Welcome to the club if you made a New Year’s resolution to remove these unresolved invoices in 2025. A fifth (21%) of Americans have paid off their debts at the top of the financial to-do list this year. However, achieving it is not an easy goal. Rising inflation prices and interest rates have pushed credit card balances, a major source of consumer debt, to record levels. Almost half (48%) of credit card holders have debt per month, and I wonder if a majority (53%) have credit card debt for at least a year.
However, if you are a homeowner, you may be able to find a relief by opposing the value of your home. The average interest rate on home equity loans, and the credit cousin, Hellok, is currently under 8.5%, far lower than double-digit APR on credit cards and personal loans. As you can imagine, low interest means lower monthly payments and overall cheaper borrowing costs.
However, using a home equity loan to pay off your debts is not an easy task. Doing so has some unique risks. Before adopting this financial strategy, here are how everything works, along with the important advantages and disadvantages to consider.
Why use a home equity loan to pay off your debt?
As they have lower interest rates than other loans, paying off debt using a mortgage or HELOC is a viable choice for people who have no mortgage debt and who own much of their property entirely.
The average interest rate on home equity loans, and cousin of credit line, Helocs is currently in the 8-8.5% range, far lower than double-digit APRs on credit cards and personal loans. As you can imagine, low interest means lower monthly payments and overall cheaper borrowing costs.
Professionals who use home equity to consolidate debt
Using your home equity for debt settlement can be a wise move for a number of reasons, including:
- There is one streamlined payment
- Locking low interest rates
- Your monthly debt payment may be low
One streamlined payment
When you integrate your debts using your home equity, you can simplify your life. Instead of paying one credit card invoice on the 15th, another credit card invoice on the 20th and your personal loan on the 27th, there is only one deadline to remember each month. As on-time payments are a key component of your credit score, this helps to eliminate the possibility of missing payments due to calendar confusion.
Low (and lock-in) interest rates
Because your home serves as collateral, household equity loans generally have lower interest rates than other unsecured forms of debt that are not supported by anything. As of April 2025, the best home equity loan rate (for the most creditworthy borrowers) is below 8%, so you can shave a significant portion of your bill compared to an average credit card rate above 20%.
Plus, home equity loans have a fixed interest rate, so payments are always the same. This is a big difference from a credit card with a variable APR. (Note: Most home equity credit lines also have variable rates, but you can switch to a fixed fee.)
Reduce monthly payments
Using home equity loans for debt settlement usually results in lower monthly payments due to lower interest rates and longer loan durations. If your monthly budget is tight, the money you save each month can be what you need to get out of debt.
Cons of using home equity to consolidate debt
Home equity loans for debt settlement may work for some people, but it is not necessarily the best choice for everyone.
Among the drawbacks:
- By default, a home with risk
- Your interest rate may still be high
- Risk of increased debt load (if you resume old spending habits)
- Prepaid and ongoing fees
The house is in line
There is a reason the home equity loan rate is lower than many other borrowing routes. Lenders can take you home if you don’t pay it back. If you are considering applying for a home equity loan, the chances of foreclosure should be the best. If you sell your home while the loan is outstanding, you will need to pay off the loan at once just as you would have to settle the original mortgage.
Your rate may still be pretty high
Don’t confuse it with “cheap” and “cheap.” Home equity products cost less than other loans, and are true, but those charging interest in the 7-10% range are rarely free money.
And that’s especially true if you’re trying to settle an unpaid invoice. Don’t trick the ads for “A SOW AS AS A SOW.” These attractive teaser percentages are reserved for Sterling applicants, with empty credit scores and low debt levels. If you are making the most of your credit card, have a lot of responsibility for student loans, or have a mound of medical bills, you probably aren’t running for the best offers.
“If you’re carrying a large credit card balance, it can signal your lender that you’re a high-risk borrower,” says Linda Bell, senior writer for Bankrate’s home lending team. “Even if you have significant credit card debt, you can still get a home equity loan, but lenders compensate for that additional risk by giving you a higher rate. If you fall in this group, it makes sense to wait until you lower your debt level before applying.”
Increase in debt load
Home equity loans allow you to consolidate your debts, but they are only useful when limiting the expenditures that caused that debt in the first place. If you clear your card balance and start charging again immediately, it will make your debt worse. Now you can borrow your home equity loan payments and credit card payments. It is important to address the root cause of your debt before taking on another loan.
Borrowers must have a healthy amount of home equity (at least 20%, preferably close to 40% or 50%) to qualify for these loans. However, keep in mind that by borrowing your home equity, you are essentially running out of stock in your ownership. Your assets will be reduced and your obligations will increase. This does not improve the debt-to-income ratio or loan-to-value ratio, two aspects of the financial profile that lenders often see.
Fees to pay
If you issue a home equity loan, you may be charged a series of upfront fees or fees to close the loan. Some of these costs are charged by lenders, while other costs are charged by external authorities and professionals (such as local county clerks and real estate lawyers). Prices may include:
- Origination fee: Usually 0.5-1% of total loan
- Home rating fee: Anywhere between $314 and $423, according to Angi’s 2025 data, renovation sites and search services
- Credit Report Fees: $10- $100
- Legal costs: Flat time or loan amount percentage
- Notarization Fee: Over $100
- Title search price: $100- $450
These closure costs tend to be less than mortgage closure costs, but they may also be supplemented. Sometimes it’s 5% of the principal (if you have a six-figure loan or a credit line, it could be thousands of dollars). Furthermore, many HELOCs offer annual maintenance fees. If you have a lot of debt to consolidate, it may still make sense to pay these additional fees, but it is wise to budget for them and compare them with the amount that will ultimately save interest on a loan on your credit card bill.
What debt should you consolidate with your home equity loan?
These are the types of debt that are suitable for repayment on a home equity loan.
Credit Card
Many homeowners use home equity loans to resolve unpaid credit card balances. After a home renovation, it is the most common application. The reason is simple: Home equity loan interest rates (currently under 9% on average) run at least half of your credit card (over 20%). This means that you can repay your credit card faster and cheaper with just one lump sum payment.
Personal loan
Personal loans vary widely, but especially with collateral, your interest rate can be higher than your home equity loan interest rate. Loans that are not supported by collateral are usually more expensive than secured loans, as lenders take more risk. Home equity loans often offer much longer repayment terms (as many as 20 years) than personal loans.
Medical expenses
According to the Consumer Financial Protection Agency, 15 million Americans have medical debt on their credit reports, with an average balance of over $3,100. If a significant amount is not covered by health insurance, you can use your home equity to cover such health care costs. Additionally, if you choose HELOC, you will benefit from a flexible repayment amount (in most cases, you can only pay interest during the initial draw period). However, before you make a move, talk to your healthcare provider about the low-cost payment plans you will be offering.
Student loan/education fees
If you need to pay off your student loan, borrowing money from the house is one possible way to do that. However, you cannot take advantage of the student loan tax credit. Also, if it’s a federal loan, you’ll lose other potential benefits, such as forgiveness and income-based repayment options. A better course is to pay university tuition directly at HELOC.
What debt should you not consolidate with your home equity loan?
Home equity loans may not be the best idea.
Automatic loan
A car is a depreciable item, meaning it loses its value over time. This means that in a few years, your home equity loan balance can be more than your car’s value. Plus, if you have good credits to great credits, the current rates for purchasing a new car are far below the average home equity loan fee.
Vacation/Gorgeous Items
It’s attractive, but using a home equity loan on holidays or big ticket items is not a good idea. If you need to take a loan, it means your income cannot maintain your spending and this bad habit can put you in debt. Before you splurge, remember how long the loan lasts. You will still be paying it back after the good times have passed.
Home loan
Mortgage fees are generally lower than the share rate of your home, so paying back your major mortgage with a HE loan or HELOC rarely makes sense. In some cases, you may consider refinancing instead (see “Other ways to consolidate your debt” below).
investment
A surprising number of millennial homeowners (30%) consider other investments to be a valid reason to use home equity (i.e., non-home) home equity, the Home Equity Insights survey found. Investing is important, but it’s controversial to go into debt to do so. Especially considering the current high-cost borrowing costs that rival stock market returns (it was definitely a good strategy when loan rates were at historic lows a few years ago). Avoid using home equity loans for investments. It is more appropriate to use your savings or earned income, especially if you are able to invest through your company 401(k) plan.
How to apply for a home equity loan
I feel that applying for a home equity loan is quite similar to the process I took to secure my first mortgage. Here’s a summary of what you need to do:
- Know your borrowing power: Before applying, we recommend that you understand your credit score, estimate what your home is worth and calculate your stock interests. Start comparing different lenders and you’ll be more educated.
- Look at the various offers: All lenders are different and therefore require research into closure costs, fees and other detailed printed matters. We recommend starting your search at a savings or checking account or a financial institution with a major mortgage. Some lenders offer discounts to existing customers.
- Complete your formal loan application: You will need to submit documents confirming your income and employment, along with other necessary documents. You must agree to allow hard pulls of your credit history and scores.
- Rate your home: Estimating what your home is worth is not the last word about the actual value of your home. Your lender will likely need an valuation you pay to determine the current market value of your home. However, an increasing number of lenders are using AVM (automatic valuation model) to skip the valuation process.
- hang on: Don’t expect to get money right away. While some lenders provide HELOC relatively fast funding, for example, online lenders figures can pay the funds in just five business days, but with full approval for a home equity loan, you can wait up to eight weeks and feel closer to your first mortgage timeline.
- Review and sign the closing document. There is a serious impact that you have to sign a variety of documents and not do so on about the contract to pay off your loan.
- Receive loan proceeds: Home equity loans are paid in one lump sum. Once you receive the money, you can use those funds to pay back other debts.
Other ways to consolidate debt
Home equity loans are not the only option for debt settlement. Make sure to compare these routes as well before you rock your home:
- Personal loan: Personal loans carry higher interest rates than home equity loans, but they don’t carry the weight of your home. If an emergency occurs and you can’t make a payment, you won’t lose your home through your personal loan.
- Balance Transfer Credit Card: If you have a large portion of your debt using credit cards, you may consider transferring it to a new credit card that offers a 0% APR to a new credit card that comes with an extended introductory period. This means that there is no interest charge on the amount for a certain amount (often two years). However, some card issuers may limit transfers, for example, up to $10,000. Therefore, you may not lose as much of your high-cost debt as you wish. Plus, the clock ticked by. When the promotion period ends, interest rates will begin on new cards. Unless you settle your balance before that, you will be reverting to the same correction.
- Refinance cash out: Instead of taking out a second mortgage with a home equity loan, you can completely replace the original mortgage and even more borrowings can be replaced with cash-out refinances. The extra amount you can earn in cash is based on the amount of home equity you have built up. This move makes most sense if you can get a lower rate on a new loan.
- Debt settlement loan: There are loans specifically designed to combine debt and pay off. Some of the best lenders offer rates that can rival household capital fees if your credit is excellent. However, the terminology tends to be much shorter. While home equity loans may offer 20-year repayment terms, debt consolidation loans tend to work on a more stringent timeline (often under 7 years).
Conclusions regarding the use of home equity to pay off debts
Using home equity for debt settlement could be a wise move for borrowers with a large amount of high-profit card debt, as “his) loans usually have lower fees than credit cards,” Bell says. “It can save you some big money in the long run by reducing your monthly payments and how much you pay over time.”
But while it can have a positive impact on borrowers’ revenue, she points out, it cannot remove the issue. “Remember, you are simply changing one form of debt for another,” says Bell. You still need to pay back all the money you owe. The cost to do so will be less.
Additionally, Bell says that several forms of debt, such as student loans and credit cards, are unsecured. This means that if you fail to pay off, there’s nothing your lender can get back from you. Meanwhile, Home Equity Loan and Helock are secured. Your home will act as a collateral for your debt. Therefore, the fees are lower. In the case of default, lenders are your go-to.
So be careful before committing to home equity finance. “It certainly could potentially cut interest rates,” Bell says. “But if you can’t pay off your loan, you could lose your home.”
