It can be hard to get out from under credit card debt—but there are options.
If you’re a homeowner, one solution is to use the equity you’ve built in your house. By turning that equity into cash, you can pay off debts and reduce your long-term interest costs.
Still, this move isn’t right for everyone. If you’re considering using a home equity loan to pay off credit card debt, read on to understand the full pros, cons, and process for doing so.
In this guide:
- Why you would consider using a home equity loan to pay off credit card debt
- Should you use a home equity loan to pay off credit cards?
- Pros and cons of using a home equity loan to pay off credit card debt
- Will a home equity loan cover the total amount of credit card debt?
- How to use a home equity loan to pay off credit card debt
- Are there alternatives to using a home equity loan to pay off credit card debt?
Why you would consider using a home equity loan to pay off credit card debt
Equity is the difference between your home’s value and your mortgage balances. So as you pay off your mortgage, your equity increases. It also increases as your home rises in value.
Once you build enough equity, you can leverage it with a home equity loan or HELOC (home equity line of credit), which essentially turns that equity into cash you can use for any purpose—including paying off credit cards and other types of debt.
There are quite a few reasons you might want to do this. First, home equity loans are secured by collateral (your house), so they typically have much lower interest rates than credit cards. They also allow you to roll your card balances into a single payment, which makes it easier to track and repay.
Should you use a home equity loan to pay off credit cards?
Despite all the advantages it comes with, using equity to pay off your credit cards isn’t always the answer. There are also some drawbacks you’ll want to consider before choosing this path.
First, home equity loans use your home as collateral. That means you could be foreclosed on if you fail to make payments. This is different from credit cards, which are unsecured. If you default on these, your credit will take a hit, but you won’t be at risk of losing your home.
Home equity loans also don’t address the root of the problem. If you have trouble keeping your spending in check, you could find yourself right back where you started—high credit card bills and all.
Pros and cons of using a home equity loan to pay off credit card debt
With any financial product, there are pros and cons to consider—and home equity loans are no different. See below to understand the full scope of these products and how they can impact your household.
Pro: Lower interest rates
Credit cards tend to have much higher rates than home equity loans since they’re not secured by any collateral. So, when you use a home equity loan to pay off your card balances, you replace those higher rates with a lower one—saving you significantly on interest in the long run.
Currently, home equity loan rates are in the 5% to 6% range, according to an analysis of lenders. Credit cards, on the other hand, average 15% rate.
Pro: Streamline payments
When you use a home equity loan to pay off your credit cards, it streamlines the balances into one single loan. That means you no longer have several credit card payments to make each month and, instead, will make just one payment to your home equity lender.
This can make staying on top of your payments easier and it can also help with general household budgeting.
Con: Puts your home at risk
The major downside is that home equity loans put your home in jeopardy. With these loans, your house is the collateral. While that does make for lower interest rates, it also comes with serious risk. If you don’t make your payments, the lender can foreclose on the home to recoup its losses.
Con: Interest payments aren’t tax deductible
One other major downside is that with home equity loans, the interest isn’t tax deductible—at least not if you use the money to pay off credit cards.
If you use the funds to improve your home, though, you may be able to write off the interest. Talk to a tax professional if you’re considering this.
Will a home equity loan cover the total amount of credit card debt?
A home equity loan might be able to cover all your credit card balances, but not always. It depends on how much equity you have and the total credit card debt you owe.
Most lenders will allow up to an 80% to 90% combined loan-to-value ratio. This means you can borrow up to 85% of your home’s value across both your existing mortgage and your home equity loan.
So if your home is worth $350,000 and you still owe $250,000, you could borrow up to $65,00 (350,000 x .90 – 250,000). In this scenario, if your credit card balances were less than $65,000, then yes, a home equity loan could presumably pay off all your credit card debt.
How to use a home equity loan to pay off credit card debt
If you’ve considered the pros and cons of using a home equity loan to pay off credit card debts and are ready to move forward, use the below guide, which offers step-by-step instructions on how to get approved, receive your funds, and, ultimately, pay off your credit cards.
How to use a home equity loan to pay off credit cards
There are two types of home equity products you might use to pay off credit cards: a home equity loan or a home equity line of credit (HELOC).
With home equity loans, you get a lump-sum payment after closing. You then repay the loan in fixed monthly payments over an extended period of time (usually between five and 30 years).
Here’s how you can go about getting a home equity loan:
- Determine how much equity you can access. To calculate how much money you could get with a home equity loan, multiply your home’s value by 90% and then subtract your mortgage balance.
- Get preappoved with several lenders. You’ll need financial information including your mortgage and home value. Some lenders may require hard credit checks for this, so apply in quick succession (bureaus count all inquiries within 30 to 45 days as one) to minimize the impact on your credit score.
- Compare lenders. Use your preapproval quotes to compare lenders on rate, fees, closing costs, terms, and other details, and choose which one you’d like to move forward with.
- Fill out your application and provide documentation. You’ll need to fill out the lender’s full application and provide any financial documents they request. These may include tax returns, bank statements, or pay stubs. They may also verify your employment.
- Close on your loan. Once you sign your paperwork and pay any required closing costs, you’ll receive your funds and can pay off your credit cards. Some home equity lenders pay your creditors directly. You’ll then begin paying your home equity lender back with monthly payments.
The entire home equity loan process generally takes at least a few weeks to complete.
How to use a home equity line of credit to pay off credit cards
HELOCs are slightly different from home equity loans. Though they do turn your equity into cash, they don’t provide a lump-sum payment. Instead, your equity becomes a credit line, which you can withdraw funds from as needed. It works much like a credit card, only with a much lower interest rate.
HELOCs typically come with variable interest rates, which means their rate—and your payment—can change over time.
To get a HELOC, you’ll need to:
- Determine how much equity you can access. Most HELOC lenders will lend you up to 80% to 90% of your home’s value minus your existing mortgage balance. So, to determine how much money you could get with a HELOC, multiply your home’s value by 90% and then subtract your current mortgage balance.
- Get preapproved with several lenders. You’ll need some financial information and details about your mortgage and home value. Some lenders may require a hard credit check. This could impact your credit score, so make sure to apply for all your preapproval quotes within a 30-day window to be safe.
- Compare lenders. Use each lender’s quote to compare them on rates, fees, closing costs, terms, and other details, and choose the lender you’d like to proceed with.
- Fill out your application and provide documentation. Next, fill out your lender’s full loan application and provide the requested financial documents. These usually include things like tax returns, W-2s, bank statements, and more.
- Close on your loan. Finally, you’ll sign your paperwork and pay any required closing costs. Then, you’ll receive your line of credit and can withdraw the money needed to pay off your credit card debts.
Typically, you’ll make interest-only payments for the first 10 years of a HELOC. Once that period ends (called the draw period), you’ll begin paying the lender back in full.
Are there alternatives to using a home equity loan to pay off credit card debt?
Home equity loans aren’t the only way to pay off credit cards, so if they feel too risky, consider one of the below options as an alternative.
Keep in mind: Whichever route you choose, you should shop around for your lender, as it could save you significantly on interest in the long run. You should also be mindful of your spending habits moving forward. Otherwise, you could find yourself in a similar high-debt situation in the future.
0% balance transfer card
One alternative is a balance transfer card. These are credit cards that allow you to roll other card balances onto them and pay zero interest for a limited period of time. Often, it’s between one and two years.
These can be smart options if you know you can pay off your balance in that time, but if not, proceed with caution. Once your 0% rate expires, it’s typically replaced with a much higher one.
A personal loan—sometimes called a debt consolidation loan—is another option you might consider. Typically, personal loan rates are slightly lower than rates on credit cards, so they’ll save you money in the long run. Additionally, they’re unsecured, meaning they won’t put your home at risk.