How to use a HELOC to pay off debt (and when it makes sense)

Yahoo

27-05-2025

Are you overwhelmed by credit cards, personal loans, or medical bills? Depending on your financial situation, using a home equity line of credit (HELOC) to pay off debt could be a smart move.
However, it's crucial to understand how paying off or consolidating debt with a HELOC works to decide if it makes sense for you.
A HELOC is a line of credit drawn from the equity in your home. It functions like a credit card with a revolving line of credit, unlike a traditional mortgage or personal loan, which gives you a lump sum of money. A HELOC gives you access to money for just about anything, such as large purchases, home improvements, or debt consolidation.
Most HELOCs have variable interest rates, although some lenders offer fixed-rate HELOC options. HELOC annual percentage rates (APRs) are typically much lower than credit card rates. So, while they have some of the same features as a credit card, they can be more affordable and actually help you pay off credit card debt.
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To pay off debt with a HELOC, you need to understand how to qualify and what rules you have to follow. Here are the basics on getting a HELOC and using the funds to pay off other debts.
HELOC lenders typically look for homeowners with 15% to 20% equity in their house. Equity is your home's value minus your outstanding mortgage balance. That means you're more likely to get approved if your mortgage balance is 80% to 85% less than your home's appraised value. For example, if an appraiser claims your home is worth $400,000, your outstanding mortgage principal should be a maximum of $320,000 to $340,000. If your balance is higher, you won't qualify for a HELOC.
You'll also need to meet basic borrower requirements, such as having a good credit score, a low debt-to-income ratio, stable income, and a history of on-time payments.
There are two main phases of a HELOC.
The draw period: You can access as much or as little of the line of credit the lender approved you for during the draw period, which usually lasts up to 10 years. During this time, you're typically required to make minimum interest-only payments on the amount you withdraw (though you can pay more). During this period, you can draw money as needed to pay off medical debt, credit card bills, or other significant debt payments.
The repayment period: In the repayment period, your minimum payment will increase to cover both interest and principal until you've paid off the balance. The repayment period usually lasts for 20 years, and you can no longer draw money during this time.
HELOCs are secured loans that use your home as collateral. Secured loans are considered less risky for lenders because if a borrower can't repay the debt, the lender can seize the home.
Secured loans can be riskier for borrowers, though. If you struggle to afford monthly payments on both your HELOC and original mortgage, your home could go into foreclosure. So, while a HELOC can help you get out of debt, only consider this option if you're confident you can keep up with the loan payments. You don't want to lose your house in an attempt to pay off unsecured debt, such as a credit card or personal loan.
There are several benefits to a HELOC, especially if you're dealing with high-interest debt. Here are a few pros to consider.
Lower interest rates: HELOC interest rates can be lower than those for credit cards or other unsecured loans, like personal loans. Using a lower-interest line of credit to pay off higher-interest debt will save you money on interest payments.
Affordable payments: For the first decade or so, you can typically make interest-only payments on your HELOC. This can be more affordable than the minimum payments for other borrowing methods.
May improve credit utilization: Credit utilization refers to the percentage of your available credit you're using. The lower your utilization ratio, the better. For example, it's better for your credit score if you owe $1,000 on your credit card with a $10,000 limit than if you owe $9,000. The FICO credit score model doesn't usually include HELOCs when calculating credit utilization. (However, other scoring models might.)
Streamlined payments: Simplifying from multiple credit card payments to one HELOC payment could make it easier to manage your finances.
Before using a HELOC to pay off other loans, consider these potential downsides.
Requires enough home equity: You may have a hard time qualifying for a HELOC if you don't have at least 15% equity in your home.
May come with closing costs: If the lender charges closing costs, you could pay 2% to 5% of the credit limit.
Variable interest rates: Repaying a variable-rate HELOC can be difficult to budget since the payment can change periodically.
Defaulting can risk home foreclosure: Your home is collateral with a HELOC, so if you have trouble repaying, the lender can repossess your home. There can be consequences for not repaying your credit card, personal loan, or student loan bills, but because these are types of unsecured debt, companies cannot take away things like your home.
Lower interest rates are one of the biggest advantages of a HELOC, making it a solid option for people with high-interest debt.
'Anytime you can consolidate debt by rolling into a loan with a lower interest rate, it can put you in a better financial position,' said Dre Torres, loan officer at Cornerstone First Mortgage, via email. 'Savings from a HELOC can help you have a positive monthly cash flow or pay down other debts.'
However, struggling to repay a HELOC has serious consequences.
'A HELOC is tied to your home, so it's not something you want to take lightly. Make sure you are financially diligent and don't get back into debt,' noted Torres. 'If you lack a solid budget or have poor spending habits, a HELOC is generally a bad idea.
There are other ways to consolidate debt if a HELOC is not right for you.
Home equity loan: Access your home's equity in a lump sum, typically repaid at a fixed interest rate.
Cash-out refinance: Refinance for more than your existing mortgage if you have enough equity. Take the difference in cash and use it to pay off debt.
Personal loan: You can borrow a lump sum to consolidate or pay off higher-interest debt and repay it at a fixed rate, usually within five to seven years.
Credit card balance transfer: Transferring high-interest debt to a credit card with 0% APR could save you money if you can pay off the balance before the no-interest period ends. You typically need good to excellent credit to qualify.
Credit counseling programs: Some nonprofit agencies can help you negotiate more affordable payments with your creditors if you're struggling to stay current.
Using a HELOC to pay off debt can be a good idea if you have high-interest credit card debt. HELOCs tend to have lower rates than credit cards because they're secured by your home. But that also means you could lose your home if you struggle to repay the balance.
A HELOC typically shows up on your credit report as revolving credit. As with other credit accounts, missing payments can hurt your score. A HELOC can also impact your credit utilization. While FICO doesn't include a HELOC in your utilization calculation, other credit score models might.
You can use a HELOC or home equity loan to pay off high-interest debt. Both use your home as collateral. HELOCs usually come with variable interest rates. Home equity loans have fixed rates, making them more predictable. Your HELOC payments could be more affordable if you choose interest-only payments during the draw period. However, your payments will increase significantly when the draw period ends.
Read more: HELOC vs. home equity loan — Choose the right one for you
Laura Grace Tarpley edited this article.