Using home equity to consolidate credit card debt: Does it work?
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Using the equity you’ve built up in your home to help pay off credit card debt could certainly help you save some money in the long run.1 Home equity products often carry a lower interest rate than credit cards,2 which could reduce the amount of interest you pay.
If you have multiple credit card debts, using the value built up in your home through a home equity line of credit (HELOC) or home equity loan to consolidate debt could reduce the number of payments you have to make. Instead of paying down multiple credit cards each month, you will only need to put money toward your home equity option.
Are you ready to explore how using your home equity could help you consolidate high-interest debt? Apply now to connect with a home equity specialist who can answer questions and help you through the process.
When using home equity may save money
Consolidating high-interest cards with home equity could help you save some money in interest payments when most of these are true.
- The rate gap is large. This occurs when your card APRs are meaningfully higher than the rate on the home equity option.
- The balance is big enough to justify the cost. Closing costs and fees on a HELOC or home equity loan might not make it worth it unless you have a relatively large credit card balance.
- You keep the repayment period short. A shorter term generally means less you will have to pay in total interest.
- You stop adding to the cards. The plan works only if the cleared balances stay cleared. In other words, you can’t keep spending on the credit cards.
- Your income is stable. You’ll need to be able to keep up with the new payment.
When it may not save money
Here's when using a HELOC or home equity loan to consolidate credit card debt may cost more or add risk without a clear benefit.
- The balance is small. Fees and closing costs for home equity options may cost more than the interest you would save.
- The new term is much longer. A lower monthly payment can hide a higher total cost.
- The rate is variable. A HELOC with a variable rate could mean an increase in your payments over time.3
- The cards will fill back up. Continuing to spend on the credit cards would mean you’ll owe the home equity debt as well as new card debt.
- Your income is uncertain. Missing payments on a HELOC or home equity loan can put your home at risk of foreclosure.
What are my potential savings?
Here are some examples that can show you how using home equity could help you consolidate high-interest credit debt.4 The comparisons hold the repayment period equal first, then change it.
Scenario 1: A larger balance with a shorter term
This is what it could look like to consolidate $20,000 card balance at 24% APR, a home equity loan at 9% with a 3% fee ($600), and a five-year repayment period.
In this illustration, the equity loan costs about $9,000 less. That result is based on the differences between the rates and the fee. It also relies on the borrower to stick to the five-year schedule.
Scenario 2: Same balance with a much longer term
Now stretch the same 9% equity loan over 15 years.
The monthly payment drops by more than half, which could be an advantage in the short run, but total interest is higher than paying off the cards at 24% over five years before counting any fee.
A smaller payment could feel like savings while the total cost goes up.
Should I consider a HELOC, home equity loan or cash-out refinance?
All three of these options use the equity you've built up in your home, but they work differently. Here's a look at the differences among the options.
A HELOC and home equity loan sit behind your first mortgage as second liens. You will make payments toward those options alongside your original mortgage.
A cash-out refinance replaces the first mortgage, so the new rate applies to your entire balance. That matters if your current mortgage rate is lower than what is available today.
Which risks should I weigh when considering a HELOC for debt consolidation?
- Your home is the collateral. If you cannot repay a HELOC, the lender could take action against the home, including foreclosure.
- Payments can change. A variable-rate HELOC payment could rise if rates go up. Interest-only payments will increase when the draw period ends and principal repayment begins.
- Closing costs and fees add up. Compare the APR and total cost, not just the interest rate.
- Cards can fill back up. If balances return, you carry both debts.
- Flexibility may shrink. Card issuers sometimes offer hardship programs. Ask whether any program applies before moving the debt. Don’t assume a HELOC or home equity loan will offer the same terms.
- Tax questions. Whether interest is deductible depends on how the funds are used and your situation. Talk with a tax professional to determine what you will be allowed to deduct.
Which alternatives could I also consider?
Using home equity is one option among several. Depending on your credit and situation, here are some other options you could consider.
- A balance transfer card may offer a low introductory rate for a limited time, though it often comes with a transfer fee.
- A personal loan is generally unsecured, so your home is not at risk, and has a fixed term.
- A debt management plan through a nonprofit credit counseling agency.
- Pay the highest-APR card first while making minimum payments on the others.
Each has tradeoffs in cost, eligibility and risk. Compare them carefully before you decide.
Which steps should I follow before I choose a HELOC to solve debt issues?
- List each card balance and APR. Add up the total balance and the interest you pay each month.
- Get written estimates for the equity option. Include the rate, APR, fees, closing costs and term.
- Compare total cost over the full term, not just the monthly payment. Use the same payoff period for both options when you can.
- Stress-test the payment. If the rate is variable, calculate what you might have to pay at a higher rate.
- Decide how you will stay out of card debt. Set a budget, lower limits or remove saved cards if that helps curtail your spending.
How Rate's HELOC works
If a HELOC fits your plan, here is how a Rate HELOC works. Rate's digital application takes about five minutes to complete, and you can get your funds in as little as five days.7
Rate's HELOC allows additional draws as you make interest-only payments during the draw period. Monthly payments with a fixed-rate option will stay the same once principal and interest are included after the draw period. Payments could increase if rates rise during the repayment period.
Eligibility and terms depend on factors such as property type, loan-to-value (LTV) ratio, credit score, debt-to-income (DTI) ratio, occupancy and lien position.
You can use Rate's HELOC calculator to estimate payments at different rates and determine if it is right for your situation.
Home equity for credit card debt: Frequently asked questions
It could be a good idea to use a home equity option to consolidate credit card debt when rates and fees are well below your card costs, the payoff period is short and you stop adding card debt. It is riskier when the balance is small, the term is longer or income is uncertain. Because your home secures the new debt, your home could be at risk of foreclosure if you miss payments.
A HELOC is a line of credit with the flexibility to draw cash when you need it. A Rate HELOC with a fixed-rate repayment option will keep your payments consistent over the life of the loan. A home equity loan generally offers a set payment and term, which may suit a one-time consolidation.
You could face late fees, credit damage and, in serious cases, foreclosure and the loss of your home. If you expect trouble making payments, contact your lender early to ask about options.
Consolidating your debts allows for predictable budgeting and lower monthly expenses, but it does mean your credit score could drop temporarily. Lenders use your credit score to get a picture of your debt management history, any delinquent payment patterns or missed payments.
A higher credit score means lenders will be more likely to offer borrowing opportunities with favorable terms, while a lower score means those options may be more limited. A debt consolidation loan, if paid off on time, can certainly improve your credit score in the long term. In the short term, you can expect your score to drop by a few points.
Whichever debt consolidation plan you choose, approval will require a hard inquiry on your credit. A hard inquiry occurs when a lender requests to check your credit report to determine your eligibility for a loan.
A hard inquiry can drop your score by up to five points. For this reason, it’s a good idea to limit hard inquiries on your credit report as multiple requests can bring down your score by a considerable amount.
1Savings, if any, vary based on the consumer’s credit profile, interest rate availability and other factors. Contact Rate for current rates. Restrictions apply.
2Source: Average credit card interest rate is 24.72% (Forbes) vs. our HELOC starts at 8.9% (subject to change) – which is 64% lower.
3The variable rate home equity line of credit (HELOC) is an open-end product where the borrower can withdraw funds and make interest only payments during the draw period. Monthly payments will increase to include both principle and interest payments after the draw period has ended. A minimum 90% of the total approved HELOC amount must be disbursed. The remaining 10% of the approved credit line can be drawn down later as needed during the draw period. The monthly variable interest rate is based on an Index, which is the Prime Rate published in the Wall Street Journal plus a fixed margin. This product is currently only available in Arizona, California, Illinois, Massachusetts, and New Jersey. The HELOC requires you to pledge your home as collateral, and you could lose your home if you fail to repay. Property insurance is required as a condition of the loan and flood insurance may be required if your property is located in a flood zone. Borrowers must meet minimum lender requirements in order to be eligible for financing. Available for primary, second homes and investment properties only. Property type, loan-to-value, and FICO restrictions and requirements apply. Dependent on minimum credit score and debt-to-income requirements. Occupancy status, lien position and credit score are all factors to determine your rate and max available loan amount. Not all applicants will be approved. Applicants subject to credit and underwriting approval. Contact Rate for more information and to discuss your individual circumstances. Restrictions apply.
4All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Rate does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error-free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Rate. Rate, its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.
5Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principal amount and will be paid off over the full loan term. Contact Rate for more information.
6Rate home equity line of credit (HELOC) is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw. This product is currently not offered in the states of New York, Kentucky, West Virginia, Delaware, Maryland and Maine. The HELOC requires you to pledge your home as collateral, and you could lose your home if you fail to repay. Property insurance is required as a condition of the loan and flood insurance may be required if your property is located in a flood zone. Borrowers must meet minimum lender requirements in order to be eligible for financing. Available for primary, second homes and investment properties only. Dependent on minimum credit score and debt-to-income requirements. Occupancy status, lien position and credit score are all factors to determine your rate and max available loan amount. Not all applicants will be approved. Applicants subject to credit and underwriting approval. Contact Rate for more information and to discuss your individual circumstances. Restrictions apply.
7Applications may be completed in five minutes but may fluctuate. Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing. In addition, funding timelines may be longer if we cannot readily verify that your property is in at least average condition with no adverse external factors with a property condition report and may need to order a desktop appraisal to confirm the value of your property. Texas borrowers will have a 12-day cooling period prior to closing on their home equity loan which will begin after the borrower has both filed a loan application and received consumer disclosures.
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