Consolidating Debt with a Home Equity Loan

What it is

A home equity loan is a secured loan that lets you borrow money against the value of your home, with your house as collateral. The loan comes in the form of a lump sum, and you pay back the money in fixed monthly payments—essentially a second mortgage.

How it works

For consolidating debt, a home equity loan can be just what you need. With a lump sum, you get access to the cash you need to pay off your debts and replace your monthly debt payments with one, easy payment. Home equity loans also have lower interest rates than credit cards (i.e., 3-9% vs. ~16%).

Factors to consider

  • Credit score
  • Debt-to-income ratio
  • Current market value of home

Important to know

  • The interest you pay is only tax-deductible if you use the loan for home renovations.

Pros

  • Fixed interest rate
  • Receive money as a lump sum
  • Predictable monthly payments
  • More affordable than private loan

Cons

  • Interest rates can be higher than HELOC
  • Risk foreclosure if you default
  • Two mortgages instead of one
  • Fees and closing costs apply

Explore more advantages and disadvantages of using a home equity loan for debt consolidation—plus alternative ways to consolidate your debt.

FAQs

The main differences between home equity loans and HELOCs involve payment methods, interest rates, annual fees, and interest payments. Read More

To qualify for a home equity loan, you must own at least 20% equity in your home, have a credit score of 620 or higher, and have a debt-to-income ratio of 43% or lower. Read More

Though getting a home equity loan with bad credit is more difficult, it is possible. Unfortunately, the lower your credit score, the higher your interest rate may be. Read More

Consolidating your debt with a home equity loan makes sense if it will save you money and if your existing debt isn’t overwhelming. Read More

Apply for a home equity loan by finding a lender that is trustworthy and fits your needs, preparing the proper paperwork, and filling out an application. Read More

Bottom Line

If you know exactly how much money you need to be debt-free, a home equity loan is a great option. But if you anticipate racking up more credit card debt in the future—or are concerned about upcoming expenses that may put you further into debt—you should consider other options. Plus, if you don’t want to potentially put your house at risk, a home equity loan is not for you.