How to use a HELOC to pay off debt

Are you carrying high-interest debt? If so, you’re not alone. In 2023, the average American carried a credit card balance of about $6,500, according to Experian. Paying off that kind of debt can take years if you only make the minimum monthly payment. Luckily, there’s a better way: consolidating your debt at a lower rate, so you can make quicker progress on your journey to becoming debt-free.  

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There are many tools you can use to consolidate your debt, such as personal loans or home equity loans. However, many homeowners prefer to use a home equity line of credit (HELOC), which offers additional flexibility and competitive rates. We’ll explain the ins and outs of using a HELOC to pay off debt so you can decide whether it’s the right tool for you.

Pros and cons of using a HELOC to pay off debt

Here’s a quick rundown of the most important points when it comes to using a HELOC to pay off debt, compared to your other options:

Pros of using a HELOC to pay off debt

• Pay off debt faster: If you pay more than the minimum due, you’ll pay off your debt much faster with a HELOC because more of your money will go to paying down your balance instead of into the lender’s pocket.
• Lower interest rates: HELOCs generally charge much lower rates than credit cards, allowing you to save money and pay off debt quicker. 
• Smaller monthly payment: You have the option of making interest-only payments during the draw period, which will be smaller than you’re used to. This can make it more expensive to repay your in the long run, however. 
• Tax deduction for some uses: You can borrow additional funds if needed, and if you use them for home improvements or to buy a second home, you may be able to deduct the interest from your taxes.
• Option to borrow more as needed: A key feature of HELOCs is the flexibility to borrow additional funds (up to your limit) for just about anything you need during the initial draw period, which usually lasts for 10 years.

Cons of using a HELOC to pay off debt

• Risk of foreclosure: One of the biggest cons of using home equity to consolidate debt — any home equity product — is that it requires a lien. If you default, your lender can foreclose, and you could lose your home.
• Variable interest rates: HELOC interest rates change over time, similar to your credit card. That means your monthly payment may change, potentially making it more expensive to pay off your debt. 
• Closing costs and fees: You’ll typically have to pay between 2% and 5% of your HELOC limit just to open the account. After that, you may have additional annual fees or draw fees to pay.
• Not everyone will qualify: You may not be eligible if you have bad credit, a debt-to-income ratio of 45% or higher, and less than 20% equity in your home, although some lenders are more flexible than others. Use this calculator to check if you are likely to qualify.
• Temptation to borrow more: Having flexible access to funds is handy, but some people are tempted to use it when they may not need it. Similarly, once your credit card balances are gone, it can be tempting to spend more again, landing you further in debt. 
• Requires discipline to pay off: If you make interest-only payments on your HELOC until the repayment time period starts, you could be in debt for decades longer and pay thousands more in interest. 

How to use a HELOC to pay off debt

It takes between two and six weeks to apply for a HELOC. Here’s how the application process works, and how to use the funds for paying off credit card and other debt. 

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1. Research and compare lenders: Many lenders offer HELOCs. Get at least three quotes (ideally, more) for HELOC rates and terms from different lenders by going through the pre-qualification process, which won’t impact your credit score. 

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2. Gather your documents and apply: Collect copies of your ID and recent statements for your mortgage, bank account, pay stubs, and other income. Choose the best offer you received and submit these documents with your application to your lender, who will help you complete the underwriting process.

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3. Receive your funds and pay off your debts: If you’re approved, you’ll be able to take a “draw” against your line of credit. Ask your current lenders for a payoff statement, and take out enough to pay off these current credit card balances or other debts. 

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4. Pay back your HELOC: If funds are tight, you can get by with making interest-only payments on your HELOC. It’s recommended to pay more, however, in order to replenish your available line of credit and to see a financial benefit from using the funds to pay off credit card debt.

When is using a HELOC to pay off debt a good idea?

A variety of factors determine whether a HELOC is the best way to pay off your debt. Here are a few signs to look for that could indicate you’re in a good position for one:

• Your income is stable: It’s not a good idea to put your home at risk if you’re not able to ensure, within reasonable certainty, that you’ll be able to continue earning enough income to make all the payments until the debt is paid off. 
• You want additional flexibility: Having a HELOC opens doors to new opportunities beyond consolidating your debt. You can make smaller interest-only payments during the draw phase, and you can borrow more funds as needed.
• You have a plan to manage your spending: You’ll have the upper edge in dealing with fluctuating HELOC payments as interest rates change (and avoiding overspending) if you track your budget each month. 
• You’ve researched your other debt consolidation options: Many people jump at applying for a HELOC before fully looking into all their options, and in some cases these may be more appropriate. Let’s look at what some of those other options might be.

Alternatives to debt repayment

It’s a good idea to be aware of your other options when it comes to repaying debt since not everyone can qualify for a HELOC. Before you start looking for HELOC lenders, consider whether these other alternatives would work better first:

Budget for a repayment plan

If you can pay more than the minimum toward your debt each month and you don’t want to open a new account, consider using specific debt relief strategies such as the debt snowball or debt avalanche method to pay off your debt faster. These techniques work best with a budget. 

Credit counseling

If you’re not sure how to budget or how to get started paying back your debt, consider reaching out to the National Foundation for Credit Counseling for a free financial review and strategy session with a nonprofit credit counseling agency. They’ll help you figure out how to get out of debt, which may include an affordable debt management plan.

Use another tool to refinance or consolidate your debt

A HELOC isn’t your only choice to restructure your debt to make it easier to pay off. Some of these alternatives can be much cheaper and you won’t have to put your house up as collateral, either. 

• Refinancing: Some types of debts, such as auto loans or student loans, can be refinanced, which can lower your monthly payments.  
• Personal loans: Many people use a personal loan as a debt consolidation loan because personal loans don’t use your home as collateral, and often come with fixed monthly payments. 
• Home equity loans: Using a home equity loan to pay off your debt may be better if you’re looking for a lower fixed interest rate and don’t have any plans to borrow further in the future. 
• Home equity investment: You won’t have to make any payments for up to 30 years with a home equity investment, which you’ll repay later as a portion of your home equity. HEIs also come with less stringent requirements than HELOCs, which make them easier to qualify for when you are dealing with debt. 
• Balance transfer credit cards: When you first open these cards, you may have years to pay off your debt interest-free before the regular credit card interest rate kicks in. You can completely avoid paying interest by paying off your debt during the interest-free period. 
• Cash-out mortgage refinance: You can replace your current mortgage and borrow additional funds with this option. This resets the clock on your mortgage and spreads your debt consolidation costs out up to 30 years, which can increase your overall cost – but lower your monthly payments. 

Negotiate with lenders

Your lender may be more willing to work with you on repayment than you realize, especially since they have a financial incentive to retain happy customers and avoid costly debt collection efforts. You can try negotiating with your current lender to lower your interest rate, extend your repayment term, or settle your debt for less than you currently owe. If you opt for a debt settlement, however, be aware that you may owe taxes on the forgiven amount.

Final thoughts

Choosing a HELOC to pay off debt can be a wise choice, particularly if you want added payment and funding flexibility but can still commit to paying off your balance early. Make sure you think through the possible scenarios that could happen, however, such as a drastic rise or fall in interest rates that could impact your payments, as well as the transition from the draw period to the repayment period. This can help you ensure your financial success in the long run. 

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If you are looking to pay off debt using a HELOC alternative, see if you qualify for a Home Equity Investment from Point. Point’s HEI lets you unlock your home equity with no monthly payments, no income requirements, and no need for perfect credit.