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Can I use home equity to pay off debt?

Home equity loans offer lower rates and higher amounts than other loans — but prepare to pay up 2% to 5% in fees.

Home equity can be used for more than home improvements — it can also be used for debt consolidation. Debt consolidation involves taking on one large loan to pay off two or more debts. Common debts to consolidate include: Credit cards, personal loans, medical bills, tax debt, student loans and business loans.

If you’re struggling to keep up with debt, then using your home’s earned equity for debt consolidation may help you get back on your feet. But should you take on a home equity loan, or a home equity line of credit (HELOC)? Compare these two borrowing options to see which one fits your situation best — or see if it’s a viable option at all.

Debt consolidation home equity loan

A home equity loan, sometimes called a second mortgage, allows you to borrow against your home’s value — your home is the collateral. These loans are typically given in a lump sum, making them a simple and convenient way to pay down your debt.

The amount you can borrow is typically 70% to 80% of your home’s value. And to qualify, you typically need at least 15% to 20% in equity.

Loan details

  • Interest rates tend to be around 4% to 8%, depending on your credit score.
  • Repay the loan with monthly installments
  • Terms typically range between five to 30 years, based on how much you borrow.
  • You need at least 15% to 20% of equity, a credit score in the mid-to-high 600s and a low debt-to-income ratio to qualify

Pros

  • Versatile. Home equity loans can be used for nearly anything, including debt consolidation.
  • Low APRs. Home equity loans are secured by your home, which means rates tend to be lower than unsecured personal loans or credit cards for debt consolidation.
  • Longer terms. Terms can reach up to 30 years, giving you plenty of time and flexibility to repay.
  • Fixed rates. Home equity loans have fixed interest rates, unlike HELOCs which have variable rates.

Cons

  • Need equity. If you’re a new homeowner, you may not have enough equity to qualify.
  • Two mortgage payments. Even though you’re borrowing against your home’s equity, it’s still another loan, giving you two mortgage payments and less disposable income.

HELOCs for debt consolidation

A home equity line of credit (HELOC) is similar to a home equity loan, but it takes on a different form. HELOCs are typically well-suited for borrowers that need a lot of cash but they’re not completely sure on how much they need, making it a decent option for debt consolidation.

The amount you can borrow is typically around 70 to 85% of your home’s value.

Loan details

  • HELOCs have variable rates, typically 2% above the current prime rate
  • 10- to 20-year repayment period
  • Offers a line of credit instead of a lump sum, this draw period can last up to 10 years
  • Borrowing limit set by the amount of equity in your home

Pros

  • Borrow what you need. Unlike home equity loans, HELOCs allow you to cap your spending on what you need or want to borrow.
  • Flexibility. HELOC funds can be used for nearly anything, and that includes paying off other debt.
  • Access funds for years. Many HELOCs have a draw period for 10 years, allowing you to wait before borrowing, or only borrow when you need it.
  • Pay interest during the draw. During the draw period, you only need to pay interest on what you’ve borrowed.

Cons

  • May overspend. HELOCs may offer a large borrowing limit and have long draw periods, making it easy for some to overspend.
  • Variable rates. Its interest rate changes with the prime rate, making interest charges less predictable during the draw period, and this can make it difficult to estimate how much you’ll owe overall.
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HELOC vs. home equity loan for debt consolidation

Compare the two most popular ways to utilize your home’s equity for the purpose of consolidating your debt.

Home equity loanHELOC
Interest rates
  • Around 4% to 8%
  • Prime rate + ~2%
Possible fees
  • Closing costs
  • Application fee
  • Origination fee
  • Appraisal fees
  • Title fees
  • Credit check fee
  • Prepayment penalties
  • Closing costs
  • Application fee
  • Origination fee
  • Appraisal fees
  • Title fees
  • Credit check fee
  • Prepayment penalties
  • Annual fee
  • Inactivity fees
Turn-around time
  • One to six weeks
  • One to six weeks
Equity requirement
  • At least 15% to 20%
  • At least 15% to 20%
Who it’s best for
  • Homeowners with a lot of equity who would prefer a loan in a lump sum.
  • Homeowners with a lot of equity who need flexibility in how much they borrow, or want to borrow smaller amounts over time.

How to qualify for a home equity loan or HELOC

To take on a home equity loan or HELOC, you need enough equity to qualify. For HELOCs and home equity loans, plan to need at least 15% to 20% in home equity — the more, the better. For either borrowing method, lenders typically cap your borrowing amount to 70% to 85% of your home value.

Other typical requirements include:

  • Low DTI ratio, preferably under 43%
  • Good credit score, 650 to 670+
  • Enough provable, disposable income
  • On-time repayment history on mortgage
  • Clean credit reports

5 steps on applying for a home equity loan or HELOC

There are a few things you’ll need to do yourself, but applying for a home equity loan or HELOC isn’t too difficult. Here are five basic steps to take:

  1. Figure out your equity position. See if you have enough equity to qualify for either method. Simply take note of your mortgage balance, and then consider using an online home evaluation tool. If you owe less than what your home is valued at, you may have equity.
  2. Check your credit reports and score. Review your credit reports and take note of your credit score. Home equity loans and HELOCs may require a score in the mid-to-high 600s. If it’s not that great, you should still know your creditworthiness so you can look for lenders that can work within that range.
  3. Shop for lenders. Now that you know your credit score and equity position, you can shop for lenders that can work with your situation.
  4. Try preapproval if possible. Some lenders allow for preapproval, which involves a soft credit check that doesn’t harm your credit score. This can let you compare rates and get an idea of what lenders you may qualify with.
  5. Choose the lender and fully apply. If all goes well and you find a lender you like, apply for the home equity option you want, and if approved, receive the funds.

Can I be approved for home equity financing if I have a lot of credit card debt?

Qualifying for a home equity loan or HELOC requires a low DTI ratio, often 43% or less. Some lenders are more lenient on this requirement, but the lower your DTI ratio, the better your odds.

If you have a high amount of credit card debt but also have a lot of available income, you may still qualify. And remember that with credit card debt, only the minimum monthly payments are considered when calculating your DTI ratio — not the full amount owed.

Use our DTI ratio calculator to figure out your estimated DTI ratio. Simply enter in all your credit card minimum payments, other loan payments, and then your gross monthly income.

Alternatives for paying off debt

Home equity can be used for debt consolidation, but it’s not the only path you can take. If you’re unable to qualify for a home equity loan to pay off your debt, or it doesn’t fit your needs, then consider these other tactics:

  • Refinancing. This involves replacing an existing loan with a new loan, often with the intention of getting a lower interest rate and lower monthly payment. Common debts to refinance include mortgages, car loans, personal loans and student loans.
  • Consolidate with a credit card. You may be able to get a credit card to consolidate your loans. However, these tend to come with higher rates than home equity loans or HELOCs.
  • Balance transfer credit card. A balance transfer credit card allows you to move balances to other accounts. Introductory rates tend to be as low as 0%, and you can consolidate multiple credit cards together.

For more debt consolidation options, read our guide on the best debt consolidation loans.

Our verdict

Home equity loans and HELOCs are popular for borrowers that want to pay off various debts. These loans tend to come with lower rates than debt consolidation personal loans or credit cards, so it could save you more money overall.

However, keep in mind that there’s more at risk with these home equity loans — your home is securing the loan. Only consider a home equity loan or HELOC for debt consolidation if you’re confident you can comfortably repay on time.

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