You can use your home equity to consolidate debt, but make sure you understand the risks

Sometimes it even makes sense to put all your eggs in one basket.

Consolidating your debt can help you streamline your repayment plan – and hopefully save you money in the long run. However, when using your home as collateral for your existing debt, there are a few more factors to consider – starting with the fact that failure to repay could cost your home.

How to Consolidate Debt With Your Home Equity

Debt can pile up quickly, and you might face multiple payments each month for things like your mortgage, credit cards, and student loans.

“Most consumers are dealing with some type of unsecured debt, and COVID has definitely made it harder to deal with,” said Jeffrey Arevalo, financial wellness expert at GreenPath Financial Wellness.

Consolidating your debt means taking out a large loan and using it to pay off your other existing debts. That way, you only have one loan payment to make each month, ideally with a lower interest rate on that single loan than on your other existing loans.

For example, if your credit card charges 16% interest on your remaining credit card debt, and you consolidate that loan into a home line of credit with an interest rate of about 4%, you will save a lot of money on interest.

“For someone who is struggling to pay off their debt, not moving quickly enough, pays high interest rates, or is simply overwhelmed, I would consider debt consolidation,” says Arevalo.

For those with a decent amount of equity in their home, a home equity loan or line of credit (HELOC) can be a good tool to consider – if you can qualify for it. Home lending has tightened over the past year, making these loans more difficult to obtain when you have lower creditworthiness and less equity in your home.

A home equity loan is similar to a traditional loan: you receive a lump sum at the beginning of your term and then have monthly payments (plus interest) until you have paid off the loan. A home equity line of credit is more like a credit card. It’s a revolving line of credit, meaning you choose how much to spend on the line and then have a repayment period to repay the money you borrowed (plus interest).

Is It A Good Idea To Use Home Ownership For Debt Consolidation?

You should seriously consider your repayment plan and whether the underlying behaviors that led to your debt persist before taking out a home loan or debt consolidation line of credit.

“One should be so careful about converting unsecured debt into secured debt,” Arevalo says. “If you default on a home equity loan or a home equity line of credit, you could risk things like foreclosure.”

Yes, you risk losing your home if you fail to make your payments.

“I think borrowing money from your house to pay off your credit cards is a dangerous world because often we don’t change our behavior. In the end, we just put all of our mountains of debt in a huge pile, ”says Craig Lemoine, director of the Academy for Home Equity in Financial Planning at the University of Illinois.

But if you get it right and pay diligently, then it can be a way to save money on your debt payments.

Taking out high-yield loans and consolidating them into a HELOC or home equity loan “could save you thousands of dollars a month,” said Darren Q. English, development loan officer at Quontic.

Again, make sure you have looked at the underlying circumstances that gave rise to your debt in the first place.

“If it turns out that they can save a lot more money in interest and are doing fine turning unsecured debt into secured debt, a home equity loan would make sense,” Arevalo says. “But any behavior or circumstance that caused the debt to accumulate in the first place needs to be addressed.”

You should approach your situation holistically to know if this strategy makes sense. Think about all your income and debts, what other recurring bills you pay, and your cash flow.

“Sometimes a loan or a consolidation won’t solve this underlying problem. It could just be a plaster, ”says Arevalo.

Home Loans vs. HELOC For Debt Consolidation

The principles of using either debt consolidation product are the same: you take out your HELOC or home equity loan, use it to pay off existing debts, and then only have that one existing loan to deal with.

A home equity loan is a more structured, traditional loan. You will be withdrawing a lump sum on your home and can usually use it for consumers to pay off their debts “fairly quickly,” Arevalo said.

You have a fixed rate on a home loan. This means that you fix your interest rate at the beginning of your loan term and it does not change.

A HELOC, on the other hand, offers a little more flexibility. It is similar to a credit card and so your payments are variable based on how much you spend on your line. Your interest rate is also variable on a home loan, meaning that as interest rates rise, you will face higher interest payments.

With a home equity loan in particular, you are more likely to need to pay the closing costs and get a valuation of your home, although some lenders require the same action for HELOCs. These are expenses.

Pros and Cons of Using Home Ownership for Debt Consolidation


  • Combine multiple debts into a single payment

  • Save money on interest

  • Streamline repayment (one payment to worry about instead of many)


  • Turn unsecured debt into secured debt

  • Might Lose Your Home If You Don’t Make Your Payments

  • May not be suitable for an ideal interest rate

  • You must have good creditworthiness and a reasonable amount of home equity in order to qualify for a home loan

Alternative debt consolidation options

If you are considering debt consolidation but aren’t sure if it is right for you, reach out to a free counseling agency who can help you with your decision.

If you are wary of converting your unsecured debt into secured debt, a bank transfer credit card can make sense. Depending on how much debt you need to pay off, you can also get a personal loan. Both options have their own pros and cons, so do your research before diving in.

Whatever you do, “be careful not to just move your debt elsewhere instead of dealing with it directly,” Arevalo says.