Can you use home equity to pay off credit card debt?

^{The article is for educational purposes only. JPMorgan Chase Bank, N.A., currently offers home equity lines of credit (HELOCs) in select states and does not offer home equity loans in any state. Please talk with a Home Lending Advisor to see if HELOCs are available in your area. Any information described in this article may vary by lender.}

Quick insights

• You may pay off credit card debt with a home equity loan or home equity line of credit (HELOC).
• Either option can help consolidate multiple credit card balances into one loan or credit line that you repay at the terms your lender sets.
• Paying off credit cards with home equity is a strategy that might benefit your financial situation but isn’t without a level of risk.

Reducing debt is a worthwhile part of trying to improve credit and overall financial health. Several approaches can be effective, including consolidation loans and specific repayment strategies. In this article, we’ll review ways you might access home equity to pay off credit card debt.

How home equity is determined

To cut a long story short, your home equity is your home’s current market value minus your outstanding mortgage principal. For example: Your home is appraised at $300,000, and your outstanding mortgage is $150,000, so you’d have $150,000 in equity. A home’s market value can fluctuate, but in general, homes appreciate over time. You also build equity as you make mortgage payments and pay down the principal.

Ways to tap home equity to pay off credit cards

Home equity loans and HELOCs are two options that basically turn your home equity into money you can use. Both options would create a new outstanding debt, for which your lender sets the amount and repayment terms. Here’s how the options work.

Using a home equity loan to pay off credit cards

A home equity loan provides a sum of money that you typically must repay over a set term with fixed interest. The money can usually be transferred into a checking or savings account. You can use it to pay credit card bills or balances. Once you borrow home equity loan, you start to repay over a set term whether or not you pay off each of your credit cards.

How a HELOC can pay off credit card debt

A HELOC works like a credit card in that it’s a revolving line of credit—you can charge up to a limit and pay interest on what you borrow. Your limit is based on your home equity, but you don’t have to use it all. You can pay off credit card debt during a draw period, often several years, and repay what you borrow at the lender’s terms.

Using a HELOC to pay off credit cards might sound like trading one type of debt for another. In a sense, that’s true, but a HELOC can be more flexible. How you repay a HELOC differs from how you can pay off credit cards. The terms for repayment, such as the draw period, repayment period and interest rate, differ from those of credit cards.

Advantages of using home equity to pay off credit card debt

Here are some potential advantages that the process could pose:

• Interest savings: Compared to credit cards, home equity products tend to have lower interest rates. You could reduce the total interest you pay over time when paying off credit card debt with a home equity loan or HELOC.
• Consolidation effect: Paying off credit cards with a home equity loan converts multiple monthly payments into one. This streamlining effect can make monthly debt repayment more straightforward and convenient within your budget.
• Improving credit: Paying off credit card balances may lower your credit utilization ratio, a factor used to calculate your credit score. Making monthly payments on time creates a positive payment history, another factor in improving your credit score.

Disadvantages of using home equity to pay off credit card debt

• Longer repayment terms: The repayment terms for home equity loans and lines of credit typically range from 5-30 years. The time it takes to pay off any debt depends on the frequency and amount of your payments. For example, paying off any debt typically takes the longest when making only minimum monthly payments.
• Fees and additional costs: HELOCs and home equity loans may have upfront closing costs and fees. These are often due before you can open and use the home equity product you choose.
• Collateral requirement: When you borrow against your home equity, your home is used as collateral. Therefore, defaulting on a home equity loan or HELOC risks foreclosure.

In summary

Paying off credit card debt with your home equity might simplify payments, save interest and improve your credit score. Two options include home equity loans and lines of credit. However, the process involves risks and potential disadvantages, such as a long repayment period, closing fees and more total interest charges. These factors are important when deciding if using home equity to pay off credit cards aligns with your financial situation and goals.