Home Equity Loan for Debt Consolidation: Should You Do It?
- A home equity loan can be a good debt consolidation option if you have enough equity and a rock-solid plan for repaying the loan.
- Consolidating debt with a home equity loan may lower your monthly payments, but you should compare the total borrowing costs — including interest and closing costs — before moving forward.
- Alternatives like a HELOC, personal loan, balance transfer credit card or cash-out refinance may be a better fit depending on your credit score, debt amount and financial goals.
Debt can make it difficult to get ahead financially, especially when you’re dealing with credit card or other high-interest debt. If you’re a homeowner, a potential solution is to use a home equity loan for debt consolidation.
By tapping your home equity to pay down your debts, you can lower your interest rate and potentially reduce both your monthly payment and total borrowing costs.
But using a home equity loan to pay off debt isn’t a decision to take lightly. Before moving forward, it’s important to understand the potential benefits, risks and alternatives to determine whether a home equity loan is the right solution for your situation.
Should you get a home equity loan for debt consolidation?
Using a home equity loan to consolidate debt can be a good option if you’re struggling to manage your monthly debt payments and have sufficient equity in your home.
A home equity loan is a type of second mortgage that allows you to convert some of your home’s equity to cash. You’ll receive the funds in a lump sum and must repay your balance over a set repayment term.
A home equity loan is often helpful if you have high-interest debt, such as credit card debt, since you can secure a lower interest rate and save money in the long run.
You could use a home equity loan to pay off various debts, including:
- Credit cards
- Personal loans
- Student loans
- Medical bills
It’s generally not recommended to use home equity loans to pay off a loan tied to a depreciating asset, such as a car or boat. It may also be better to pay off low-interest debt by adjusting your budget and making a higher minimum payment.
Example: How a home equity loan could lower your monthly debt payments
Let’s say you have $30,000 in credit card debt with an average APR of 24% and a monthly payment of about $900.
You decide to take out a home equity loan to pay off the debt, and qualify for a $30,000 home equity loan with a 20-year term and a 7.5% interest rate. Here’s how the two loans compare:
| Credit card debt | Home equity loan | |
|---|---|---|
| Balance | $30,000 | $30,000 |
| Interest rate | 24% | 7.5% |
| Minimum monthly payment | $900 | $242 |
| Total interest | $58,422 | $28,003 |
| Total of all payments | $88,422 | $58,003 |
In this example, consolidating the debt with a home equity loan could reduce the payments by more than $650 per month.
However, it’s also important to compare the total borrowing costs, not just the monthly payment.
Pros and cons of using a home equity loan to pay off debt
Pros
- You’ll simplify your monthly payments: Instead of having multiple due dates to keep track of each month, you’ll only have one. This can help you avoid missing payments on your credit cards or other debts, which is crucial if you want to maintain a good credit score.
- You might get a lower interest rate: Since home equity loans are secured by your home, lenders consider them lower risk and therefore typically offer lower interest rates.
- You could end up with lower debt payments: Consolidating debt using your home equity may reduce your monthly payments, since it’s likely the home equity loan will have a lower interest rate.
Cons
- You may have to pay fees: Taking out a home equity loan comes with various closing costs, which may include a loan origination fee, appraisal fee and credit report fee. These fees could end up costing between 2% and 5% of the loan amount.
- Your home is at risk of foreclosure: Your home is used as collateral on a home equity loan — this means that if you fail to make payments, your lender can repossess your home through the foreclosure process.
- You could end up underwater on the loan: When you take out a home equity loan, your equity shrinks. If, for some reason, your home value drops, it’s possible you could end up owing more on the home than it’s worth.
- You probably won’t get a tax deduction: Under current IRS rules, home equity loan interest is deductible only when the funds are used to “buy, build or substantially improve” the home securing the loan.
Are you eligible for a home equity loan?
Lenders assess several key factors to determine your home equity loan eligibility, including:
Home equity
You’ll generally need at least 15% equity in your home to qualify for a home equity loan to consolidate debt. However, this will vary slightly between lenders.
Credit score
Again, this will vary from lender to lender. Most lenders set a 620 minimum credit score for home equity loans. If your score is on the lower end, you can expect a higher interest rate.
Don’t know your credit score? Get your free score on LendingTree Spring today.
Debt-to-income ratio
Home equity loan lenders typically require you to have a maximum 43% debt-to-income (DTI) ratio. This means that no more than 43% of your gross monthly income goes toward your monthly debt obligations.
How to apply for a home equity loan to consolidate debt
1. Calculate your home equity
You’ll want to find out how much home equity you have to determine whether getting a home equity loan is worth it and if you’d qualify.
Estimate how much you could borrow with LendingTree’s home equity loan and HELOC calculator.
To calculate your home equity yourself, simply subtract your existing mortgage balance from your home’s value. You can typically borrow up to 85% of your home’s value, though some lenders may let you borrow up to 90%.
2. Shop around for lenders
Since rates, fees and eligibility requirements can vary significantly between lenders, it’s wise to compare a few different options before making a decision. Doing so can help you find the best deal for your needs.
LendingTree is a free, safe, and secure way to quickly compare rate quotes from a network of vetted home equity lenders.
According to 2026 LendingTree data, borrowers that use LendingTree to compare offers can save $60,000+ over the life of a 30-year loan.
When banks compete, you win.
Get started by filling out our form to see competitive home equity rate offers today.
3. Receive the funds
Once you choose a home equity loan lender, get approved and pay the closing costs, you’ll receive the loan proceeds in a lump sum. You can then use the funds to pay off your existing debts.
Alternatives to using home equity for debt consolidation
Home equity loan vs. other debt consolidation options
| Option | Best if… | Interest rate competitiveness | Key drawback |
|---|---|---|---|
| Home equity loan | You’re paying off a large amount of high-interest debt with a fixed payment | $$ | Your home is at risk of foreclosure if you can’t keep up with the payments |
| HELOC | You want flexible access to funds over time | $$$ | Your interest rate is typically variable, meaning the payments are likely to fluctuate |
| Personal loan | You want to consolidate debt without tying the debt to your home | $$$$ | You’ll have a high interest rate |
| Balance transfer credit card | You want to pay off credit card debt quickly | $$$$$ (but many balance transfer cards come with 0% intro APRs) | The interest rate will be expensive once the promotional period ends |
| Cash-out refinance | Homeowners who can improve or maintain their mortgage terms | $ | You’ll have to replace your existing mortgage |
Home equity line of credit (HELOC)
A HELOC, like a home equity loan, is a type of second mortgage. Instead of receiving a lump sum, a HELOC provides a revolving credit line that works similarly to a credit card. You can use a HELOC to pay off debt by withdrawing from the credit line, repaying it and withdrawing from it again as needed — but only during the draw period, which is typically 10 years. You may only have to make interest payments during the draw period. However, once the draw period ends, you’re required to make both principal and interest payments over a set repayment term.
Compare current HELOC rates.
Personal loan
Personal loans are typically unsecured, which means they don’t require collateral like home equity loans and HELOCs do. This is a big plus if you’re not comfortable putting your home on the line to pay off your other debts. However, because there’s no collateral, lenders will charge you a higher interest rate to account for the higher risk.
Borrowers with good credit scores may qualify for a personal loan that has a lower interest rate than their current debts, such as credit cards, but the rate will likely still be higher than the rate for a home equity loan.
Estimate your monthly payments using LendingTree’s personal loan calculator.
Balance transfer credit card
If you have strong credit, you may be eligible to transfer your balance from a high-interest credit card to one with an introductory 0% annual percentage rate (APR) for a set time. Some credit cards will allow you to transfer a balance with no fees and make payments without interest for up to a year or longer, which can buy you time to pay off credit card debt, minus extra fees.
Cash-out refinance
Another way to borrow money against your home equity is to pay off your first mortgage and take out cash at the same time, using a cash-out refinance. This will replace your existing mortgage with a new loan that has new terms — and give you a lump sum to pay off your debt.
An FHA cash-out refinance backed by the Federal Housing Administration is the method to tap your home equity with the lowest credit score requirement. The guidelines only require a minimum 500 score, though many lenders may set the bar a bit higher at 580 or 600.
Frequently asked questions
Not having enough equity in your home, having a low credit score or having too much debt compared to your income are all factors that could disqualify you from getting a home equity loan.
Having a home equity loan generally won’t hurt your credit, as long as you don’t miss any payments. However, your credit score may take a slight hit when you first get the loan, since the lender will run a credit check to assess your eligibility. This is known as a “hard inquiry,” and it’s one of the five credit factors that affect your score.
To find out how much your monthly payment would be if you took out a $100,000 home equity loan, you’ll need to know the loan term and interest rate. For example, a 20-year loan at a 6% interest rate would cost about $716 a month.
If you want to keep your home equity intact, other options to get out of debt include:
- Debt avalanche or snowball method: These debt pay-off strategies involve repaying your debts in order from smallest to largest balance, or from highest to lowest interest rate.
- Debt management plan (DMP): A DMP involves working with a credit counseling agency to negotiate with your creditors to lower your interest rates or monthly debt payments.
- Bankruptcy: If you’re facing serious financial hardship and don’t think you’ll ever be able to repay your debt, bankruptcy might be worth considering. Consult with a lawyer to understand whether you can keep your home after filing for bankruptcy.
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