Thursday, 27 January 2022

Using a Home Equity Loan to Consolidate Debt: What to Consider

Using a Home Equity Loan to Consolidate Debt: What to Consider
04 Oct

consolidating debt with a home equity loaniStock

If you need money fast, a home equity loan might be a good option. A home equity loan can provide you with a lump sum of money in a matter of weeks; the borrowed amount can then be paid off on a monthly basis for a fixed rate. It can be especially helpful to use this type of loan to help consolidate your current debt. A home equity loan can combine debt from various lenders, such as different credit card companies, and place it into one convenient payment.

However, a home equity loan might not always be the best option for everyone. It’s important to understand how it works before making a final decision. This guide will help you learn what a home equity loan is, how it can be used, and how to qualify for one, so you can decide whether this loan product fits into your financial plan.

What is a home equity loan?

A home equity loan allows you to borrow money from a lender (usually a local bank) and uses your house as collateral for repayment. The interest rates can either be fixed or variable with a set repayment term of usually around 10 to 15 years.

“Home equity loans allow you to take out a lump sum up to a maximum percentage of the home’s value,” said Demond Johnson, a loan officer with Guild Mortgage based near Fort Worth, Texas. While the borrowed loan amount varies by each lender, it usually doesn’t reach over 80%.

You can use this loan for just about anything. However, it’s usually best when used toward an investment that will help you in the long run, like consolidating your current debt, and not used on something frivolous, like a luxurious vacation. Remember: You will need to pay this loan back — if you don’t, your house can go into foreclosure.

Pros and cons of a home equity loan

It’s important to understand the pros and cons of a home equity loan before considering applying for one. Consider the following.


  • It may be your cheapest option: Home equity loans typically have lower rates than a credit card or other loan product, said Johnson.
  • You may have a lower tax liability: The interest on home equity loans may be tax deductible.


  • You could lose your home: Home equity loans might not be a great option for those with poor spending habits. Since your home is on the line, these loans are best suited for disciplined borrowers who won’t miss payments.
  • You may accumulate more debt: Even though you’re consolidating your debt, you’re not debt free. Those who overspend and are not smart with their finances can continue to rack up more debt as time goes on, causing an even heavier financial burden than before.
  • You could misuse loan funds: A home equity loan can be used for just about anything, and that may be problematic for borrowers with poor spending habits. You may, for instance, want to pay for an upcoming vacation or wedding, but that will only result in more future debt without any return on your investment. Home repairs or renovations are a better use of funds, as they can increase your property value.

Using a home equity loan to consolidate debt

There are many solid reasons why someone might want to use a home equity loan to help consolidate debt.

Johnson said it makes sense to use this type of loan to help consolidate high interest debt such as with various credit cards because “the savings can be significant.” Using home equity loans to pay off other debts, such as student loans might also be wise, said George Burkley, owner of American Mortgage & Financial Services in Indiana — “[the] rates are usually much lower.”

Burkley also stated that if you’re looking to do home renovations or repairs on the house, or are interested in buying a second home, a home equity loan might be a good option to consolidate that debt, as opposed to using a credit card.

How to qualify for a home equity loan

When applying for a home equity loan, there are a few things a borrower will need to consider in order to qualify.


Borrowers will need to have substantial collateral. For a home equity loan, your house is the collateral. If you can’t make the payments each month, the lender can take away your house.

Credit score

Lenders usually look at your credit score when you qualify for any type of loan, and a home equity loan is no different. A borrower’s credit score can play an significant role when qualifying for a home equity loan. Johnson said borrowers usually need a 680 (or higher) FICO score to qualify, but scores can vary depending on each lender.


A borrower’s equity can help determine how much funds can be borrowed with a home equity loan. According to Burkley, equity usually cannot exceed “over 85-95% of what the house is worth.”

Debt-to-income ratio

Lenders will look at your income and current debts, such as credit cards, current mortgage, and student loans, to determine whether you’re able to take out a home equity loan. Lenders want to ensure you can pay back your debt so if you already have a substantial amount, you may not be an ideal candidate. Burkley said borrowers should have around a 40% to 45% debt-to-income ratio to qualify for a home equity loan.

Where to find home equity loans

A home equity loan might be a good option for you. If you’re looking to find a loan, LendingTree (the parent company of MagnifyMoney) might be able to help. With its online marketplace, you’re able to use one form to potentially be matched with up to five offers at once. First choose the type of property you need the home equity loan for, such as a condo, single family home or a townhouse. Then finish completing the form by adding your personal information and you’ll instantly receive offers available to you.

LendingTree also has a convenient home equity calculator that can help determine the estimated amount you’re eligible to borrow. This can help you to decide whether a home equity loan might be useful for your financial needs or if another option might be more efficient.

What to consider as you shop home equity loans

When searching for home equity loans, there are a few important aspects to keep an eye on. Here are a few of the most common aspects to watch out for.

  • Interest rates: Rates vary from each lender. It’s important to compare interest rates with all lenders to ensure you get the best possible rate for your financial needs. Keep in mind, some lenders are more likely to provide lower interest rates to those with excellent credit.
  • Origination fees: Some home equity loans can come with fees, such as origination fee that is applied when processing the loan.
  • Prepayment penalties: Lenders can also charge a prepayment penalty for when you want to pay off your loan early. It’s important to check with each lender to see which fees are tacked on.
  • Lenders: Search for a lender you feel most comfortable working with. You want to be able to actively discuss your financial needs with a lender so you can learn how their offers will fit for your budget and your lifestyle.

Home equity loan vs. HELOC: What’s the difference?

A home equity loan and home equity line of credit (HELOC) have a few similarities. For example, they are both backed by the equity in your home. The borrowed amount is also based on your home equity, which is normally around 80% to 90%.

However, there is a distinct difference between these two financial products: While a home equity loan provides funds in one lump sum, a HELOC is a revolving account. With the latter, you’ll be able to take out money you need during a certain time frame.

Johnson said it’s a good idea to consider a HELOC as “a VISA with a very large limit.” You’ll be charged interest on the money you borrow, and you’ll be able to pay off the HELOC and charge more to the account in the future.

However, Johnson warned that rates can change on a HELOC. That is something to consider when determining whether a HELOC is right for you.

Alternative ways to consolidate debt

Using a home equity loan to consolidate your debt might be the best option for you. However, there might be something else out there that’s an even better fit. To determine which is the best for you, it’s always smart to learn about all offerings so you get exactly what you need.

Debt consolidation loan vs. home equity loan

A debt consolidation loan (which can also be a personal loan) might be a good option for those who have a lot of debt from various lenders. Instead of paying a high-interest rate to each lender every month, you can consolidate the monthly payments into one lump sum. Often times, these rates can be much lower than what you were paying before.

Lenders usually look at your credit score for both a debt consolidation loan and a home equity loan. However, sometimes lenders can be more lenient with debt consolidation loans in terms of your credit score; oftentimes, borrowers can have less than stellar credit and still be approved for a personal loan or debt consolidation loan. However, those with excellent credit will be more likely to obtain lower interest rates with debt consolidation loans than those who have fair to poor credit.

And unlike home equity loans, debt consolidation loans don’t use your home as collateral, so you won’t have to worry about losing your home to the lender even if you can’t make payments. Find the best debt consolidation loans with our table below!



Credit Req.

Minimum 500 FICO

Minimum Credit Score


24 to 60


Origination Fee


LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

Balance transfer card vs. HEL

A balance transfer card with a promotional 0% APR can be ideal for those with high-interest credit card debt. However, qualifying for a credit card with a low balance transfer rate and promotional APR can be difficult.

While a home equity loan can be used to consolidate a variety of different debt, including home repairs, a balance transfer is strictly used for credit card debt.

Some balance transfer cards don’t come with a transfer fee, especially for those borrowers with excellent credit. However, many cards charge a fee equal to a certain percentage of your balance.

Home equity loans can sometimes allow borrowers to combine a larger amount of debt than with a balance transfer. However, a home equity loan requires you to have equity in your home. As a result, some homeowners may find that they don’t qualify for this type of financing.

A home equity loan can be a great option when you need money fast for debt consolidation, such as combining credit card debt or other debt accumulated by home renovations and repairs. But these types of loans aren’t always the best fit for everyone and should be well-considered before making a decision.

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Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Carissa Chesanek


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