. A HELOC is a line of credit you draw as needed. It often has a variable rate, though fixed-rate HELOCs exist. If you're paying everything off on day one, a fixed payment is often easier to plan around.
Does consolidating with home equity hurt my credit?
Applying usually involves a credit check, which can cause a small, temporary dip. Paying off credit card balances can lower your credit utilization, which often helps over time. Making every payment on time matters most.
How much equity do I need?
It depends on the lender and program. Lenders compare everything you'd owe on the home with its value (the combined loan-to-value) and set a maximum. Your credit, income and property type also matter.
How much does a $50,000 home equity loan cost per month?
It depends on the rate and term. At a hypothetical 9.00% rate over 10 years, a $50,000 loan would be about $633 a month; over 15 years, about $507 a month. Enter your own rate in the calculator on this page.
Can I keep my current mortgage?
Yes. A home equity loan or HELOC sits behind your existing mortgage, so your first mortgage and its rate stay the same. A cash-out refinance, by contrast, replaces your first mortgage.
What credit score do I need?
Each lender sets its own minimum. Our site focuses on homeowners with credit scores of 600 or higher; a higher score generally qualifies for better terms.
What happens if I can't make the payments?
Because the loan is secured by your home, falling behind can lead to late fees, credit damage and, in serious cases, foreclosure. If money gets tight, contact your lender early to discuss options.
Related guides and tools
Sources
- Federal Trade Commission: Home Equity Loans and Home Equity Lines of Credit
- Consumer Financial Protection Bureau: What you should know about home equity lines of credit
- Consumer Financial Protection Bureau: What is a debt-to-income ratio?
- Federal Trade Commission: How To Get Out of Debt
- Internal Revenue Service: Publication 936, Home Mortgage Interest Deduction