Debt Consolidation With Home Equity

If you are carrying credit card balances, personal loans, medical bills or other high-interest debt, and you own your home, you may have an option that people without home equity do not: borrowing against that equity at a rate that is often much lower than card interest, and using it to pay the debt off. Done carefully, that can turn several payments into one and cut the interest you pay. Done carelessly, it can put your home at risk. This page is an honest look at both sides.

Christopher Hovenier helps homeowners in Arizona, California, Colorado, Florida, Idaho, Michigan, New Mexico, Tennessee, Texas and Virginia compare their options. He is a mortgage loan originator, not a debt settlement or credit repair company, so he does not negotiate with creditors or reduce what you owe. What he can do is show you whether using your equity makes sense, and what it would really cost.

How Home Equity Can Help With Debt

One payment instead of many. Several credit cards or loans can be replaced with a single loan.
Potentially lower interest. Because the loan is secured by your home, the rate is often lower than unsecured credit card rates, though that is not guaranteed.
A defined payoff plan. A fixed-term loan gives you a set path to being debt free, unlike minimum payments on revolving balances.

Your Options

Cash-out refinance. Replace your mortgage with a larger one and use the cash to pay off debt. One payment total.
Home equity loan (HELOAN). A fixed second loan for a set amount. Your first mortgage stays in place.
HELOC. A credit line you can draw from to pay off balances. Rates are usually variable.
Reverse mortgage. For homeowners 62 and older who want to pay off debt, including an existing mortgage, without a required monthly mortgage payment. Property taxes, insurance and upkeep still apply.

Not sure which is which? Our home equity comparison guide explains all four side by side.

The Risks You Should Weigh First

Unsecured debt becomes secured debt. If you cannot pay a credit card, the usual consequences are collections and credit damage. If you cannot pay a loan secured by your home, you could lose the home.
A longer term can cost more in total. Even at a lower rate, spreading balances over 15 to 30 years can add up to more interest than paying the cards down faster.
Closing costs and fees. They come out of what you borrow or out of pocket.
The habit risk. If the cards creep back up after being paid off, you may end up with both the new loan and new balances.
Your first mortgage rate. A cash-out refinance can replace a low existing rate with a higher one.

Questions to Ask Before You Decide

What is the total I would pay over the whole life of the new loan compared with my current plan?
Why did the debt build up, and has that changed?
Could I comfortably make the new payment if my income dipped?
Would I rather keep my current first mortgage rate?
Have I looked at alternatives, such as nonprofit credit counseling or a debt management plan?

Alternatives Worth Looking At

Home equity is not the only way to deal with debt, and it is not always the best one. A nonprofit credit counseling agency, such as one affiliated with the National Foundation for Credit Counseling, can review your budget and may offer a debt management plan. Some people qualify for balance transfer or personal loan options without putting their home at risk. If you are behind on your mortgage, a HUD-approved housing counselor can explain your options, often for free or at low cost. Christopher will tell you honestly if one of those fits your situation better than borrowing against your home.

What Helps Us Give You a Real Answer

Your state and the approximate value of your home
What you owe on your mortgage today, and your current rate if you know it
A rough list of the debts you want to pay off and their balances
Your goals: lower payment, faster payoff, or both

Where We Help

Christopher helps homeowners in Arizona, California, Colorado, Florida, Idaho, Michigan, New Mexico, Tennessee, Texas, and Virginia. Availability, terms and eligibility vary by state, property and borrower.

Frequently Asked Questions

Can I use my home's equity to pay off credit card debt?

Yes, many homeowners use a cash-out refinance, HELOC or home equity loan to pay off credit cards, since mortgage-secured rates are often lower than card rates. The catch is that the debt becomes secured by your home, so missed payments could lead to foreclosure rather than collections.

Is a cash-out refinance or home equity loan better for debt consolidation?

It depends on your current mortgage. If your first mortgage has a rate you want to keep, a home equity loan or HELOC lets you leave it in place. If you want one payment and your current rate is not a priority, a cash-out refinance may fit. Christopher can compare the total cost of each for your situation.

What are the risks of using home equity to pay off debt?

Your home becomes collateral for debt that was previously unsecured, you may pay more total interest if the term is much longer, closing costs apply, and paying off cards can tempt some people to run balances up again. A lower payment today does not always mean a lower total cost.

Will consolidating debt with home equity hurt my credit?

Applying creates a credit inquiry, and a new loan changes your credit profile. Paying off card balances can lower your credit utilization, which may help, while closing old accounts can have the opposite effect. Results vary by person.

Do you offer debt settlement or credit repair?

No. Christopher is a mortgage loan originator. He does not negotiate with creditors, reduce what you owe, or repair credit. If you are behind on payments and need help with creditors, a nonprofit credit counseling agency or a HUD-approved housing counselor may be a better first call.

What if I have a lot of debt or my credit is not perfect?

Options may be more limited and the terms may be less favorable, but some programs look at your whole picture rather than a single score. Call Christopher for an honest read on where you stand and what might work, including whether now is the right time.

Home equity products are secured by your home. If you cannot repay the loan, you could lose your home. Availability, terms and eligibility vary by state, property and borrower, and all loans are subject to credit and underwriting approval. This is not a commitment to lend. Christopher Hovenier, NMLS #1404324, E Mortgage Capital, Inc. NMLS #1416824.

Pay Off High-Interest Debt With Your Home's Equity