Should You Use a Home Equity Loan to Pay Off Debt?

What is a home equity loan?

A home equity loan allows homeowners to use their home’s equity as collateral. This means the loan itself is secured by the value in your home. Opting for a loan secured by collateral often means you can qualify for lower interest rates and better loan terms, but it also means you can lose your home to foreclosure if you fail to keep up with payments.

With home equity loans specifically, borrowers can access a set amount of money with a fixed interest rate, a fixed monthly payment and a set repayment term. While the Federal Trade Commission (FTC) reports that many lenders will only let you borrow up to 80% of your home’s value across a primary mortgage and a home equity loan, some lenders will let you access more of your home’s value overall (potentially up to 95%).

For example, if you own a home worth $400,000, you may be able to owe up to $320,000 in total on your home with some lenders, or up to $380,000 in total with lenders that let you borrow up to 95% of your property’s value.

Minimum requirements for home equity loans

To qualify for a home equity loan, lenders typically require a 15% to 20% minimum amount of home equity. Most lenders are looking for credit scores of 620 or higher, though higher scores can secure better rates. Debt-to-income (DTI) ratios are also evaluated; lenders generally prefer a DTI below 43%, though some may allow slightly higher ratios depending on other factors.

Loan amounts vary based on your home’s value and available equity, but commonly range from $10,000 to $250,000. Understanding these requirements helps homeowners determine if they qualify and what size loan makes sense for consolidating debt responsibly.

Type of debt that can be consolidated with a home equity loan

A home equity loan can be used to consolidate debt from credit cards, medical bills and student loans. Understanding how each debt type interacts with a home equity loan helps homeowners decide whether this strategy fits their financial goals.

Credit cards

By replacing multiple high-interest balances with a single, lower-rate loan, you may reduce the total interest paid over time and pay off debt faster. This approach also simplifies your finances by combining several payments into one. However, it’s important to maintain discipline with your credit cards after consolidation to avoid accumulating new debt, which could undermine the benefits of the home equity loan and extend your payoff timeline.

Medical bills

Consolidating large or unexpected medical expenses into a single loan can reduce financial stress and give you peace of mind while creating a clear repayment plan. While interest rates may apply, the predictability of fixed payments can make budgeting easier. This approach is especially useful for homeowners who want to manage medical debt efficiently without risking their credit standing or facing collection actions.

Student loans

Paying off student loans with a home equity loan requires careful consideration, as it can remove federal protections like income-driven repayment plans, deferment or forgiveness programs. While a home equity loan may offer lower interest rates than certain student loans, you are trading these benefits for a secured debt that puts your home at risk if you fall behind. For some, consolidating private student loans may make sense, but using home equity to pay federally backed loans can carry significant long-term consequences.

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Pros and cons of using a home equity loan to pay off debt

Advantages of using a home equity loan to consolidate debt can vary from person to person, but they typically include interest savings and the convenience factor that comes with going from making multiple payments each month down to just one. This is mainly due to the fact home equity loans offer competitive fixed interest rates and fixed monthly payments that are easy to predict.

Financial advisor Lawrence Sprung of Mitlin Financial in Hauppauge, New York, explained that when it comes to debt consolidation specifically, home equity loans can come with advantages like lowering the interest you have to pay each month and having one payment instead of multiple.

That said, Sprung pointed to the fact you are putting your home on the line as the biggest downside of these loans since this puts the place you live at risk if you default. “In most cases, leaving credit card debt with the credit card company and failing to make those payments will not put your home at risk,” he said.

Consolidating debt with a home equity loan also may not leave you any better off if you don’t take steps to change the way you spend. After all, paying off credit cards may not help much if you continue using them for more purchases. In fact, you may end up with additional credit card debt to deal with and a new home equity loan payment to make if nothing changes with your lifestyle and habits.

Finally, it’s important to remember that the best home equity loan rates go to consumers with good to excellent credit. If you have poor credit due to mistakes you made in the past, consolidating debt with a home equity loan may not lead to significant savings. Poor credit can also mean being denied a home equity loan altogether.

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Effect of home equity loans on credit and DTI

Paying off debt with a home equity loan can affect both your credit score and DTI ratio. On the plus side, reducing credit card balances lowers your credit utilization, which can boost your score. Adding a secured installment loan also improves your account mix, another factor credit scoring models consider.

There are downsides to keep in mind. A new home equity loan triggers a hard credit inquiry, which can temporarily lower your score. If the loan increases your total debt, your DTI ratio may rise, potentially affecting future loan approvals. Missing payments is especially risky since the loan is secured by your home.

To make the strategy work, focus on paying off balances in full and avoid adding new high-interest debt. Stay current on payments and keep other credit card balances low to protect your score. Regularly monitor your DTI and credit report so you can catch issues early.

Who should get a home equity loan?

To get a home equity loan, you need to have equity in a property. If you just purchased a home with a 5% down payment and your property hasn’t had time to increase in value, for example, you won’t even be a contender for this type of financing.

Even then, you need good or excellent credit to qualify for the best home equity loan rates. This is important if you’re trying to consolidate debt to save money on interest in addition to other goals you have (like consolidating to one monthly payment).

If you have home equity and good credit, Sprung said debt consolidation with a home equity loan makes the most sense when you can significantly reduce the interest you pay on a monthly basis and over the timeline it would take to become debt-free. This will require an understanding of the home equity rates you can qualify for, how much your new payment would be and how much interest you would pay with various loan options over time.

Finally, you should only consolidate debt with a home equity loan if you're certain you can afford to pay your bills. “You need to be extremely confident that you will be able to make the payments and eliminate the debt more quickly as a result of doing this,” said Sprung.

Home equity loan debt consolidation example

Before you decide whether you should consolidate debt with a home equity loan, consider this example scenario that shows how much someone could save.

Imagine a consumer who has $20,000 in credit card debt on a card with the current average APR of 21.47%. If they were making a monthly payment of $400 toward this debt, they would owe over $30,747.69 in interest payments alone and spend 10 years and seven months paying this amount off.

If this person had excellent credit, however, they could qualify for a home equity loan with a fixed interest rate as low as 8%. If they opted for a home equity loan with a repayment term of 10 years, they could pay $242.66 per month toward their debt over 120 months, with only $9,118.62 going toward interest. That’s a savings of more than $20,000 over the life of the loan, and they would even become debt-free seven months sooner.

Other ways to pay off debt

Besides making regular monthly payments to your lenders, there are several alternatives to home equity loans that can help you consolidate debt and potentially get out of debt faster.

• Balance transfer credit cards: Credit cards with balance transfer offers typically extend 0% APR on consolidated debt for up to 21 months, although balance transfer fees apply.
• Cash-out refinance: With a cash-out refinance, you can refinance your home with a new primary mortgage and receive cash back for any home equity you have.
• Debt consolidation loan: Personal loans for debt consolidation also come with fixed interest rates and fixed monthly payments, yet they don't require you to use your home as collateral for the loan.
• Debt management plan: Debt management plans (DMPs) have you make a single monthly payment to a third-party company that pays all your bills on your behalf. These companies also help negotiate lower interest rates and better repayment terms to get you out of debt faster.
• Debt settlement: Debt settlement is facilitated by third-party companies that tell you to stop paying your bills and start making a payment to a savings account in your name instead. The funds you save are ultimately used to settle your debts for less than you owe, but only when this strategy works. If you’re considering this option, be aware that not paying your bills can have dramatic negative impacts on your credit score.

Add in the debt snowball method or the debt avalanche, which has you focus on paying off high-interest debts first, and you can maximize your efforts.

FAQ

Bottom line

Using home equity to consolidate and pay down debt can be a viable option — especially if you have excellent credit so you can qualify for the lowest loan rates available today. If you have a strong, reliable income and you're not worried you’ll struggle to keep up with loan payments, that makes this option even more reasonable when compared to other debt payoff strategies.

Still, you’ll want to make sure your home equity loan isn't just a short-term solution to your debt problems. If you consolidate debt but keep spending more money than you bring in each month, it’s likely adding more debt and won’t leave you any better off.