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Home Equity Loans for Debt Consolidation

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Are you a homeowner with too much high-yielding debt? Do you have equity built up in your home? If you are not familiar with how homeowners use home equity loans for debt consolidation, then you’ve come to the right place because in this post I am going to discuss how, why, and when homeowners should tap into their home equity to pay down high-interest debt.

Here is how I’ve structured this post for you. First, I will discuss in general terms the most common ways homeowners access their home equity. Then we will review when you should and should not use home equity for debt consolidation. Finally, we give you a step-by-step detailed process of how homeowners use home equity loans for debt consolidation. Unlike other bloggers, we give you the details you need (see below!).

The common ways to tap into home equity is via any of the following: home equity loans (HEL) or a home equity lines of credit (HELOC). There are a number of lenders out there offering home equity loans and HELOCs, so the process of getting a loan and finding a good lender can be confusing. Fortunately, while the process may vary slightly with each lender, many of the major steps will be the same. 

To use home equity for debt payoffs, you’ll need to meet the lender’s minimum credit score requirement, income, and details about your home. However, going through these steps can be well worth the time, as being able to pay off higher interest rate debt with a low-rate home equity loan can save you thousands of dollars in the long run. 

If you’re wondering whether it’s a good idea to use a home equity loan for debt consolidation, keep reading! We’ll give you tips on how you can apply for a loan and what to look for in a good lender.

Why do homeowners use home equity loans for debt consolidation?

A home equity loan allows you to borrow against the equity in your home. Equity is calculated as home value minus any of your mortgage loans. Many lenders will allow you to borrow up to 80% of the value of your home, so the more equity you have, the more you might be able to borrow.

You’re probably thinking, why would I want to deplete the equity in my home?! Here’s why: let’s say you have $50,000 in tappable home equity and $12,000 in credit card bills. The CC interest rate is 22.5%, whereas if you got a home equity loan, the interest rate would only be 8.5%. By borrowing against your home to pay off your CC, you save 14% in annual interest charges!

You’ll have to apply to the lender and get approved, but once you’re approved, you can then use the cash proceeds from the loan for debt consolidation. Some lenders may actually require debt payoff as a condition of loan approval, but if you have the choice, having the lender take care of the payoffs can simplify things on your end.

When should I use a home equity loan to consolidate debt?

Most of the time, using a home equity loan to consolidate debt can be a smart financial move. There are some cases when you should not tap into your home equity:

  • If you can’t control your personal spending. If you have trouble controlling your spending, using home equity to cover credit card bills is just a bandaid to a bigger problem. Accessing home equity should be a way to save you money, not fuel a bad spending habit.
  • Risk losing your home. If you access your home equity, your monthly mortgage payment will increase. If you cannot cover this additional mortgage then you put your home at risk.
  • Your debt is not high-yielding, or can be paid off with alternative routes. Remember that you likely pay a lot in fees when you get a home equity loan so if the fees are the same amount as you’d pay in interest, then it may not be worth it. Also, since you are replacing unsecured debt (credit cards) with secured debt (home loan), it’s very risky — always look for alternative routes before paying!

 To make an informed decision, you should understand the pros and cons of doing so. 


Using a home equity loan for debt consolidation can save you a lot of money. Not only are home equity loans typically offered at much lower interest rates than credit cards or other consumer debt, but you might also be able to get a tax deduction on the interest you pay on a home equity loan. You’ll want to consult your accountant or CPA since this could vary depending on your specific financial circumstances, but it is something that could save you even more money when you end up filing your taxes. 

On top of saving money, you’ll also be able to simplify your budget. Instead of having to make multiple payments to different lenders, consolidating the debt on a home equity loan means you just make one payment to worry about. 


Since a home equity loan uses your property as collateral, it’s possible you could lose your home and be evicted & foreclosed if you miss enough payments. So, before you consider a home equity loan, make sure you can afford the monthly payments to avoid eviction and foreclosure. You’ll want to think about all of your monthly expenses, such as utility bills, groceries, any potential home or car repairs, childcare expenses, and more.

Also consider the stability of your monthly income, whether you have an emergency fund, and how your budget could be affected if you have a HELOC and the payments go up. 

Since using a home equity loan to consolidate debt can free up credit card limits, you’ll also need to be sure you can stay disciplined in your spending habits. If you continue to spend on credit cards after the debt consolidation, you could find yourself in a situation where you are no longer able to afford all of the monthly payments. 

What types of home equity loans are there?

Outside of a cash-out refinance, home equity loans and HELOCs are two popular methods to turn home equity into cash for paying off debt. So, which one should you choose? 

The answer depends on several factors, such as how often you need funds, whether you know how much cash you need, and whether you prefer a fixed or variable interest rate. 

HELOCs and home equity loans each have their own set of pros and cons, and choosing the wrong one could end up costing you time and money. 

Home equity loan

A home equity loan is a closed-end loan, meaning the funds are disbursed all at once. It’s also common for interest rates to be fixed, so you won’t have to worry about your monthly payments changing. 

Home equity loans are a great choice if you know exactly how much cash you need, and are confident you will not need additional cash in the near term. If you do end up needing additional funds and want to tap into your home’s equity again, you’d need to apply for a new home equity loan. 

HELOC: home equity line of credit

If you’re unsure how much cash you need, or want the flexibility of being able to constantly draw cash from your home equity, a line of credit could be worth looking into. You can use a home equity line of credit to draw funds up to a specified credit limit for a certain time frame (typically 10 to 15 years). Once you’ve paid down the balance below that credit limit, you can draw additional funds. 

The downside of a HELOC is that interest rates are typically variable, so you could see your monthly payments changing over time. However, some lenders do offer HELOCs with the ability to lock a portion of your balance at a fixed interest rate. 

What do lenders require for a home equity loan?

Lenders all have varying requirements for a home equity loan. However, nearly all of them will consider your credit score, your debt-to-income ratio, and how much equity you have in your home.

If you have a credit score of 700 and above, a debt-to-income ratio below 50%, and a loan-to-value ratio below 80%, you should have no problem qualifying for a home equity loan. However, because each lender sets its own risk criteria, you may find that some lenders are more flexible than others.

How do I apply for a home equity loan?

Getting a home equity loan for debt consolidation involves several steps. You’ll need to make sure that you are eligible as a borrower, that your property is eligible, and that you meet any other requirements by the lender.

Individual steps can vary depending on the lender you choose, but you’ll run into many of the same steps regardless of which bank you choose. Here is a summary of the steps you can expect you go through in tapping your home equity for debt consolidation:

  • Shop lenders to find the best rates, fees, loan programs, and terms available
  • Submit an application
  • Sign preliminary disclosures
  • Provide the lender with any documents needed to render an initial loan decision
  • Schedule any third-party inspections required by the lender
  • Provide the lender with any documents required by underwriting
  • Schedule an appointment with a notary to sign final loan documents
  • The loan is funded after the lender receives the executed loan documents

Shop lenders

Before you choose a specific lender, you should shop rates with at least a handful of companies instead of refinancing your mortgage with the same lender you’re already using. Different lenders offer various combinations of interest rates, fees, loan programs, and loan terms. Shopping rates with multiple lenders will give you insight into which mortgage is the best one for you.

Many borrowers focus on the interest rate and fees charged but don’t forget about the fine print in the loan terms. Some loans may have additional costs such as pre-payment penalties, account inactivity fees, or minimum draw amounts that could make it difficult and more expensive for you to use. 

It can also be helpful to read user reviews about the lender as it will give you insight as to what your experience might be like. How knowledgeable were the loan officers? Were they transparent about the process? Did they experience any hidden fees?

Submit an application

Once you’ve decided on a lender, you can submit a loan application if you have not yet done so already. You’ll need to provide the lender with some basic information about yourself, the property, and what type of loan you’re looking for. The lender will also need your permission to conduct a hard credit pull. 

Sign preliminary disclosures

Once you have submitted the application, some lenders will require you to speak with a loan officer, while others handle this step automatically. Once you have confirmed the type of loan you want, you will need to sign disclosures that outline the terms of the loan you’ve applied for. These disclosures will contain information about the interest rate, fees, and details of loan terms such as how monthly payments are determined and whether there are any pre-payment penalties. 

Provide the lender with initial supporting documents

After disclosures have been signed and you have agreed to move forward, the lender will typically request documentation from you. You may be asked to document your income with things like pay stubs, W2s, or tax returns. Other items you could be asked for could include insurance documents, bank statements, and mortgage statements. This documentation will then be reviewed by the lender’s team of underwriters to make sure you qualify for the loan. 

Schedule third-party inspections

Depending on the lender and the specific characteristics of your loan, third-party inspections may be a requirement for your loan. The most common is an in-person appraisal inspection, where a certified appraiser looks at your home and gathers data to determine what it is worth in the current market. Some lenders may only need an exterior inspection, while others require an interior inspection as well.

Provide additional supporting documents (if applicable)

After your initial documentation has been reviewed by a lender, it’s not uncommon for them to have some clarifying questions to tidy up some loose ends. This is one of the last hurdles to obtaining final loan approval. This could be as a result of something that popped up on a third-party inspection, or perhaps a document was not legible. Many times, an explanation or updated document is all that is needed.

In some instances, the lender might not be able to approve you for the loan. If this happens, you’ll speak with your loan officer to confirm the information on your loan application and discuss any available alternatives, such as lowering your loan amount, paying off additional debt, or choosing a different loan program.

Schedule an appointment to sign the final loan documents

Once final approval has been issued by the lender, you’ll be able to schedule an appointment to sign your final loan documents. This will involve a meeting with a notary, which the lender will arrange.

A notary is needed to confirm you are who you say you are and helps reduce fraud and identity theft. When the notary reaches out to you to confirm the details of the signing, make sure you ask what identifying documents you’ll need to have. If you don’t have the necessary identification, the notary may not be able to complete the signing, and the appointment may need to be rescheduled. 

Loan is funded

Congratulations! Once you’ve signed your final loan documents, you’re nearly done. All that is left is for the lender to review the documents to make sure they were signed and notarized properly before funds will be disbursed and your loan is considered complete. 

If the lender requires you to use your equity for debt consolidation, they will send the funds to the applicable lenders. Otherwise, they will send the funds to the bank account you have designated. In the case of a HELOC, you should be able to access the funds within 24 hours. 

Using a home equity loan for debt consolidation

Home equity loans often have lower interest rates than other types of consumer debt and can be a useful financial tool to save you money over the long run if you’re looking for a loan for debt consolidation. Consolidating debt into a home equity loan can also simplify your finances with only a single monthly payment to make.

However, before you sign on the dotted line, it’s important that you make sure you can afford the monthly payments. Home equity loans use your home as collateral, and you could lose the home if you’re not able to make payments in a timely manner.

Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. All information shown here is for illustrative purpose only and the author is not making a recommendation of any particular product over another. All views and opinions expressed in this post belong to the author.

Andrew Wan

Written By Andrew Wan

With a decade of experience as a mortgage underwriter and a licensed California real estate broker since 2018, Andrew Wan use his expertise and experience to share insights on the housing industry. He covers a wide variety of topics, from buying a home to what the home loan process entails, and enjoy sharing tips to help better prepare you for how to make it all a seamless experience.