Using Home Equity Loan for Debt Consolidation

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Key takeaways

A home equity loan allows you to consolidate high-interest debt into one lower, fixed monthly payment.
Your home acts as collateral. Missing payments can put your property at risk.
Alternatives like HELOCs, personal loans, and 401(k) loans may also help, depending on your credit and financial goals.

High-interest credit card debt is a burden for too many Americans. The Federal Reserve Bank of New York found that consumer credit card debt hit $1.18 trillion in Q1 of 2025. The problem with credit card debt is that high borrowing costs and compounding interest make it hard to pay off.

One solution is debt consolidation. Consolidation can help you better manage payments and save money. If you’re a homeowner, you have a special option available. You can tap into your equity to consolidate debt.

Here’s how using a home equity loan for debt consolidation works and how to decide if it’s the right choice for you.

How to use a home equity loan to pay off debt

A home equity loan allows you to tap into the equity you’ve built in your home. Home equity is the current value of your property minus the amount you owe on your mortgage. Homeowners can borrow against this value to receive a loan.

A home equity loan gives you the money in a single lump sum at a fixed interest rate. The interest rate is typically lower than that of credit cards and personal loans. The low interest rate is because your property secures the loan. If you fail to repay the money, you risk foreclosure on your home.

You can use the loan to pay off multiple high-interest debts. Consolidating your debts leaves you with a single payment each month instead of several. It simplifies your finances, reduces interest costs, and may lower your monthly payment.

Is it a good idea to use home equity to consolidate debt?

Using home equity to pay off debt can be a smart financial move under the right circumstances. Debt consolidation refinance with a home equity loan works best for people who:

Have built substantial equity in their homes
Can qualify
Have disciplined financial habits
Can secure a significantly lower interest rate
Have a plan to pay off the loan
Can avoid incurring more debt

Consolidating high-interest debts into one bill can make payments easier to manage. You can save money with a lower interest rate and potentially lower your monthly payment. It can also help improve your credit.

Are you a homeowner? Check out:

How to borrow using equity!

The problem with using a home equity loan is that it turns unsecured debt into secured debt. Your house becomes collateral. If you fall behind on payments, you could face foreclosure. It could also extend your repayment term, which may increase the total interest paid over the life of the loan.

Does debt consolidation hurt your credit? It can cause a temporary dip because of the hard inquiry for the new account. Your credit score should improve overall as you pay off credit card balances and make on-time payments on your loan.

In the end, a home equity loan is only a good idea if you are sure you can repay the debt.

Pros and cons of using a home equity loan to consolidate debt

Pros:

Lower interest rates
Single monthly payment
Fixed repayment schedule
Lump sum funding
Flexible credit score requirements
Potentially lower monthly payment
It may help you build credit

Cons:

Risk of foreclosure
Closing costs and fees
Potentially longer repayment term
Reduces home equity
It may encourage more debt

Who can qualify for a home equity loan to consolidate debt?

Lenders’ requirements for home equity loans vary. Typically, they require you to have 15% to 20% equity, a debt-to-income (DTI) ratio below 43%, and a minimum credit score of 620.

Check your credit score and credit report before you apply. Identify areas for improvement. Applicants with higher scores will get better rates.

A stable, sufficient income and a consistent record of on-time mortgage payments will increase your chances of approval. Lenders want to ensure you can handle the new loan on top of your existing financial obligations.

How can I apply for a home equity loan for debt consolidation?

Here’s how to get started:

1. Evaluate your home equity

To determine how much equity you have in your home, subtract your current mortgage balance from your home’s market value. Lenders usually let you borrow 80% to 85% of your home’s value minus how much you owe on your mortgage.

2. Compare lenders

Shop around and prequalify with multiple lenders. Not all lenders offer the same loan terms, especially if you have a poor credit history. Compare interest rates, repayment terms, closing costs, fees, and customer service ratings. Then apply for the best deal.

3. Gather required documentation

The exact documents you’ll need depend on your lender. Most require:

Proof of income (pay stubs, W-2s, or tax returns)
Government-issued ID (driver’s license or passport)
Social security number
Mortgage statement
Home insurance declaration
Recent property tax statement
Home title
Title insurance policy

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Lenders use this information to check your credit, verify your income, and determine how much you can borrow.

4. Submit your application

Once you’ve chosen a lender and gathered your documents, it’s time to submit your application. The lender will do a home appraisal to check the property’s value. They will also review your application based on your credit score, income, and equity. After approval, you’ll receive a loan offer outlining the terms.

If you accept it, the lender will schedule a closing, and you’ll receive your lump sum, usually within a few days. You can then use that money to pay off existing debts and focus on repaying one new loan.

Emergencies can pop up at any time.

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Alternatives for debt consolidation refinance

If a home equity loan doesn’t suit your needs, several other loan options can help you consolidate debt.

HELOC for debt consolidation

You can use a home equity line of credit (HELOC) for debt consolidation. A HELOC is another way to borrow against the equity you’ve built in your home. Instead of receiving a lump sum, you borrow as needed during the draw period. Then, repay what you used during the repayment period.

To use a HELOC to consolidate debt, you borrow against the line of credit to repay other debts. Then, make a single HELOC payment each month. You only pay interest on the amount you borrow.

The advantage of a HELOC for debt consolidation is that you will get a lower interest rate and save money.

HELOC or home equity loan for debt consolidation

When you compare HELOCs and home equity loans, you’ll find that the main difference lies in how you receive and repay the funds. Home equity loans give you a lump sum at a fixed interest rate. You have set monthly payments, which makes budgeting easier.

HELOCs let you borrow as needed at a variable interest rate. Your monthly payments may change, and your interest rate may fluctuate with the market. They tend to be better for ongoing expenses where you don’t have a final number.

Additionally, securing a HELOC with bad credit is typically harder than getting a home equity loan with a poor score.

Cash-out refinance

A cash-out refinance replaces your existing mortgage with a new, larger primary mortgage. The difference between your new loan and the amount you still owe becomes available in cash. Use the money to pay off high-interest debts. You are left with one mortgage payment each month.

You will likely receive a lower interest rate, but you may extend the terms of your primary mortgage. A longer-term mortgage could cost you more in interest over time. You will also have to pay closing costs, which you may be able to avoid with a home equity loan.

This option best suits borrowers who want to use mortgage refinancing while tackling debt.

Personal loans

Personal loans are a good option if you don’t want to use your home as collateral. They tend to have lower interest rates than credit cards and are less risky.

Qualifying for them depends primarily on your credit profile and financial history. You can find personal loans for bad credit, but their interest rates will be high, so you may not save money.

Home equity loan vs personal loan for debt consolidation

The choice between a home equity loan and a personal loan comes down to how comfortable you are with risk. A home equity loan uses your property as collateral. You will get a lower interest rate, but risk foreclosure if you fail to repay.

Personal loans are unsecured, and so do not require collateral. They are less risky but have higher interest rates, especially if you have poor credit.

A home equity loan is a better choice if you have significant equity, a stable income, and can repay the loan. If there is any chance that you cannot repay, do not put your home on the line.

401(k) Loan to buy a house or pay off debt

A 401(k) loan lets you borrow from your retirement savings at a low interest rate. You must repay the money within five years. The interest you pay goes back into your retirement account.

How long does it take to get a 401(k) loan? Generally, your plan administrator disburses funds within a few business days, depending on their process. They do not conduct a credit check since you borrow from your account.

Failure to repay the loan can leave you in debt and risk your retirement savings. You may also be subject to tax penalties if you don’t repay the money on time.

Consider the consequences when choosing between a 401k loan vs. a home equity loan. Do you want to risk your retirement savings or your home? Taking out a 401k loan to pay off credit card debt may solve short-term problems but lead to long-term financial setbacks.

Frequently asked questions

1. Does debt consolidation affect buying a home?

Yes, consolidation can affect buying a home. In the short term, the hard inquiry can lower your credit score. In the long run, paying off debt will reduce your DTI and credit utilization. Lower utilization plus on-time payments will improve your score. A higher credit score and lower DTI make it easier to secure a mortgage at a better rate.

2. Is a home equity loan a good idea to pay off debt?

A home equity loan can be good if you have sufficient equity, a stable income, and a solid repayment plan. It often comes with lower interest rates than credit cards or personal loans. It is not a good choice if you cannot repay the loan or continue to take on debt. Your home is collateral, so defaulting can lead to foreclosure.

3. How many home equity loans can you have?

Most lenders allow only one home equity loan at a time. Some may permit a second loan or a HELOC if you have enough equity and a strong credit score. Managing multiple loans increases your risk of defaulting. In many cases, refinancing into a larger loan may be a better strategy than stacking multiple loans.

Bottom line

Tapping into your home’s equity can be a smart first step toward paying down debt. It can simplify your finances and reduce your interest expenses.

Borrowing against your home is not the right choice for everyone. If there is any chance you won’t be able to repay the money, do not take out the loan and risk foreclosure. Plenty of other methods for debt consolidation exist. Choose a debt relief method that helps you pay off debt fast with low risk.

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Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor's credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor's degree in journalism and an MBA.

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Using Home Equity Loan for Debt Consolidation

Key takeaways

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How to use a home equity loan to pay off debt