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What Can Home Equity Loans Be Used For

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  • Consolidate debt with fixed rates and payments using a home equity loan, but remember your home is on the line (foreclosure risk).
  • Lower monthly payments and free up cash flow for retirement savings, emergencies, or home improvements through debt consolidation.
  • Qualifying for a HEL typically requires you to have a credit score of 660+, a debt-to-income ratio below 40%, and at least 10% home equity.
  • Compare offers, understand risks, and ensure a HEL aligns with your goals before proceeding.

Millions of homeowners throughout America have certain common goals, and one of those goals is to save money. Whether that’s at the grocery store, with monthly utility bills, or lowering debt payments. This pursuit touches all aspects of life, from hunting for deals at the grocery store to seeking lower monthly utility bills. But where it becomes most crucial is in managing and reducing monthly debt payments. The journey to financial stability is often challenging, and finding effective strategies to ease this burden is essential.

One effective strategy available to homeowners is the strategic use of a 2nd mortgage, specifically a Home Equity Loan (HEL), to consolidate debt. For homeowners struggling under the weight of considerable debts, leveraging home equity offers a ray of hope. By tapping into the equity built up in your home, you can consolidate your debts, significantly reducing your total monthly outlay. Using home equity responsibly and in a manageable way can thus be a smart financial move for those feeling overwhelmed by debt.

With that said, there are some caveats and warnings that you should be aware of before getting a 2nd mortgage (home equity loan or HELOC), namely that you can lose your home if you’re unable to make the payments. Keep reading to learn about the risks and benefits of what a home equity loan can be used for.

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What is a home equity loan?

A Home Equity Loan is a debt obligation between a homeowner and a mortgage lender in which the homeowner receives a lump sum of money from a lender. In exchange, the homeowners use their equity as collateral.

Quick facts about home equity loans (HEL)

 Here are some quick facts about home equity loans:

  • Home equity loans have a fixed interest rate, which means a fixed payment each month
  • Your HEL monthly payments will include both principal and interest.
  • Home equity loans will be in second position behind the first mortgage (if you have one).
  • There can be closing fees with a home equity loan.

The process of obtaining a home equity loan is similar to that of a first mortgage, and I’ll touch on that later in the article.

Home Equity Loan Lender Requirements

These are the baseline Home Equity Loan requirements with most mortgage lenders.

Sometimes, a homeowner can have a credit score below 660, a DTI above 40%, and less home equity; however, that is not the industry norm. If you don’t meet the above requirements, you should still look into your options with an experienced loan officer to see if there are additional opportunities for those who don’t meet the baseline Home Equity Loan requirements.

Is a Home Equity Loan the same as a HELOC?

No, a home equity loan is not the same as a home equity line of credit (HELOC). Although these are both types of second mortgages, the latter is a line of credit that allows the borrower to use as little or as much as they applied for whereas the home equity loan is a one-time lump sum payment.

Here are the differences:

Home Equity LoanHome Equity Line of Credit
Fixed-rateAdjustable rate
Principal and interest paymentInterest-only payment
Lump sumEquity draw available

These are the main differences between a home equity loan and a HELOC. Someone who does not need a lump sum and prefers to access their equity over time would most likely choose a HELOC.

Types of consumer debt

You can consolidate debt and pay it off with a home equity loan. Unsecured debt have higher interest rates and monthly payments.

Credit card

According to Forbes.com, at the start of 2024, the average credit card interest rate was 27.79%. Regarding store retail credit cards, the average interest rate consumers pay is 28.93% (CNBC.com). Credit card debt is one of the most toxic and debilitating types of debt you can have, consolidate that debt as soon as you can!

Medical loans

Not everyone has health insurance; even if someone does, the health insurance carrier doesn’t always cover your medical expenses. An entire industry is dedicated to obtaining a loan to pay off medical debt.

In a recent survey from WalletHub.com, medical loans have an APR as high as 35.99%. A ten-year medical loan with an interest rate of 35.99% and a starting balance of $50,000 has a monthly payment of $1,544.11, and your total interest paid is $135,293.56. That’s a staggering amount to come up with each month, and for the first few years, most of your payment goes to the 35.99% interest you are paying.

Student loans

It’s been in the news more than once: there is a student loan debt crisis in America. There is $1.74 trillion in student loan debt (Motley Fool). And many student loan borrowers seem never able to get ahead of the principal they owe. They pay each month, but somehow, that principal balance continues to go up, and they end up with an amount they’ll never be able to repay.

Timeshare loans

Who doesn’t love to vacation? But those vacations can get costly, especially if you have a timeshare loan with an interest rate as high as 20.00% (Sofi).

If you have a five-year, $20,000-time share loan, your monthly payment will be $529.88, and your total interest expense will be $11,792.66.

Personal loans

Some personal loans are advantageous; however, some are not. Many personal loans come with origination fees, prepayment penalties, and high-interest rates.

Peer-to-peer loans

What is a Peer-to-Peer (P2P) loan? It’s an online platform where individuals and, in some cases, businesses can lend directly to other individuals. Another term for it is social or crowd lending. Peer-to-peer loans can come with high-interest rates and significant origination fees.

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Cost savings calculation

Here is a simple cost savings calculation when comparing a consumer debt similar to the ones listed above and a Home Equity Loan.

In this example we see the cost savings difference between someone’s consumer debt and if they were to obtain a HEL.

Consumer Debt = $50,000Home Equity Loan = $50,000
Interest Rate = 20.00%Interest Rate = 9.00%
Monthly payments = $849.41Monthly payments = $449.86
Total of all monthly payments =  $203,858.95Total of all monthly payments = $107,967.11
Total interest paid = $153,858.95Total interest paid = $57,967.11

The above is based on paying consumer debt and a HEL over 20 years. As you can see, the consumer debt structure is significantly more expensive than paying on a HEL. By paying off your consumer debt with home equity loans, you’ll save almost $100,000 in interest.

Improved monthly cash flow with a home equity loan

Your monthly cash flow will improve by $399.55 if you pay off your consumer debt with a Home Equity Loan.  With the improved monthly cash flow, you can utilize the money towards the following.


Many Americans don’t save enough money for retirement. According to a recent article in bankrate.com, 35% of Americans felt they were “significantly behind” with their retirement savings.

If your new Home Equity Loan saves you $500 per month, and you invest it in a retirement account earning 7.00% per year, you’ll have over $600,000 after 30 years.

An additional $600,000 for retirement is life-altering for many Americans, and you could see a significant boost to your retirement fund by using your HEL monthly savings.

Emergency fund

If you don’t have a three-monthly emergency fund that can cover your monthly expenses if you lose your job, you should strongly consider using your HEL savings to help get this going.

An emergency fund is essential, and using your HEL savings could be the first step in making this happen.

House repair fund

The cost of a new furnace is thousands of dollars. Appliances can also total up to thousands of dollars. Do you have AC in your home? If you need a new AC unit, be prepared to spend between $3,000 – $8,000 if you need a new unit installed (Angi.com).

Using your monthly HEL savings to set up a house repair fund is a prudent decision that can help you cover the cost of unexpected house repairs.

Save for home improvement projects

Do you need some improvements for your home? Your monthly HEL savings could go a long way toward making those dreams of a new bathroom a reality. You’ll want to consider setting up a separate account (that earns interest!) to see your balance grow (and prevent you from using it for other things).

And when it comes to the home improvement projects you are considering, ensure they increase the home’s value. Bathroom improvements and kitchen upgrades typically give you the biggest bang for your buck. That’s a way to help you build long-term wealth.

Pay for college

We all know college costs are high, and every year the cost keeps increasing. Using a HEL to pay off your debt could provide a big boost towards paying for college and might help your student avoid the pitfalls of student loan debt.

How to obtain a home equity loan

 Obtaining a Home Equity Loan is similar to obtaining a new first mortgage.

  • Identify your total consumer debt.
  • Make a cost comparison between your consumer debt and Home Equity Loan
  • Search for quotes from lenders who offer HEL’s and compare offers
  • Apply for the HEL, and send in your required documentation
  • Complete an appraisal (if required)
  • Sign loan documents and close your loan.

Typically, the process from beginning to end is 20 to 35 days. Once your HEL is closed, the closing company will wire you your lump sum amount within 24-48 hours (or send you a certified check for the full amount).

If you don’t have a first mortgage, should you get a HEL? 

No, unless some unusual circumstances would cause the first mortgage to be more expensive. Apples to apples, a first mortgage will have a lower interest rate and cost (if structured properly).

Alternatives to a home equity loan

Here are some alternatives to a home equity loan.

401k loan

A 401k loan is an alternative to a home equity loan; however, there are some downsides and risks you should be aware of before you obtain one. The downside to a 401k loan is you are losing out on investment earnings, and the repayment period for a 401k loan is generally one to three years (which means a much higher monthly payment).

A big risk with a 401k loan is that if you lose your job, you might be required to pay off the balance in full, whereas a HEL does not have the same requirement. This is a huge risk you must be prepared for because you can’t get another loan to pay off that lump sum balance if you don’t have a job. 

Personal loan

A personal loan is another alternative to a home equity loan. They are a good option if you can find a personal loan with a low rate and no fees. However, therein lies the problem with these types of loans because many come with high rates and exorbitant fees. 

A significant benefit to a personal loan is the ease with which you can obtain one and how fast it closes. Something to consider if you need cash fast and/or your cash needs are below $20,000.

Home equity line of credit

A Home Equity Line of Credit is an excellent alternative to a Home Equity Loan. Above, I covered the differences between the two, and depending on your needs, a HELOC might be the best alternative for you and your financial goals.

Use a home equity loan to improve your wealth

Improving your monthly cash flow using a Home Equity Loan to pay off debt is a wise financial decision. This long-term financial plan will build wealth for you and your family.

The first step in this process is to identify your total consumer debt, do the cost comparison calculations, decide what you’ll do with that savings, and then apply to a mortgage lender offering Home Equity Loan products.

After accessing your home equity, you’ll want to stick to your plan and utilize your monthly savings to improve your long-term wealth.

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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.

Kevin O'Connor

Written By Kevin O'Connor

Loan Officer Kevin O’Connor has over 17 years of experience as a Mortgage Loan Originator. He is fully licensed with the California Department of Real Estate and the Nation Wide Multistate Licensing System (NMLS). He has worked with thousands of homebuyers and homeowners over the course of his career. From first-time homebuyers to experienced property investors, he has earned the reputation of putting his client’s priorities first. He is a trusted advisor who has a wealth of knowledge and expertise.