Using a home equity loan to consolidate debt isn’t worth the risk. Consider these alternatives

While high home prices aren’t good news for homebuyers, many existing homeowners are sitting on a goldmine of equity.

By the end of the second half of 2022, the average US homeowner had $216,900 in “vulnerable equity” while still retaining 20%, according to the latest data from mortgage technology and data provider Black Knight.

With equity at record highs and relatively low interest rates on HELOCs and home equity loans, it can be tempting to tap into your equity to pay off other higher-interest debt — such as mortgages. B. Credit cards – to consolidate and pay off. Taking out a home equity loan, or HELOC, to pay off debt has its benefits, but it also comes with risks. Experts also suggest looking for alternatives before using your home equity to consolidate debt.

Pros and cons of using your home equity for debt consolidation

If you have significant high-interest debt, using your home equity to pay it down is likely to result in a lower interest rate. The average interest rate on a $30,000 10-year home equity loan is currently 7.05%. The average credit card interest rate is 15%, but consumers often find themselves with even higher credit card interest rates that exceed 20% or 25%. Reducing the interest rate you pay on your debt helps you pay off balances faster because more of your payments are on principal rather than interest.

Another benefit is a monthly payment, which could make managing your debt easier, especially if you have multiple loan payments. Home equity loans can have terms of up to 30 years, which could lower monthly payments.

Despite these benefits, this strategy can be dangerous. While credit card debt is unsecured, meaning no collateral is required, both home equity loans and HELOCs use your home as collateral.

Aside from putting your home at risk, you also won’t be able to deduct the interest on your HELOC or home equity loan from your taxes. If you mortgage your home and use the money to make improvements, the interest is usually tax deductible. But if you’re using it for some other purpose, that’s not it.

You may also have to pay closing costs when you tap into your home equity, which can range from 2% to 5% of the loan amount. Also, it can take anywhere from two to six weeks for the loan funds to be disbursed to you.


  • Your interest rate will likely be lower

  • A monthly payment is easier to manage

  • Your monthly debt payments could go down


  • Your home is in danger

  • Interest is unlikely to be tax deductible

  • You’ll likely end up paying some hefty fees

  • The timeframe for funding will be longer than some alternatives.

How to Get a Home Equity Loan or HELOC for Debt Consolidation

Many banks, credit unions, and online lenders offer home equity loans and HELOCs. How to get one:

  1. Decide whether a home equity loan or HELOC makes more sense for your situation. For example, if you know the exact amount you want to consolidate, a home equity loan might make sense.
  2. Compare options from different lenders. If you take the time to look around you can find the best possible rates and terms.
  3. Submit an application. Just like with your home mortgage, you will need to provide proof of income and identity, proof of address, and documentation of your assets.
  4. Wait for an appraisal. Your lender will order an appraisal before approving you for a home equity loan, or HELOC.
  5. Complete the loan. It typically takes between two and six weeks for a home equity loan, or HELOC, to close.

Expert Opinion: Is Using Home Equity a Good or Bad Idea for Debt Consolidation?

Experts tend to agree that taking on new secured debt — with a home as collateral — to eliminate high-yield debt isn’t the best move. “It’s extremely rare that I would say you borrow money from your house to pay off your credit card debt,” said Leslie Tayne, founder and chief counsel at Tayne Law Group.

“I wouldn’t necessarily recommend converting unsecured debt or credit card debt into secured debt,” says Tayne. “You wouldn’t lose your home to credit card debt, but you could lose your home if you default on a HELOC.”

“The best thing to do is look at your budget and examine different alternatives. If you don’t have a decent budget after taking out a HELOC or home equity loan, you could easily find yourself under water again. And while you may get a lower interest rate than credit cards, the upfront cost of unlocking your home equity is often high.”

Alternatives to using home equity for debt consolidation

For those struggling with high interest rates and juggling multiple monthly payments, an unsecured credit card or personal loan could be a better debt consolidation alternative.

Balance transfer credit cards

Credit cards with a balance transfer are often offered with a promotional interest rate for a fixed period of time, e.g. B. 12 or 18 months offered. During this period you benefit from a low or 0% interest rate. This interest-free period could give you the time you need to pay off your existing debt without incurring hefty interest charges. Just make sure you pay back your balance before the end of the promotional period, as after that the card’s regular rate, which can be high, will apply.

Unsecured Personal Loan

Another alternative is an unsecured personal loan. Personal loans typically have low fixed interest rates and terms generally range from 12 to 60 months. Depending on your lender, you may be able to borrow up to $50,000, and the funds are often paid out in as little as one or two business days.

Cash-Out Refinancing

Even if mortgage rates have gone up, a cash-out refinance could still make sense if you’re looking to consolidate your debt. Whether this option makes sense depends on several factors, including the amount of equity you have in your home, your credit, and the amount you want to borrow.

With a cash-out refinance, you replace your existing mortgage loan with a larger mortgage loan and receive a lump sum payment for the difference. You could then use these funds to consolidate your debt.

Experts generally do not recommend refinancing into a new mortgage loan with a higher interest rate than what you already have. For example, if your current mortgage rate is 4%, a cash-out refinance rate would be over 5.5% today and not worth it in the long run.

Negotiate with your creditors

Your creditors may also be willing to work with you to create a debt settlement plan that is more manageable. “It’s possible to renegotiate the terms of outstanding credit card debt,” said William Bevins, CFP and Tennessee Fiduciary Financial Advisor. “Lowering the current interest rate, requesting a temporary payment reduction, and pushing back monthly due dates are a few options.”

Frequently Asked Questions (FAQ)

Can I be approved for a HELOC or home equity loan if I already have a lot of debt?

It’s possible to get a HELOC or home equity loan if you have significant credit card debt. However, whether or not you’re approved will likely depend on how much equity you have in your home, your credit history, income, and other factors.

Is it wise to use equity to consolidate debt?

Using your home equity to consolidate debt can be a risky move. If you can’t handle your monthly payments, your lender could foreclose on your home. A credit card, personal loan, or other form of unsecured financing might be a less risky choice.