Using a Home Equity Loan to Consolidate Debt – Forbes Advisor

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As a homeowner, you have additional financial responsibilities, including the mortgage, property taxes, home maintenance, and other expenses. Chances are you’re also shouldering high-interest debt like credit cards. Fortunately, there are ways to pay off your debt faster with the help of your home.

A home equity loan allows you to use the equity in your property to consolidate debt at a lower interest rate. However, this strategy has some disadvantages. Here’s what you should know.

How a Home Equity Loan Consolidates Debt

Equity is the difference between what you owe on your home (the mortgage balance) and its current value, which is usually based on its current appraisal. You can’t get a home equity loan unless you have some equity in your home; Lenders typically look for at least 15% equity to essentially loan you back.

The more you pay your lender, the higher your equity grows. Another way equity grows is when the overall housing market is healthy and property values ​​(or selling prices) are rising in your area. With a home equity loan, you can borrow that equity in the form of a lump sum installment loan.

This money can be used for a variety of purposes such as: B. to modernize your home, pay for college, meet emergency expenses, and consolidate debt.

Home equity loans are a good tool for debt consolidation because the interest rates are quite low compared to other forms of debt. Once your home equity loan is complete and you have received your money, you can use the money to pay down your existing debt and then make a one-off payment to your lender until the loan is repaid, typically over a period of five up to 20 years.

Pros and cons of using a home equity loan for debt consolidation

When deciding whether or not to use a home equity loan for debt consolidation, there are a few key pros and cons to consider first.


  • Lower interest rates: If you’re looking for ways to borrow money or consolidate debt, a home equity loan offers some of the lowest interest rates available. Currently, the average annual percentage rate (APR) is around 4% to 6%. Personal loans and credit cards, on the other hand, often have double-digit interest rates.
  • Easier access to financing: While you must meet certain income and debt balance requirements, a home equity loan is usually easier to qualify than other types of debt. This is partly because your property serves as collateral, so there is less risk for the lender than with an unsecured loan, where no asset is used as collateral, as they can repossess the collateral in the event of a default. Therefore, the lender is more willing to offer a home equity loan.
  • Potential for a tax deduction: There is a chance that you could write off some of the interest you pay on your home equity loan. However, you can only make this deduction if you use the money to pay for renovation work. If home renovations are part of your larger financial plan, relying on a home equity loan instead of a credit card can help, especially if you’re also trying to pay off your high-interest debt.


  • Risk of losing your home: Because your property serves as collateral, you could lose your home if you default on payments or default. As long as you’re able to keep up with the payments, that shouldn’t be a problem.
  • Your home could fall under water: Because a home equity loan taps into the value you’ve built in your home, there’s a chance you’ll find yourself under water on your mortgage (you owe more than the property is worth) if home values ​​fall. That’s not a problem if you plan on staying in your home for several years, or enough time to regain the property’s value. But if you were hoping to move soon, you might end up suffering a loss.
  • Additional costs may arise: You may need to pay to have your home appraised professionally in order to determine the value for a home equity loan. Generally this costs a few hundred dollars but can be higher depending on where you live and the type of property. You may also have to pay closing costs for the loan.

Is a Home Equity Loan the Best Way to Consolidate Debt?

If you’re in good financial shape, using your home equity to get rid of high-interest debt faster is a smart move. However, if you don’t plan to stay in your home for long or are not sure that your income will be stable throughout the repayment period, you may want to consider an alternative debt consolidation method.

Other Debt Consolidation Options

There are a few ways to consolidate your high-interest debt without risking your property.

1. 0% balance transfer cards

To attract new business or exhibition cards for existing customers, credit card companies often offer a 0% introductory interest rate to customers who renew their existing credit card balance, usually from a competitor.

The introductory phase usually lasts 12 to 18 months, during which the credit does not earn interest. This means that 100% of your payments go towards paying off the principal, allowing you to get rid of that debt faster. There is usually a 2% to 5% transfer fee up front. The key is to cash out your balance before the end of the introductory period, otherwise you’ll start accruing interest again.

2. Take out a personal loan

Personal loans, which are loans that let you pay for almost anything up to a certain amount, can also help you consolidate debt. Rates are typically lower than credit card rates, at least for borrowers with good credit ratings.

There are two types of personal loans: secured and unsecured. Secured loans are backed by collateral such as a bank account or a vehicle. This helps reduce the lender’s risk, resulting in a lower interest rate. Unsecured loans allow you to borrow money without posting collateral; The downside is that the rate can be a bit higher and you may be subject to stricter requirements.

3. Put together a debt management plan

If you’re struggling to make payments on unsecured debt, such as credit cards or personal loans, you may consider working with a nonprofit credit counseling agency to create a debt management plan (DMP). An accredited advisor handles your payments and negotiates with lenders on your behalf to lower the cost of your debt. You then pay your reduced payments directly to the agency and receive regular progress reports. Registration for a DMP may incur a fee.

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