Using A Home Equity Loan For Debt Consolidation

Juggling high-interest credit cards and loan payments can make eliminating debt seem impossible. If you’re feeling squeezed, you’re not alone. In 2025, U.S. credit card debt reached $1.28 trillion according to the Federal Reserve Bank of New York – with 60% of cardholders carrying a debt balance each month. Managing multiple high-interest cards along with other loans puts you at risk of missing payments or, worse, struggling to afford your bills.

One way to pay off high-interest debts and consolidate payments into a single, more affordable amount is to use a home equity loan for debt consolidation. If you’re a homeowner with enough equity and solid credit, it could save you money over time.

Understanding what a home equity loan is, how it can be used for debt consolidation and the potential risks involved can help you decide if it’s right for your financial situation.

How A Home Equity Loan For Debt Consolidation Works

Debt can come in many forms, from high-interest debt – such as personal loans and credit card bills – to mortgages, car loans, student loans and more. When you have multiple types of debt, managing payment schedules and interest rates can be overwhelming, not to mention inefficient.

A home equity loan can offer a strategic way to consolidate your debt and funnel high-interest balances into one manageable fixed-rate loan. It allows you to borrow a percentage of the equity you have in your home and convert it into a lump sum of cash, which can be used to consolidate debt, shrink monthly payments, minimize interest costs and save money in the long run. 

The catch? To be approved for this type of loan, you have to be a homeowner with enough home equity and good credit. Since a home equity loan is a secured loan, your home will be used as collateral. If you default, you risk losing your home and the equity in it.

The Upsides of Home Equity Loans For Debt Consolidation

There are several reasons to consider a home equity loan to consolidate debt.

You’ll Likely Pay Lower Interest Rates

Credit cards carry very high interest rates — the average U.S. credit card rate in March 2026 was 19.2%. Because home equity loans typically offer lower rates, consolidating credit card balances into one loan may reduce both your monthly payment and total interest costs.

You Can Work On A Fixed Payment Schedule

By consolidating your debt into a home equity loan, you can instead repay it in a single predictable installment each month, typically over 5 – 30 years. Most home equity loans have fixed interest rates, so the monthly payment stays the same throughout the loan term. This stability may make it easier to budget and pay down your debt on a clear schedule – unlike credit cards, where payments and rates can and often do fluctuate.

You’ll Have Fewer Payments to Manage Each Month

If you pay off your credit cards, personal loan or both with a home equity loan, you’ll end up with fewer monthly payments to juggle. Instead of making payments on, say, three credit card accounts and a personal loan, you’ll only need to remember to make one monthly home equity loan payment. That might help you get on a better financial track.

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The Downsides of Home Equity Loans For Debt Consolidation

Any loan comes with risks, and home equity loans are no exception. So if you’re considering one for debt consolidation, make sure you know what you’re signing up for before you sign on the dotted line. 

You Need To Make Your Full Payment Every Month

You technically don’t have to pay off your entire credit card balance each month – only the minimum monthly payment. However, paying just the minimum each month isn’t a good idea, since this can cause your debt to grow quickly given the compounding interest on the principal amount. Still, when money is tight, the option of paying only the minimum payment may help you avoid late fees, a negative impact on your credit score or penalties.

On the other hand, with a home equity loan, you must make your full payment each month, regardless of cash-flow limitations. So you’ll want to be sure your household budget can comfortably cover that monthly payment amount.

There’s The Potential To Accumulate New Debt

Consolidation doesn’t eliminate your debt — it simply restructures how you repay it.  If you subsequently put large balances on your credit cards again, or are not careful with your future spending in other ways, you could end up deeper in debt than you were before.

For example, suppose you use a home equity loan to pay off $20,000 in credit card debt and a $20,000 personal loan. After you consolidate those debts into the new loan, you will be responsible for making monthly payments toward that loan’s total of $40,000. And if you also start charging your credit cards again without paying them off each month, you’ll add new debt on top of what you already owe.

Before taking out a home equity loan, carefully assess your spending habits, budget and income. Debt consolidation can only help if you’re committed to minimizing new debt and making consistent payments.

You Risk Losing Your Home

Since a home equity loan is a secured loan that’s backed by your home as collateral, it’s much like a first mortgage: If you fail to make your payments, you could lose your property in foreclosure. Personal loans and credit cards don’t come with that risk; however, missing payments or defaulting will negatively impact your credit score and history as well as your eligibility for other loans and lines of credit.

You Reduce The Equity You Have In Your Home

Home equity is an important aspect of building future financial security – after all, for most, it’s a significant component of total net worth. When you sell your home, your equity has the potential to turn into substantial cash flow, especially as it grows and your mortgage loan amount shrinks.

When you take out a home equity loan, you reduce the amount of equity you have available because you’re borrowing against it. Rebuilding that ownership takes time – and if you sell your home with less equity in it, you’ll walk away with less money because you’ll need to use that much more of the sale proceeds to pay off your mortgage and home equity loan debts.

For example, say you have $150,000 remaining on your mortgage and your home is worth $350,000. You have $200,000 of available equity – but if you take out a home equity loan for $100,000, you’ve now cut that amount in half.

If the market shifts and there is a dramatic downturn in home prices, you also may find your home is worth less than the money you’ve borrowed against it; this is known as “being underwater.’

How To Use A Home Equity Loan To Pay Off Debt

Getting a home equity loan isn’t an overly complicated process, but there are a few steps to be aware of.

Step 1: Determine Your Available Equity

When considering a home equity loan for debt consolidation, you should start by roughly assessing your available home equity. Your available equity is the difference between your home’s value and what you still owe on your mortgage. (For example, if you estimate that your home is worth $350,000 and you owe $150,000 on your mortgage, you have an estimated $200,000 of equity in your home.)

A quick internet search of market values in your neighborhood can give you a general idea of what your home might be worth if you’re uncertain. Online home equity calculators can then help determine how much equity you have.

Step 2: Decide How Much To Borrow

Some lenders allow borrowing up to a 80% – 85% combined loan-to-value ratio (LTV). However, the amount you can actually borrow may be lower depending on lender guidelines and your financial profile. For example, if your home is worth $350,000 and you owe $150,000 on your mortgage, a lender allowing a 80% combined loan-to-value ratio could allow total borrowing up to $280,000. That means you might be able to borrow about $130,000 in home equity.

The good news is that if you are consolidating your debt, you might not need to borrow that much. If you are already struggling with credit cards and personal loans, it may also not be wise to borrow more than you need to consolidate your debts.

Step 3: Check Your Credit Score And Credit History

In most cases, your credit score must be at least 680 to qualify for a home equity loan. You can usually check your score online or by reaching out to your bank. While you’re at it, you should review your credit report as well. You can request a free copy of your credit report from each of the three major credit bureaus (Experian, Equifax and TransUnion) at AnnualCreditReport.com. 

Step 4: Calculate Your Debt-To-Income Ratio

Lenders will use your DTI – your total monthly debt divided by your total monthly income – to help decide whether you qualify. Most lenders prefer a DTI of 43% or lower, though requirements can vary. This means that if you currently have a lot of debt, you may need to pay down some of it before you can qualify.

Step 5: Compare Lenders

Look for a lender that offers competitive interest rates and reputable, customized services. If you had a positive experience with your original mortgage lender, you might start there. You can also compare lenders online to find the lowest interest rates and fees.

Step 6: Apply For A Home Equity Loan

A home equity loan is generally considered a second mortgage on your property, so you’ll likely be asked for many of the same documents you provided for your initial mortgage back when you first bought your home.

To apply, you’ll likely fill out an online form listing your income and debts, including how much you owe on your primary mortgage. Most lenders will require that you verify your income, provide a recent home appraisal, and they will also run a credit check.

Documentation needs may be different for self-employed individuals. However, some common forms of required paperwork involved include:

Step 7: Have Your Home Appraised

Your lender will likely require an up-to-date home appraisal to determine your home’s equity, and you’ll be responsible for covering the cost. The average cost of a traditional home appraisal is typically $350 – $600, depending on the property and location.

During this process, a licensed appraiser will visit your property to evaluate its exterior and interior, from foundation to roof. They’ll inspect appliances, verify the number of bedrooms and bathrooms, and assess the home’s size, layout and overall condition. The appraiser will also review recent sales of comparable homes in your neighborhood to estimate your property’s current market value.

After your lender receives the report, the appraised value will be used to calculate your home equity. If the equity is too low, you may have to borrow against a reduced amount of equity or look for another way to consolidate your debt.

Step 8: Close On The Loan

As with a primary mortgage, you should expect to pay closing costs on a home equity loan – usually from 3% – 6% of your loan amount. The fees cover costs that your lender incurred while originating your home equity loan, and you can choose to pay them when you close or wrap them into your monthly payments. The average approval and closing process can take anywhere from a few weeks to a few months, followed by a mandatory 3-day rescission period before funds are released. This 3-day window allows the borrower to rescind – or back out of – the loan without paying a penalty

Step 9: Pay Off Your High-Interest Debts

When you receive your lump-sum loan payment, pay off your credit card and other higher-interest debts as soon as possible. The longer you wait, the more interest you’ll accumulate – and the greater the temptation will be to spend some of the new funds elsewhere. If you eliminate your debt immediately upon receiving your home equity loan, you won’t have to worry about that debt’s fast rate of growth anymore.

Step 10: Start Repaying Your New Home Equity Loan

You’ll do this in monthly installments, including interest, much as you currently pay your primary mortgage. The number of payments will depend on your loan term. For example, a 10-year home equity loan involves 120 monthly payments, while a 5-year loan involves 60 monthly payments. But remember: If you miss payments or deadlines, your lender may charge late fees and could eventually take legal action, including foreclosure.

Other Ways To Consolidate Debt Using Home Equity

There are a few ways to use the equity in your home to consolidate your debts besides home equity loans.

Home Equity Line Of Credit

A home equity line of credit (HELOC) also lets you tap into your home equity. But instead of receiving your money in a single lump sum that you pay back over time, you get a revolving line of credit based on your loan-to-value ratio; this is the amount you owe on your home (any outstanding loans or other debts that are secured with your home’s value) compared to the appraised value of your home.

For example, if your home has an appraised value of $250,000 and you have an outstanding mortgage principal of $150,000, your LTV is 60%. Many lenders will allow you to borrow up to 80% – 85% of the value of your home. This means you can borrow a total of $200,000 (with 80% LTV). As you already owe $150,000 for your primary mortgage, you may be able to borrow an additional $50,000 for a HELOC. Lenders may approve an LTV of 85%; in this case, you could borrow a total of $212,500 (this total again includes your primary loan). In this scenario, you may be able to be approved for up to $62,500 for a HELOC.

You can then borrow against your HELOC up to that amount for anything you’d like, including debt consolidation.

Unlike a home equity loan, with a HELOC you only pay back the amount you’ve actually borrowed, not the full amount approved. So if you only borrow $30,000 of an $80,000 HELOC to pay off credit card debt, you’ll only pay back that amount (with interest).

HELOCs have a specific draw period (when you can take out money) and a repayment period (when you cannot). Each is set based on the loan’s terms. While there are fixed-rate HELOCs available, many lenders use variable interest rates – so a HELOC functions similarly to a credit card because it provides a revolving line of credit, though it is secured by your home.

Cash-Out Refinance

You can also use your equity to consolidate debt by applying for a cash-out refinance. With this type of mortgage, you refinance for more than you currently owe and receive the difference as a lump sum of cash. For example, if you owe $150,000 on your mortgage, you might refinance for $200,000 and use the additional $50,000 to pay off debt.

Keep in mind that a cash-out refinance usually costs more in the long run than a traditional refinance, since it generally resets your mortgage term and increases the amount you owe. An online cash-out refinance calculator can help you determine whether this option is right for your financial situation.

FAQ

The Bottom Line: For The Right Homeowner, A Home Equity Loan Can Be A Strategic Way To Consolidate Debt

If you have substantial equity in your home, a home equity loan can provide a fixed-rate, lower-interest way to consolidate high-interest debt, such as credit cards or personal loans, into a single monthly payment.

However, home equity loans are typically second mortgages and carry risks. If you take on new debt while repaying the loan, you could end up deeper in debt. And because your home serves as collateral, defaulting could lead to foreclosure.

For borrowers who can make consistent payments and avoid accumulating new debt, a home equity loan can be an effective way to consolidate and pay off high-interest balances. Use the Home Equity Calculator from Quicken Loans to understand how much you may be able to borrow with a home equity loan.

Ben Shapiro

Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.

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