Using A Home Equity Loan To Tackle Credit Card Debt: A Guide

If you are a homeowner with credit card balances piling up, tapping into the equity of your house could help you break the relentless crush of sky-high interest rates. However, while using a home equity loan to pay off credit cards is an option for some, it’s not the right solution for everyone.

Before you lean on your home equity, it’s useful to get familiar with the mechanics of this option and the risks to be aware of.

Home Equity Loans, Explained 

A home equity loan is a type of second mortgage that allows you to tap into the equity you’ve built in your home. As a homeowner, you build equity through your down payment, each monthly payment and increases to the property’s value.

When you take out a home equity loan, you will receive a lump sum of cash. You can use the funds in almost any way you see fit. But you’ll be expected to make fixed monthly payments to repay the loan. This payment is in addition to your monthly mortgage payment.

Using A Home Equity Loan To Tackle Credit Card Debt

The funds you receive from a home equity loan can be used in many ways, including debt consolidation. One of those possibilities is to pay down your credit card debt.

Below is a closer look at the steps involved in using a home equity loan to pay off credit card debt:

• Assess your financial situation. Take stock of the equity you have in your home and the balances of your credit cards. Ideally, you’ll have more than enough home equity to pay off your credit cards.
• Consider why you are in this situation. If you’ve accumulated a significant amount of credit card debt, it’s important to evaluate why. In some cases, you might have gone through an expensive period of your life. In others, you might have a habit of overspending regularly. Getting honest about why you are swimming in credit card debt can help you chart a realistic path forward.
• Compare other debt consolidation solutions. If you want to get your credit card debt under control, finding a way to consolidate the balances into a single loan with a lower interest rate is often worthwhile. While a home equity loan is one solution, an unsecured personal loan is another option to consider.
• Research lenders. If you determine that a home equity loan is the right fit, it’s time to shop around. Seek out a lender offering the most attractive loan terms for your situation.
• Get prequalified. A potential lender will ask for some basic information about your financial situation. For those with a solid financial standing, it might be easy to get prequalified.
• Apply. If you like the offer you received, finalize your application for a home equity loan.
• Pay off your credit cards. If approved for the loan, use the proceeds to pay off your credit card balances.

After obtaining the loan, you’ll need to factor this regular monthly payment into your budget.

Benefits And Drawbacks Of Using A Home Equity Loan For Credit Card Debt

Every financial product has advantages and disadvantages to consider. We explore both sides below.

Benefits

• You’ll have a lower interest rate. Most credit cards come with high interest rates, with an average of 21.59% in early 2024. But the secured financing of a home equity loan tends to come with much lower interest rates, allowing you to borrow money and pay substantially less interest.
• There will only be one bill to pay. Paying off multiple credit card balances with a single home equity loan will cut down on the number of payments to juggle each month.
• Your repayment plan will be locked in. Unlike a credit card with a variable rate and changing payment, a home equity loan allows you to lock in a predetermined monthly payment for the duration of your loan.
• You’ll know when you’ll be out of debt. With a set repayment term, you’ll know exactly how long it will take to get out of debt if you stick to the term.

Drawbacks

• You risk losing your home. When you take out a home equity loan, your home is used as collateral. If you cannot keep up with the payments, then the lender could foreclose on your home.
• Your credit score might be impacted. When you apply for a new loan, your credit score might fall.
• You could end up in more debt. Consolidating your credit card debt might make mathematical sense. But if you don’t change your spending patterns, you could end up accumulating more debt on your credit cards after consolidation.
• You could face fees. When you apply for and close on a home equity loan, you are going to pay closing costs and fees. These can cut into your overall savings.

Alternative Methods For Paying Down Credit Card Debt

A home equity loan is one way to tackle your credit card debt. But it’s not the only solution. Below are some other methods to consider.

• Refinance: If you refinance your home loan, you’ll essentially replace your existing mortgage with a larger one and pocket the difference. You can use those funds to pay off your credit cards without adding a separate home equity loan payment to your budget.
• Home equity line of credit (HELOC): A HELOC is a type of revolving credit that allows you to borrow against your home equity on an as-needed basis. You can use the funds to pay off your credit card balances. But you’ll end up with a second mortgage payment that can change due to the variable interest rate. Rocket Mortgage doesn’t offer HELOCs at this time.
• Debt snowball method: The debt snowball method doesn’t involve any debt consolidation strategies. Instead, the focus is paying off your smallest credit card balance with any money you have available in your budget. As you pay off your debts, you can redirect that minimum payment into your next credit card balance and eliminate your debt ahead of schedule. 
• Balance transfer credit card: A balance transfer credit card allows you to move your debt to a new credit card. In general, these cards offer a 0% introductory period, which can give you a chance to make significant headway on your payoff plan.
• Debt consolidation loan: A debt consolidation loan is a type of personal loan that doesn’t require collateral. With that, you won’t have to put your home on the line to consolidate your credit card debt into a single payment.

FAQs About Using A Home Equity Loan For Credit Card Debt

If you have questions about tapping your home equity for credit card debt consolidation, we have the answers you seek.

Can I use a home equity loan to pay down credit card debt?

Yes, home equity loans can be used to pay down credit card debt. A home equity loan allows homeowners to tap into their home equity in order to consolidate high existing debt (like credit card debt) at a lower rate than a credit card’s APR.

How do you qualify for a home equity loan?

Most lenders require you to have at least 20% equity in the home before you can apply for a home equity loan. When you apply, you’ll need to provide proof that you can afford to repay the loan and have a reasonably high credit score.

What’s the best way to get credit card debt under control?

Debt consolidation offers a way to lock in a lower interest rate while you pay off your debt. But if you don’t adjust your spending habits, it’s easy to end up in more debt on your credit cards, on top of your newfound loan.

The best way to get your debt under control is to commit to paying off the balance as quickly as possible, even if that means cutting back on your lifestyle spending or boosting your income through a side hustle.

The Bottom Line

A home equity loan offers a way to streamline your credit card payments and lock in a lower interest rate. For homeowners with enough equity who want to get out of credit card debt, a home equity loan could be the right solution.

If you are ready to tackle your credit card balances, apply for a home equity loan with Rocket Mortgage^® today.