Should you use a home equity loan for debt consolidation?

Should you use a home equity loan for debt consolidation?

A home equity loan for debt consolidation can offer homeowners a competitive rate and the ability to tackle debt faster. Learn more about home equity loans and other alternatives to consider.

Siarra Ortiz
January 5, 2022
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Are you looking to take control of your financial future? For the average person, that journey begins with eliminating debt. Consolidating all debt into one monthly payment — often with a lower interest rate — can significantly help. Explore the workings of using a home equity loan for debt consolidation, the pros and cons, and home equity loan alternatives to consider.

What is a home equity loan?

Home equity loans — also known as second mortgages — allow homeowners to borrow money against the equity in their homes. The homeowner repays the loan on top of their original mortgage at a fixed interest rate, with a repayment term of one to thirty years.

To calculate your home equity, you can use a straightforward formula. Simply take the current appraised value of your home and subtract your outstanding mortgage balance. For example, if your home is appraised at $300,000, and you have an outstanding mortgage balance of $180,000, your home equity would amount to $120,000 ($300,000 - $180,000).

How do debt consolidation home equity loans work?

Debt consolidation is a form of debt refinancing that combines all your debts into one affordable monthly payment. You can use debt consolidation for credit cards, auto loans, student loans, and more.

While there isn't a dedicated debt consolidation home equity loan, you have the freedom to utilize the funds at your discretion. This flexibility allows you to allocate the funds towards your outstanding debts as needed.

Pros of using a home equity loan for debt consolidation

A home equity loan for debt consolidation offers the following advantages:

  • Lower interest rate: Since your home secures the loan, it often has a lower interest rate than other options, like personal loans. If your home equity loan’s interest rate is less than your debt’s, you could save money in the long run.
  • Fixed interest rate: Home equity loans offer a fixed interest rate — protecting homeowners from a volatile market.
  • Single monthly payment: One monthly payment is easier to manage compared to multiple.
  • Lower payments: One monthly payment with a fixed interest rate can reduce how much of your monthly cash flow goes to servicing debt obligations.

Cons of using a home equity loan for debt consolidation

It's important to understand the disadvantages to determine if home equity loan debt consolidation is right for you.

  • Fees: Home equity loans have several expenses associated with them. You'll be on the hook for a home appraisal of roughly $300- $400. There are also closing costs, which include loan origination and title fees.
  • Possible impact on your credit: Applying for a home equity loan or missing payments can damage your credit score. Ultimately making it harder to get approved for other financial products.
  • Potential for foreclosure: A home equity loan uses your home as collateral, so if you fail to make payments, you risk losing your home.

How to start the home equity loan process

If you’re looking to use a home equity loan to consolidate your debt, then you should:

  • Assess your debts and equity: Before applying, it's important to know where your debt and equity stand. Do you have enough equity to cover your debts? If you don't have enough equity to tap into, you'll likely be unable to consolidate debt.
  • Determine your eligibility: Home equity loans have specific eligibility requirements for homeowners. Lenders typically asses credit score, debt-to-income ratio (DTI), loan-to-value ratio, and employment history.
  • Shop lenders: Request information on eligibility and financing requirements, including lending fees and other costs. You'll also want to compare loans to find the most competitive interest rate.

Home equity loan alternatives

Depending on your debt repayment needs and credit eligibility, you may need to explore other home equity loan alternatives to consolidate your debt.

Home equity line of credit

A HELOC is a revolving line of credit that allows you to borrow against your home's equity. Similar to a credit card, you can withdraw cash when needed and only pay back what you borrowed. Homeowners also pay interest on the funds used during the draw period, which typically lasts ten years.‍ HELOCs have variable interest rates, so they're impacted by the economic environment.

Since a HELOC offers revolving credit, it can help with long-term bills or anticipated debt, like future large investments.

Home equity investment

A home equity investment (HEI) is another popular home equity loan alternative. With a home equity investment, you can tap into your existing equity to receive a lump sum of cash.

The terms for home equity investments vary from HELOCs or home equity loans because there are no monthly payments or restrictions. Instead, borrowers repay the amount plus a percentage of their home's appreciation through a home sale, refinance, or another source of funds at any time during the 30-year term.

Cash-out refinance

A cash-out refinance replaces your existing mortgage with a larger one and pays you the difference in cash. Mortgage rates are subject to change with a cash-out refinance, so you should aim to secure a lower rate. ‍

The current average rate for a 30-year fixed refinance is 6.78%, and the average for a 15-year fixed-rate refinance is 6.07%.

Credit card balance transfer

A balance transfer allows you to move your credit card debt from one to another ⁠— usually with a lower rate or promotional period of 0% interest. However, these rates are temporary — lasting anywhere from 12-18 months — and can make it more challenging to pay off debt once the promo rate is gone.

Personal loans

Personal loans often offer better rates than credit cards, making them appealing to some consumers. The rates are tied to your credit score and can be fixed or variable, depending on the lender. It's also important to assess whether the terms charge for early repayment — if so, it's unlikely you'll save over the life of the loan. Ultimately, consumers will still deal with monthly payments.


The bottom line

Managing debt can quickly feel overwhelming. However, since most homes increase in value over time, leveraging equity to consolidate debt has never been easier. Homeowners can take advantage of home equity loans or other home equity loan alternatives to help tackle debt and take control of their finances.

Point is a homeowner-first solution for debt consolidation. With no monthly payments and the ability to maintain control over your home, an HEI is an effective solution for homeowners. If you've been rejected from conventional financial products, you may still be eligible for an HEI with Point. Contact us to learn more about HEIs and how they can help you get a financial fresh start.

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