Using a Home Equity Loan for Debt Consolidation Isn’t Worth the Risk

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

At the end of the second half of 2022, the average American homeowner had $216,900 in “workable equity” while retaining 20%, according to the latest data provided by mortgage technology and data provider Black Knight.

With record equity and relatively low rates on HELOCs and home equity loans, it can be tempting to dip into your capital to consolidate and pay off other debts that have higher interest, like credit cards. . Taking out a home equity loan or HELOC for debt repayment has its benefits, but it also comes with risks. Experts also suggest exploring alternatives before using your home equity to consolidate debt.

Advantages and Disadvantages of Using Your Home Equity for Debt Consolidation

If you have significant high-interest debt, using the equity in your home to pay it off will likely cause the interest rate to drop. The average rate for a $30,000 10-year home loan is currently 7.05%. average credit card interest rate is 15%, but often consumers end up with even higher interest rates on their credit cards, exceeding 20% ​​or 25%. Reducing the interest rate you pay on your debts will help you pay down your balances faster because more of your payments will go toward principal rather than interest.

Another benefit is having one 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 advantages, this strategy can be dangerous. While credit card debt is unsecured, meaning it doesn’t require collateral, home equity loans and HELOCs use your home as collateral.

In addition to putting your home at risk, you also won’t be able to deduct interest from your HELOC or home equity loan on your taxes. When you borrow against your home and use the money to make improvements, the interest is usually tax deductible. But if you use it for other purposes, it is not.

Additionally, you may have to pay closing costs when tapping into the equity in your home, which can amount to 2-5% of the loan amount. It can also take between two and 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 payments could decrease

The inconvenients

  • Your home is in danger

  • Interest will likely not be tax deductible

  • You will probably pay high fees

  • Funding time 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. Here’s how to get one:

  1. Decide if a home equity loan or HELOC is better for you. For example, if you know the exact amount you want to consolidate, a home equity loan might be a good idea.
  2. Compare the options of different lenders. Taking the time to shop around can help you find the best rates and terms possible.
  3. Submit an application. Just like you did with your mortgage, you will need to provide proof of income and identity, proof of address, and documentation of your assets.
  4. Wait for an evaluation. Your lender will order an appraisal before approving you for a home equity loan or HELOC.
  5. Close the loan. It usually takes between two and six weeks to complete a home equity loan or HELOC.

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 house as collateral – to eliminate high-interest debt is not the best decision. “It’s extremely rare that I tell you to borrow from your house to pay off your credit card debt,” says Leslie Taynefounder and principal attorney of Tayne Law Group.

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

“Ideally, you want to look at your budget and consider different alternatives. If you don’t budget properly after taking out a HELOC or home equity loan, you could easily be under water again. And while you can get a lower interest rate than credit cards, the upfront costs of tapping into your home equity are often high.

Alternatives to Using Home Equity to Consolidate Debt

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

Credit cards with balance transfer

Balance transfer credit cards often come with a promotional interest rate for a set period, such as 12 or 18 months. During this period, you will 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 high interest charges. Just be sure to pay off your balance before the end of the promotional period, as the card’s regular rate, which may be high, will apply thereafter.

Unsecured personal loan

Another alternative is an unsecured personal loan. Personal loans usually have low fixed rates and terms usually range from 12 to 60 months. Depending on your lender, you may be able to borrow up to $50,000, and funds are often disbursed within one or two business days.

Refinancing by withdrawal

As mortgage rates have risen, a cash refinance might still make sense if you’re looking to consolidate your debt. The suitability of this option depends on several factors, including the amount of equity in your home, your credit, and the amount you wish to borrow.

With a cash refinance, you replace your existing mortgage with a larger mortgage, and the difference is paid to you in a lump sum. You could then use these funds to consolidate your debt.

Experts generally don’t advise refinancing a new mortgage with a higher interest rate than the one you already have. For example, if your current mortgage rate is 4%, a cash refinance rate today would be higher than 5.5% 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 more manageable debt repayment plan. “It is possible to renegotiate the terms of outstanding credit card debt,” says Guillaume Bevins, CFP and Fiduciary Financial Advisor in Tennessee. “Reducing the current interest rate, requesting a temporary reduction in payments, and moving the due dates for monthly payments are some possibilities.”

Frequently Asked Questions (FAQ)

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

It is possible to get a HELOC loan or a home equity loan if you have a lot of credit card debt. However, whether or not you approve will likely depend on your home equity, credit score, income, and other factors.

Does it make sense to use equity to consolidate debt?

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

Nancy I. Romero