Can you use home equity for debt consolidation?

This article is for educational purposes only.  JPMorgan Chase Bank, N.A. does not currently offer Home Equity Loans and does not currently offer Home Equity Lines of Credit (HELOCs) in all states.  Please talk with a Home Lending Advisor to see if HELOCs are available in your state. Any information described in this article may vary by lender.

Quick insights

• Home equity can be used as a financial tool in a variety of situations and to achieve different goals.
• To use home equity for debt consolidation, your options might include home equity loans or home equity lines of credit (HELOCs).
• Using either a home equity loan or HELOC to pay off debt has pros and cons, depending on the terms and situation.

Home equity loans or HELOCs can create a financial opportunity for homeowners who have various goals, including debt consolidation. In this article, we’ll explain the concept and process of using home equity for debt consolidation.

Can you use home equity to pay off debt?

As equity in your home accumulates, you may be able to access it in various ways, including a home equity loan or HELOC. The basic principle is the same: You turn the financial value of your home equity into a loan or credit line. Either option could be used to consolidate multiple debts and make repayment more straightforward.

Using a home equity loan for debt consolidation

This is a loan that provides a sum of money. You typically agree to repay the loan at a fixed interest rate through recurring monthly payments. Once you receive the money, you can use it to pay certain bills or entire loan balances. For example, you could pay off a credit card with a home equity loan. If the card’s APR is 15%, and the loan interest is 5%, you can save money by paying down the loan instead of the card.

To consolidate more than one debt, including credit card balances, you’d have to pay off each outstanding balance in full. You’d likely send separate checks or payments to each lender. Regardless of the debt you’re paying off, you’re responsible for repaying a home equity loan at the terms you agreed to.

Using a HELOC for debt consolidation

A HELOC provides revolving credit that you can draw from during a certain period. To do that, you may be able to write access checks, make online transfers or use a linked debit card. These options vary depending on the lender but could be used to pay off multiple outstanding debts. Then, you’d be responsible for repaying your HELOC. However, instead of making several monthly payments, you’d make one toward your HELOC.

HELOCs often have variable interest rates, so the minimum amount due each month might vary. During the draw period, you typically pay interest only on the amount you borrow.

Pros and cons of using home equity to pay off debt

When your main goal is debt consolidation, relying on home equity has potential benefits and drawbacks.

Pros

• A single payment: Managing monthly payments can make repaying debt more complicated. You could be paying bills several different dates each month. Whether you consolidate with a home equity loan or HELOC, repayment involves one recurring monthly payment. No more paying credit cards and loans on different days each month.
• Potential savings: Interest rates for home equity loans and HELOCs might be better than those of other unsecured debts, especially credit cards. The interest rate you get will vary based on several factors, but overall, a low interest rate could help you save on the total interest you pay over the repayment period.
• A new timeline: Home equity loans and HELOCs have their own repayment periods. The new timeline can be more appealing than having several distinct loan terms. By following the terms of the repayment plan and avoiding new debt, you’d know when your debt will be paid off.

Cons

• Home collateral: Tapping home equity uses your home as collateral. Therefore, defaulting on any home equity loan or HELOC could result in repossession or foreclosure.
• Costs: These vary by lender but can add to the total cost of the loan or line of credit. In some cases, the closing costs and fees might offset the savings of consolidating debts with a HELOC or loan.
• Lower equity: When you use your home equity, the amount you have decreases. This could impact your future financial situation or decisions. If you want to move, for example, having an open loan or HELOC affects the amount of equity you can use for a new home purchase.

Who is eligible for home equity debt consolidation?

Different lenders will have different eligibility criteria for home equity loans and HELOCs. For example, many lenders will require an appraisal when you apply, while some could some ask about your specific plans for using the equity.

In general, lenders will consider several factors, including:

• Current equity: Whether you apply for a loan or HELOC, you can borrow a portion of the total equity, but rarely the full monetary amount. One data point lenders use to decide how much they will lend is your loan-to-value (LTV) ratio.
• Creditworthiness: Your credit utilization ratio, credit mix and payment history are among the factors that determine your credit score and creditworthiness. Repayment is part of the agreement to open home equity loans and HELOCs. Therefore, lenders often assess creditworthiness when reviewing such applications.
• Debt-to-income (DTI) ratio: Most credit applications, not just loans and HELOCs, will require your employment or income information. This is compared with your total debt to determine the DTI ratio and eligibility for a home equity loan or HELOC.

Alternatives to using home equity for debt consolidation

Your debt consolidation options may also include a balance transfer. This can work similarly to home equity loans and HELOCs in that you’d go from managing multiple debts to managing one. Instead of paying down debts, each with a distinct interest rate, you’d be repaying one new loan, credit line or credit card.

When paying off debt, everyone’s situation differs and impacts their choice of financial strategy. Sometimes consolidation isn’t the optimal solution for reducing debt. Other repayment strategies—the snowball and avalanche methods, for instance—could help you pay off debt without relying on home equity or new loans.

In conclusion: Is using home equity a good idea for debt consolidation?

Leveraging your home equity can be a strategic way to consolidate and reduce debt. It’s important to approach home equity loans and HELOCs as consolidation options with a clear budget and repayment plan. Benefits might include interest savings and simplified monthly payments. These are worth weighing against the potential drawbacks and overall risk of defaulting on a home equity loan or HELOC.