Homeowners with enough equity in their home can borrow against it to consolidate existing debts using a home equity loan or HELOC. This strategy can simplify repayment and reduce interest rates — but it’s not without risk.
In this guide, we’ll explain how home equity loans and HELOCs work for debt consolidation, who they’re best suited for, and what pitfalls to watch for. We’ll also review alternatives, qualification steps, and which types of debt you should (and shouldn’t) consolidate using your home equity.
Key Insights
- Home equity loans and HELOCs can help consolidate multiple debts into a single monthly payment — often at a lower interest rate.
- Your home is used as collateral, which means missed payments could lead to foreclosure.
- You need sufficient equity (typically 15%–20%), good credit, and a stable income to qualify.
- This strategy works best for high-interest debts like credit cards and payday loans — but not ideal for student loans or auto loans.
- Alternatives include balance transfer cards, personal loans, and 401(k) loans — each with pros and cons to consider.
What Is Home Equity — and How Is it Used to Consolidate Debt?
Home equity is the difference between your mortgage balance and the current value of your home – essentially, the amount of your home that you own free and clear. You can borrow against your home equity for all kinds of reasons, including using a debt consolidation loan, using one of two methods:
A home equity loan acts as a second loan on your home, with its own fixed interest rate, monthly payment, and repayment term. You receive one lump sum all at once.
A home equity line of credit (HELOC) acts as a line of credit that you can borrow from, up to the limit, similar to a credit card. You draw from your credit line as needed during the draw period, then pay your balance back over time. HELOCs have variable interest rates.
To consolidate your debts, you take the provided funds and use them to pay off your existing debts. Then, you make one monthly payment to the lender over time until the debt is completely paid off.
Pros of Using Home Equity to Consolidate Debt
Using a home equity loan or HELOC to consolidate debt has several clear advantages — especially for homeowners with strong credit and stable income.
Lower interest rates
One major advantage of using your home equity to consolidate debt is that home equity loans and HELOCs may have lower interest rates than other forms of debt, such as credit cards or personal loans.
– Drew Feutz, Certified Financial Planner and founder of Migration Wealth Management, LLC
Home equity loans and HELOCs typically offer lower rates compared to credit cards and unsecured personal loans. This can save you thousands in interest over the life of the loan — especially if you're consolidating high-interest debts.
One monthly payment
Consolidating your debts means fewer bills to track. You’ll have a single monthly payment, one due date, and a consistent plan — making it easier to budget and avoid late fees.
Potential for lower monthly payments
If your new loan offers a lower rate or longer repayment term, your monthly payment may decrease. This frees up cash in your budget for savings, emergency funds, or early loan payoff.
Predictable repayment (for loans)
Home equity loans come with fixed interest rates and set repayment periods, giving you a clear payoff timeline and consistent monthly payments — unlike credit cards or variable-rate debt.
May improve credit in the long run
If you use the loan to pay off maxed-out cards or missed-payment debts, and keep your new loan in good standing, your credit utilization will drop — which can boost your score over time.
Risks of Using Home Equity to Consolidate Debt
While using your home equity to consolidate debt can be a smart move in the right circumstances, it also comes with significant financial risks. Before taking this step, it’s essential to understand the potential consequences — including putting your home on the line.
1. Your home is collateral
A potential disadvantage of using your home equity to consolidate debt is that your home serves as collateral, and you may end up consolidating previously uncollateralized debt into a loan that is collateralized by your home. If you fail to pay back a home equity loan or HELOC, you risk foreclosure and losing your home.
– Drew Feutz, Certified Financial Planner
2. Fees and closing costs
These may include origination fees, appraisal costs, title search fees, and ongoing annual HELOC fees.
“Fees/costs associated with home equity loans will differ depending on the lender, but generally include origination fees for processing the loan, appraisal fees to determine the value of your home, closing costs for a title search and to record the loan, and potentially an ongoing annual fee for HELOCs,” says Feutz.
3. Reduced equity and ownership
Using your equity reduces your ownership stake. If home values fall, you could owe more than your home is worth (negative equity).
4. Rising interest rates (for HELOCs)
HELOCs often have variable rates, which can rise over time — making payments unpredictable and potentially much higher later on.
Best Debts to Consolidate Using Home Equity
These types of debt typically come with high interest rates and are unsecured, making them strong candidates for consolidation through a home equity loan or HELOC:
Credit cards
Top credit card providers tend to offer higher interest rates than home equity loans and HELOCs. Consolidating this kind of revolving debt can help you simplify your monthly payments and potentially save hundreds — or even thousands — in interest over time.
Personal loans
Especially unsecured ones. May have higher interest rates than home equity-based loans.
Payday loans
Extremely high-interest and short-term. Using home equity here can result in major savings — if you qualify.
Debts You Should Avoid Consolidating with Home Equity
Some debts are either protected, already secured, or offer better options — consolidating them using your home may not be in your best interest:
Medical bills
May be eligible for payment plans or settlements directly with providers. Also protected under credit reporting grace periods.
Student loans
Especially federal loans — which offer repayment programs, forbearance, and forgiveness options you’d lose if you consolidate into a home equity loan.
Auto loans
Already secured by the vehicle. The interest savings are often minimal, and trading car collateral for home collateral increases the risk.
Getting a Home Equity Loan to Consolidate Debt: Tools and Strategies
Here are some tools and strategies you can use to get a home equity loan for debt consolidation:
Know how much you need to borrow
Make a list of all your debts, including the name of the creditor, the interest rate, and monthly payment. Choose which debts it makes sense to consolidate, then add the balances together to arrive at the total amount you need. This should give you an idea if you have enough equity in your home to consolidate your debts.
Figure out your qualifications
Before you can take out a home equity loan or HELOC, you will need to apply for one and meet the lender’s requirements:
Sufficient equity. Most lenders will require you to have at least 15% to 20% of your home’s value in equity before you can secure a loan or HELOC.
Credit score. Lenders may look for a credit score of at least 680, though some lenders may accept scores as low as 620. The higher your credit score, the better the interest rate you can get.
Income. You need to have sufficient income to repay your loan, and lenders will also look at your debt-to-income ratio – if you have too much debt compared to your income, you won’t qualify.
Gather your documents
To submit an application for a home loan or HELOC, you need to provide key documents. Make sure to gather these ahead of time to make the application process smoother:
Full name, Social Security number, and date of birth
Current and previous addresses
Name of your employer and employment history
Photo identification
Recent paystubs and W-2s
Recent tax returns
Property information including proof of homeowners insurance, mortgage statements, and property tax statements
Shop around
Compare lenders and rates to look for the best deal. While you may want to start with your current mortgage lender, you don’t have to go with them. Compare rates online or work with a mortgage broker to find the right lender.
Pick the right repayment term
Home equity loans offer terms ranging from five years, 10 years, 15 years, and even longer. If you choose a shorter repayment period, your monthly payments will be higher. But shorter repayment periods often come with lower interest rates, and lower total repayment costs over the lifetime of the loan.
Debt Consolidation Alternatives to Home Equity Loans
Credit Card Balance Transfer
Looking to consolidate credit card debts? Consider a balance transfer credit card with a low introductory APR offer – some cards go as low as 0% for qualified borrowers. You can move your credit card balances over to the new card, and try to pay down your debt before the introductory interest rate expires.
Personal loan
Personal loans can be used for many financial purposes, including debt consolidation. These loans are typically unsecured (though there are personal loans you can secure with collateral like a car or bank account), which means lower risk for you. On the flipside, you might pay higher interest rates than you would with a home equity loan or HELOC.
401(k) loan
If your plan administrator allows it, you can borrow money from your 401(k) to consolidate debt and pay yourself back over time. But this can severely reduce the savings potential for your retirement accounts, and you may have to pay back the loan in full all at once if you leave your job.
Frequently Asked Questions
Can I Get a Home Equity Loan to Pay Off Debt?
You can use a home equity loan or HELOC to pay off debt, then repay the new lender. This essentially transfers your old debts to a new lender, ideally with a lower interest rate and/or better repayment terms.
Is It a Good Idea to Use Home Equity to Consolidate Debt?
It may be a good idea to use home equity to consolidate debt if you have substantial equity in your home, have a stable income, and can access a much better interest rate through a home equity loan or HELOC than you’re paying on your current debts.
What Is the Best Option to Consolidate Debt?
The best option to consolidate debt depends on many factors, including the amount of your debt, the types of debt you have, the interest rates you are paying, your credit score, and other factors.
Bottom Line:
A home equity loan or HELOC can be a smart debt consolidation strategy — but only if you have sufficient equity, strong repayment ability, and stable income. If you fail to make payments, you risk losing your home.
Before moving forward, compare options, calculate total costs, and consider safer alternatives like balance transfer cards or personal loans. Make sure your choice helps you get out of debt — not deeper into it.
