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Should You Use a Home Equity Loan for Debt Consolidation?

Matthew Levy Updated: August 29, 2023 • 7 min read
Home equity for debt

A home equity loan can be a smart way to pay off debt under the appropriate circumstances. Interest rates on home equity loans are typically lower than credit card or personal loan rates. So, you can potentially lower your overall interest on your debt. Keep in mind that there may be risks involved, such as the potential loss of your home if you're unable to pay back the loan. It's important to carefully evaluate the advantages and disadvantages and seek professional advice before making a decision.

What is a Home Equity Loan?

A home equity loan is a type of second mortgage where you borrow against the equity you've built up in your home.

The equity in your home is the difference between its market value and the amount you owe on your original mortgage. So, if your home is valued at $300,000 and you owe $200,000 on your mortgage, you have $100,000 in home equity.

If you apply and get approved for this type of loan, you'd receive the $100,000 from your lender in one lump sum that you pay off in installments each month. You'd pay a fixed interest rate, meaning that your monthly payment will be the same every month. 

How Does Using a Home Equity Loan to Pay Off Debt Work?

So, can a home equity loan be used for anything? The answer is yes, and many people choose to use it to pay off debt. The process works roughly as follows: 

  • Meet key requirements: Apply for a home equity loan from a lender, providing necessary documentation and meeting eligibility criteria. Typically, you need at least 15% equity in your home, a credit score of 620 and higher and a debt-to-income ratio of 43% or below.
  • Determine loan amount: Based on your home's equity and the lender's guidelines, determine how much you can borrow to pay off your debt.
  • Pay off existing debt: Use the funds from the home equity loan to pay off your existing debts, such as credit card debt. 
  • Consolidate debt: By paying off multiple debts, you consolidate them into a single loan with a potentially lower interest rate and a fixed repayment term.
  • Make regular loan payments: Repay the home equity loan in monthly installments according to the terms agreed upon with the lender, which may involve a fixed interest rate and a specific repayment period.

Keep in mind that there are often fees and closing costs associated with these loans, so it's essential to factor these in when considering a home equity loan. Always remember that every financial decision has its own pros and cons, and it's crucial to consider all aspects before proceeding.

Home value and home equity

Pros and Cons: Home Equity Loan for Debt Consolidation

If you're considering using a home equity loan to consolidate your debt, it's crucial to understand what this might entail. Here are some potential advantages and disadvantages of using a home equity loan.


  • Lower interest rates: Generally, home equity loan rates are quite competitive, often lower than credit card and personal loan rates. This could mean substantial savings over the life of the loan, as a lower interest rate means a lower total cost of borrowing. Current rates are about 7 - 10% as opposed to credit cards, which are reaching 24%. 
  • Large loan amounts: One of the key advantages of home equity loans is the possibility of securing a significant loan amount. This largely depends on your home's value and how much equity you've accumulated. A home equity loan could be a viable option if you need a substantial amount of money to pay off your debt.
  • Potential tax benefits: In some cases, the interest paid on a home equity loan may be tax-deductible. However, this generally applies when the loan is being used for home improvement
  • Fixed monthly payments: Home equity loans usually have a fixed interest rate and fixed monthly payments. This can simplify budgeting, as you'll know exactly what you need to repay each month, without fluctuating variable-rate debts, such as credit cards.


  • Risk of losing your home: The biggest potential downside of a home equity loan is the risk to your home. Because your home serves as collateral for the loan, failure to make the required payments could lead to foreclosure. The decision to take out a home equity loan is highly significant and requires careful consideration.
  • Fees and closing costs: Like many other types of loans, home equity loans may come with various fees. This can include application fees, origination fees, appraisal fees, and closing costs. These can add to the overall cost of borrowing, so it's good to factor these in when considering a home equity loan.
  • Credit score requirements: To get a good rate on a home equity loan, you typically need a credit score of 700 and higher. 
  • Long-term commitment: Home equity loans often come with longer repayment terms, sometimes up to 15 years or more. This means you'll be committed to making payments for a long period, which could impact your financial planning and stability.
  • Possible additional debt: If you use a home equity loan to consolidate credit card debts but continue to accrue more credit card debt anyways, you might end up with more debt than before. Having a clear plan and discipline is essential to avoid falling into this trap.

These points are only a starting place for your consideration. It's crucial to think about how these factors align with your unique financial situation and long-term goals. Financial decisions have long-lasting implications, so taking the time to weigh your options and possibly seek advice from a financial advisor can be wise.

Financial situation factors

Step-by-Step: How to Apply for a Home Equity Loan 

Applying for a home equity loan involves several steps. Here's an idea of what to expect:

  1. Understand your financial situation: Know your credit score, income, monthly expenses, and the amount of equity you have in your home.
  2. Research lenders: Not all lenders offer the same terms and interest rates. Take the time to research various lenders, comparing their rates, terms, and fees. 
  3. Prequalify: Some lenders offer prequalification, a process where you provide basic financial information, and the lender gives you an estimate of the loan amount you might qualify for and possibly an estimated interest rate. Remember, prequalification is not a guarantee of a loan, but it can give you an idea of what you might be eligible for.
  4. Complete the application: This usually requires more detailed financial information and may include proof of income, tax returns, and information about your home and mortgage.
  5. Appraisal: The lender will typically require an appraisal of your home to determine its current market value, influencing the amount you can borrow. Costs of appraisal will typically be between $300-500. 
  6. Approval: After reviewing your application and the appraisal, the lender will decide whether or not to approve your loan. If approved, the lender will provide you with the loan terms.
  7. Closing: If you agree to the terms, you'll move to closing. This is when you'll sign the final loan documents and the loan will be funded.
  8. Repayment: After closing, you'll start making regular monthly payments on the loan according to your agreed-upon terms.

Remember, taking out a home equity loan is a significant decision that can impact your financial future. Make sure to understand the terms and implications before signing any loan agreement.

Alternatives for Home Equity Loans for Debt Consolidation

If you're considering consolidating your debt, there are several other options that you can explore:

  • Home Equity Line of Credit (HELOC): HELOCs work very similarly to home equity loans. The main difference is that they act like lines of credit, allowing you to withdraw different amounts over the lifetime of the loan. They also have variable, not fixed interest rates. If you're wondering which to choose, read Home Equity Loan vs HELOC: Choosing the Best Option for Your Financial Needs.
  • Debt consolidation loans: These personal loans let you consolidate multiple debts into a single monthly payment, potentially making your debt management easier and less stressful.
  • Debt management providers: Reputable debt management or debt counseling providers can work with you to create a personalized plan to manage your debt. They can also negotiate with your creditors and provide tips on budgeting.
  • Personal loans: Personal loans can offer flexibility, as you can use the funds for any purpose, including consolidating debt. They typically come with fixed interest rates and fixed repayment periods. Check out the Best Personal Loans For June 2023
  • Cash-out refinance: This involves refinancing your existing mortgage for more than you currently owe and taking out the difference in cash. This cash can be used to consolidate your debt. Learn the ins and outs of cash-out refinance here
  • Balance-transfer credit cards: These credit cards often offer low introductory interest rates, allowing you to transfer balances from high-interest cards and potentially save on interest.

Remember, each of these options comes with its own benefits and risks. 

Terms and implications


Deciding to use a home equity loan to consolidate debt is a personal decision that hinges on various factors, including your current financial situation, the amount of equity in your home, and your ability to repay the loan. While it can offer lower interest rates, there is the potential risk of losing your home should you not make the payments. Explore all available options and make the choice that's right for you.

Written by Matthew Levy

Matthew is a freelance financial copywriter with 14+ years in financial services. He holds a Bachelor of Science degree in Economics with business and finance options and is a CFA Charterholder. He is from Vancouver, Canada, but writes from all over the world.