By Bill Lyons | Published on November 8, 2024
TABLE OF CONTENTS

    Using your home equity to pay off debt might sound like a big step, but with the right approach it can give you the breathing room you need to get your finances back on track. Read on to learn more about how a home equity loan works for debt consolidation.

    KEY TAKEAWAYS

    • A home equity loan lets you consolidate multiple debts into one monthly payment, making it easier to manage your finances.
    • A HELOAN gives you a lump sum with a fixed interest rate, while a HELOC provides a revolving line of credit with a fixed or variable rate.
    • Using home equity to pay off debt also carries risks as your home serves as collateral, there are closing costs involved, and missing payments could lead to foreclosure.
    • Home equity loans work well for high-interest, unsecured debts, but may not be ideal for federal student loans or smaller, short-term debts.

    How to Use a Home Equity Loan to Pay Off Debt

    A home equity loan (HELOAN) allows you to borrow against the value of your home and can be an effective way to consolidate debt. If you’ve built up enough tappable equity, you can use a home equity loan to pay off debts. So, if you have any lingering credit card balances or high-interest personal loans to pay off, a home equity loan might be a good solution.

    Think of it this way: instead of managing multiple debt payments, a home equity loan for debt consolidation bundles them into one single payment. This way, you only have to focus on one payment that tends to carry a lower interest rate than credit cards or other unsecured loans. This approach makes it easier to manage what you owe, potentially saving you money in the long run and reducing the stress of keeping up with different due dates and rates.

    If you’re considering using your home equity to pay off debt, start by using a debt consolidation calculator. This tool shows you potential savings from consolidating your debts and helps you understand how a new monthly payment will fit into your budget, preventing further financial difficulties.

    Pros and Cons of Home Equity Loans for Debt Consolidation

    Considering a home equity loan for debt consolidation can be a powerful financial move. Therefore, it’s important to weigh the pros and cons to help you decide if this is the right choice to help you pay off your debts.

    Pros

    • Lower interest rates: Home equity loans often have lower interest rates compared to credit cards or personal loans. Since a HELOAN is secured by your home, lenders face less risk and are able to offer lower rates.
    • Single monthly payment: You combine multiple payments into one when you consolidate debt with home equity. This makes it easier to manage your finances and reduces the stress of keeping track of different due dates and bills.
    • Fixed interest rates: With a home equity loan, you also get a fixed interest rate. This means your payments stay predictable, making it easier to plan your budget.
    • Potential tax benefits: In some cases, interest paid on a home equity loan may be tax-deductible. Check with a tax advisor to see if you qualify for this benefit.
    • Access to larger loan amounts: Since you’re borrowing against your home’s value, you may have access to a larger amount compared to unsecured loans. This can make using home equity to pay off debt more effective if you have significant balances to consolidate.

    Cons

    • Risking your home: One downside of using a home equity loan to pay off debt is that your home serves as collateral. This means that if you fail to make payments on your home equity loan, the lender could potentially foreclose on your home.
    • Closing costs and fees: Home equity loans come with closing costs and fees that can add up quickly. Make sure you factor these costs in when deciding if a home equity consolidation loan is the right move for you.
    • Lower your ownership stake: With a home equity loan, you’re essentially exchanging the equity you’ve accrued for cash. This means you’ll have less tappable equity available to you after taking out a HELOAN.
    • Temptation to spend again: If you use a home equity loan to pay off debt, this can lead to lower monthly payments which, in turn, can encourage additional spending. This is why you have to have a plan in place when taking out a HELOAN or HELOC for debt consolidation and be responsible when using your funds.

    HELOAN vs HELOC for Debt Consolidation

    A home equity line of credit (HELOC) also lets you tap into your home’s value to consolidate debt. However, a HELOC works differently and has its own strengths and weaknesses for debt consolidation.

    A HELOC functions like a credit card, providing a revolving line of credit you can draw from as needed. It offers more flexibility than a HELOAN. If you’re unsure exactly how much you’ll need or want access to funds over time, a HELOC for debt consolidation may be a good fit. However, most HELOCs come with a variable interest rate, meaning your monthly payments can change, making budgeting more unpredictable.

    Griffin Funding also offers a fixed-rate HELOC for borrowers who want to continuously draw on a line of credit, but at the same time like the predictability that a fixed interest rate offers. While a fixed-rate HELOC must be fully drawn from day one, borrowers can redraw on it as they pay down the loan if they choose to. This financing option can be a good fit if you’re tapping into your equity for a specific purpose and want to capitalize on the flexibility of a HELOC.

    On the other hand, a HELOAN provides a lump sum of money upfront. It comes with a fixed interest rate and more predictable monthly payments. This can help you budget more effectively. If you know the exact amount you need, using a debt consolidation home equity loan can simplify things, giving you one manageable monthly payment at a stable rate.

    All in all, if you prefer stability, the HELOAN may be better to consolidate debt with home equity since you know exactly what your payments will be each month. But if you need ongoing access to funds, a HELOC to consolidate debt can offer the flexibility you need, even though you’ll face variable rates.

    What Types of Debt Should You Consolidate With a Home Equity Loan?

    A woman holding a calculator sits on the floor with all of her bills and credit cards spread out around her. 

    A HELOAN for debt consolidation can be a smart choice for some types of debt, but less ideal for others. It’s important to understand your financial situation and carefully choose which debts to consolidate with home equity to ensure you’re maximizing the benefits while minimizing the risks.

    Good types of debt to consolidate with a HELOAN:

    • Credit card debt: High-interest credit cards are perfect candidates for consolidation with a home equity loan. The relatively low, fixed interest rates of HELOANs tend to be much more affordable than high credit card rates.
    • Medical bills: If you’re dealing with substantial medical expenses, a debt consolidation home equity loan can help manage these bills at a lower interest rate. A HELOAN can be helpful in repaying medical debt, while a HELOC may be useful if you need to pay for ongoing treatments.
    • Personal loans: If you have multiple personal loans with high interest rates, consolidating them with a HELOAN can lower your payments and make managing debt simpler.

    Debt not suited for HELOAN consolidation:

    • Student loans: Federal student loans often offer flexible repayment plans or loan forgiveness options. Consolidating them with a HELOAN could potentially result in losing those benefits, which may not be in your best interest.
    • Auto loans: Since auto loans are already secured by the vehicle, consolidating them with a home equity loan isn’t usually advantageous. You’d be trading one secured debt for another, but with the risk of your home on the line.
    • Short-term or small debts: Using home equity to pay off small debts or debts with short repayment terms can be risky. The longer repayment period of a HELOAN might mean you end up paying more in the long run.

    See If You Qualify for a Home Equity Consolidation Loan

    Consolidating your debt using a home equity loan or HELOC is a powerful way to regain control of your finances. Whether you prefer the fixed rate and stability of a HELOAN or the flexibility of a HELOC for debt consolidation, using your home equity can simplify your payments and potentially save you money on interest. It’s all about making a smart move that works for you.

    If you’re ready to take the next step and learn more about how to use your home equity to pay off debt, Griffin Funding is here to help. Reach out today for a free consultation or download the Griffin Gold app to begin managing your finances, tracking your credit, and getting personalized support from one of our loan officers.

    Apply for a home equity loan today and discover how we can help you achieve your financial goals with confidence!

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    Bill Lyons

    Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.