Home Equity Loan or Line of Credit for Debt Consolidation

American households manage various types of debt, including mortgages, personal loans, credit card balances, and student loans. The average American carries $104,215 in debt. A potential solution for simplifying and managing these financial obligations is using a home equity loan for debt consolidation.

If you’ve built up equity in your home, you can consolidate multiple debts and simplify payments through a home equity loan or line of credit. These options offer a streamlined approach to debt management and can provide debt relief. In this guide, we’ll explore how home equity loans and HELOCs work and the best lenders to consider if you think this approach makes sense for you.

Best HELOCs for debt consolidation

Debt consolidation can be a game-changer for those looking to streamline their finances and reduce monthly payments. By leveraging the equity in your home, you can consolidate high-interest debts into a single, manageable payment. 

This guide reviews top lenders offering home equity loans and lines of credit, focusing on why they are ideal for debt consolidation. Whether you’re looking for the best overall option, a lender specializing in large HELOCs, or the best platform for comparison shopping, we’ve got you covered.

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Why use a home equity loan or line of credit to consolidate debt?

The average mortgage holder in the U.S. has about $299,000 in home equity. Equity represents the difference between your home’s current value and the remaining balance on your mortgage. That equity is considered an asset but is often untouched until you sell the property. 

Rather than letting your home equity sit untapped for years, you can use that money for home improvements, to cover big expenses, or to consolidate and repay other types of debt. This is most easily done with a home equity loan or line of credit (HELOC).

Using your home’s equity to consolidate debt offers several benefits, including:

• Reduced interest rates
• Fewer debt balances to juggle
• Overall interest savings
• Lower monthly payments

Because home equity loans and lines of credit are secured by the value of your home, interest rates are often lower than those of other types of unsecured debt, such as credit cards or personal loans. Secured debt can often be easier to obtain and more affordable, but be sure to consider the added risks, which we’ll cover below.

Benefits and downsides of using a home equity loan to consolidate debt

As with any other financial product, you can expect advantages and disadvantages when you take out a home equity loan or HELOC to consolidate your debt. Here are a few of the most significant benefits and downsides to note. 

Pros

• Streamlined payments

  Consolidating your debts allows you to make just one payment on a single due date instead of juggling multiple payments to various creditors; this simplifies your finances and minimizes the chance of missed payments.

• Lower interest payments

  Because home equity loans and HELOCs are secured by your home, they typically offer lower interest rates than unsecured debts, such as credit cards and personal loans. Lower rates mean you end up paying less in total finance charges over the life of the loan.

Cons

• Possible home foreclosure

  Using your home’s equity is an excellent way to consolidate debt and reduce payments, but it puts your home at risk. If you default on the loan, your credit score will suffer, and you could lose your home to foreclosure.

• Becoming underwater on your loan

  Taking out a home equity loan to consolidate debt is risky if the value of your home declines. This could lead to a negative equity situation in which you owe more on your loan than the property is worth, making it difficult to sell or refinance your home.

What types of debt can be consolidated with a home equity loan?

Home equity loans and HELOCs are secured products that generally have no restrictions on how the funds can be used. Borrowers can use that cash for almost any purpose, such as consolidating various types of debt.

Common types of debt you can consolidate with a home equity loan include:

• Credit card balances
• Personal loans
• Auto loans
• Student loans

Your home equity consolidation options are limited only by the type of debt you have and the amount you can borrow against your home.

Will my debt amount affect my ability to take out a home equity loan?

Many factors determine whether you can take out a home equity loan.

First, you’ll need home equity to borrow against your home’s equity. Second, lenders still want you to qualify for this new loan, which means meeting certain income and personal requirements. 

The amount of debt you have will determine your debt-to-income ratio (DTI), which compares the minimum payment on all outstanding debt with your gross monthly income. Although there are exceptions, most lenders look for a maximum DTI of 45% to approve a new home equity loan.

In addition to your DTI, lenders will consider: 

• The total equity you have in your house
• How much you want to borrow with your home equity loan or HELOC
• Your income
• Your credit score

Depending on these factors, the amount you can take out with a home equity loan may be limited.

Will a home equity loan cover the total amount of debt?

Whether a home equity loan can satisfy your debts depends on the amount you’re trying to consolidate and the amount of equity in your home.

Lenders won’t let you borrow 100% of your home’s equity. Instead, eligible borrowers can take out up to a certain percentage of the home’s value, often 85%. 

The loan-to-value ratio (LTV) represents the amount you owe on the home compared to its current market value. The combined loan-to-value (CLTV) includes all loans against the property, including a home equity loan or HELOC.

Calculate LTV and CLTV

Here are the formulas to calculate both ratios.

Calculate your LTV

• LTV formula: (Current loan balance / Current appraised value) x 100 = LTV
• Example: Your home appraises at $400,000, and the loan balance is $260,000. The equation would look like this: 

(260,000 / 400,000) x 100 = 65% LTV

 Calculate your CLTV:

•  CLTV formula: (Current combined loan balance / Current appraised value) x 100 = CLTV
• Example: Your home appraises at $400,000. The mortgage balance is $260,000, and you want to take out a $40,000 home equity loan. Here’s how to make the calculation: 

(300,000 / 400,000) x 100 = 75% CLTV

Depending on how much equity you have in your property, you may be eligible for enough to cover the total amount of your other debts.

To calculate the maximum amount you can borrow, multiply the appraised value of your home by your lender’s CLTV limit. This figure represents the maximum loan amount you can take out on your home. Then, subtract your current mortgage balance from the maximum loan amount to determine how much you can borrow. 

The formula looks like this:

(Appraised value of home x CLTV limit) – Current mortgage balance = Amount you can borrow

 For example, if your home’s value is $400,000, the loan balance is $260,000, and your lender’s CLTV limit is 85%, you can borrow up to $80,000 for debt consolidation. 

Here’s how we found this number: 

(400,000 x .85) – 260,000 = 80,000

Should I use a home equity loan or HELOC to consolidate debt?

Choosing between a home equity loan and a HELOC for debt consolidation depends on your financial needs and repayment ability. Below is a table comparing key features of both options to help you decide which is best for you.

Feature	Home Equity Loan	HELOC
Interest type	Fixed	Variable
Disbursement	Lump sum	Revolving credit
Repayment term	Fixed term	Varies; Repayment typically begins after the end of the draw period
Repayment amount	Fixed monthly payments	Based on the amount drawn
Funding time	Fast disbursement	Access funds over time (typically a 10-year draw period)
Best for	Consolidating large debts at a fixed rate, offering predictable monthly payments and stability	Ongoing access to funds, allowing consolidation as debts accumulate or fluctuate, with flexibility to repay and redraw

What are other ways to consolidate debt?

Home equity loans and HELOCs aren’t the only way to consolidate debt. Here are some alternatives to consider if you don’t have enough home equity or don’t want to risk losing your property:

• Personal loan
• Balance transfer credit cards
• Retirement loan
• Debt management plan 

Home equity loan vs. debt consolidation personal loan

When comparing personal and home equity loans, there are several important differences. A home equity loan uses your home as collateral, but most personal loans are unsecured.

Due to the lack of collateral, interest rates on personal loans tend to be higher than those on home equity loans. Funds from personal loans may be disbursed faster, but home equity loans offer larger loan amounts and longer repayment terms.

Home equity loan vs. balance transfer credit card

Some credit cards offer 0% balance transfers to new and current cardholders. With these offers, you can pay off debts—whether another credit card balance, an auto loan, a personal loan, or even a student loan—up to the credit limit. No new interest will be charged for a certain period, typically 12 to 24 months.

 A balance transfer card is less risky because you’re not using your home as collateral, but it could be more expensive if you don’t repay the debt during the promotional period. Once the 0% rate expires, standard interest charges will apply to any remaining balance, which can add up fast.

Home equity loan vs. retirement loan

A retirement loan involves borrowing from your own employer-sponsored 401(k) or similar plan. Retirement loans allow you to borrow up to $50,000 or 50% of your vested balance, whichever is less. You can repay these loans over five years through automatic paycheck deductions.

Using a retirement loan to consolidate debt won’t affect your credit score and avoids putting your home at risk, but it’s not the wisest choice if you plan to change jobs; you might need to repay the remaining loan balance if you resign. If the balance remains unpaid, it’s treated as a taxable distribution and can incur penalties.

Home equity loan vs. debt management plan

Debt Management Plans (DMPs) are programs provided through credit counseling agencies to help consolidate your debts into a single, manageable monthly payment.

In a DMP, the agency negotiates with your creditors to potentially lower your interest rates and waive certain fees. Once you’ve made an agreement, you make one monthly payment to the agency, which it distributes among your creditors.

No collateral is required for a debt management plan, which makes them a good option for anyone who doesn’t want to risk their home. However, a DMP could end up damaging your credit score if the agency negotiates lower settlements on your debts.

How we selected the best home equity loans for debt consolidation

Since 2018, LendEDU has evaluated home equity companies to help readers find the best home equity loans and HELOCs. Our latest analysis reviewed 850 data points from 34 lenders and financial institutions, with 25 data points collected from each. This information is gathered from company websites, online applications, public disclosures, customer reviews, and direct communication with company representatives.

These star ratings help us determine which companies are best for different situations. We don’t believe two companies can be the best for the same purpose, so we only show each best-for designation once.

Recap of the best debt consolidation home equity loans