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Everything You Need To Know About Home Equity Loans For Debt Consolidation

May 17, 2024 7-minute read

Author: Victoria Araj


Have you amassed some debt and need to find a way to simplify your payments? Getting a home equity loan1 could be the answer. You can borrow on your home’s equity to pay off revolving debts like credit cards, non-mortgage loans and bills.

This article will show you when tapping into your home’s equity might fit your situation, and it will also cover alternative debt consolidation options.

Using A Home Equity Loan To Pay Off Debt

Many Americans have a revolving amount of debt from non-mortgage related expenses. American households hold a total of $16.51 trillion in debt – which is up $2.36 trillion since the end of 2019, just before the COVID-19 pandemic – according to the Federal Reserve.

Fortunately, many people can use their home equity to manage their debt.

How It Works

The first step to using your home to help address this problem is understanding what home equity is. Home equity is the difference between what your home is worth and what you owe to the lender.

You have two options if you choose to tap into your home’s equity. You can get a home equity loan or a home equity line of credit (HELOC).

Home equity loans are second mortgages that allow you to tap into your equity so you can get access to cash, allowing for loans of up to $500,000. You can also use the cash loan to pay off other higher-interest debts such as credit card debt and possibly student loan debt. Mortgages usually have lower interest rates than credit cards.

For example, you might take out a home equity loan with a 4% interest rate to pay off the debt on your 18% interest rate credit card and end up paying less in interest over the long term.

Another option that allows you to tap into your home’s equity is a home equity line of credit (HELOC), which provides the borrower with a line of credit that can be used as needed.

Let’s take a closer look at what home equity loans and lines of credit are and how they can help you consolidate your debt.

Home Equity Loans, Explained

A home equity loan is a second mortgage that allows you to get your loan all at once, or in a lump sum. The amount you’ll be able to get will be smaller than your original mortgage since lenders will rarely let you borrow 100% of your home’s equity. The repayment span is also usually a shorter period compared to your original mortgage.

Once your lender closes your home equity loan, you’ll get a lump sum payment from your lender. You’ll make a second mortgage payment separate from your primary mortgage payment.

Rocket Mortgage® is now offering a Home Equity Loan, which is available for primary and secondary homes.

Home Equity Line Of Credit (HELOC), Explained

A home equity line of credit is similar to a home equity loan, but you get cash as a line of credit instead of a lump sum. You can usually borrow between 75% – 85% of your home’s value with a HELOC. A HELOC is a lot like a credit card because you can carry a balance from month to month and make minimum payments. You pay interest on the amount you draw and the interest rate can vary.

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Pros And Cons Of Using Home Equity To Consolidate Debt

Let’s take a look at some of the pros and cons to be aware of if you’re considering tapping into your home equity to consolidate your debt.


  • Your interest rates are lower. You’ll get lower HELOC interest rates because your home is used as collateral. Credit cards aren’t backed by any physical property, which is one of the reasons interest rates are so high.

  • Credit scores can vary. Since you borrow on the equity you own in your home, you typically don’t have to have a sky-high credit score to get a home equity loan or HELOC. Check with your lender as scores may vary depending on the loan product and other lender requirements.

  • You’ll get a tax deduction. The interest you pay on your home equity loans can be tax deductible.


  • Your home is put up as collateral. When you use your home as equity, you risk the roof over your head. In other words, your home could be repossessed if you don’t repay your loan.

  • The home value could change. If you borrow on your home’s equity and the value of your property decreases, you could owe more than what your home is worth.

  • You stretch your timeline. Once you add a second mortgage to the mix, you add more debt and can potentially extend the amount of time it takes to pay off your original.

Who’s Eligible For A Home Equity Loan?

To qualify for a home equity loan, your lender will analyze your equity, credit score, and debt-to-income ratio. If you end up qualifying, you might be able to get a home equity loan soon after you buy a home. The amount you can borrow depends on the lender and the type of loan you’re after.

Here’s an example:

Let’s say you have $250,000 left of your $350,000 mortgage. You have $100,000 of home equity that’s eligible to borrow. If the lender lets you borrow around 80%, you could get a home equity loan for $80,000.

Who Should Use A Home Equity Loan?

Your home’s equity could be one of the most valuable things you own. You may work 15 – 30 years to pay it off, so be cautious when you use it. Experts recommend that you only use your home’s equity for emergency situations, such as unexpected medical bills or emergency debt consolidation.

Think carefully about the loan’s purpose down the line. Consider your future goals, other financial aspirations and whether you plan to stay in your home for the long term. All these factors, and more, could affect your decision.

Apply for a Home Equity Loan online.

The Rocket Mortgage® online application is simple and secure.

How To Apply For A Home Equity Loan To Consolidate Debt

You’ve compared your financial needs, your debt requirements and alternative methods for consolidation and you’ve decided to tap into your home’s equity. Here are your next steps:

Step 1: Determine How Much Equity You Have In Your Home

Before you apply, it’s important to know the amount of equity you have in your home. Compare the smallest loan you could possibly get to the outstanding debt you’d like to consolidate. Is the amount you’ve paid off your mortgage sufficient to cover your revolving debts? Will your equity cover this cost?

Step 2: Check Your Credit

A strong credit score can help borrowers obtain more-favorable terms for a second mortgage.

If you’re afraid your score is too low, talk to your mortgage lender or take small, actionable steps to get your credit score up to par. Your credit score and necessary qualifications will depend on your lender.

Step 3: Compare Loan Options

Compare loan options that lenders offer you for using your home’s equity. Select one that has terms and a monthly payment that are favorable for your situation. Once you’ve considered the options, decide which loan you want to pursue. It’s important to work with a financial advisor who can help you determine the best path for your financial situation.

Alternatives To Using Home Equity For Debt Consolidation

Let’s look at these additional methods, as well as the benefits and drawbacks of using them for debt consolidation.

Cash-Out Refinance

A cash-out refinance features several benefits of home equity loans, but with a couple of advantages. You’ll only have one mortgage against your house. That means there’s less risk for the lender and you’ll get a better rate than you would if it were a second mortgage.

Cash-out refinances are often the best way to consolidate debt because they’re based on your primary mortgage, so you’re getting the lowest possible mortgage rate for your financial profile.

Consolidate debt with a cash-out refinance.

Your home equity could help you save money.

Personal Loans

A personal loan for debt consolidation could allow you to reap the benefits of low interest rates. Personal loans don’t have high interest rates like credit cards, but the rate you get depends on your credit and financial history.

Look for loans that don’t charge a prepayment penalty so you won’t be charged extra if you pay off your balance early. Also, if you extend the personal loan past your intended period, you could pay additional interest that you didn’t factor in when you set up your financial plan.

Personal Loans Any Time, Any Place.

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0% Balance Transfer Card

A 0% balance transfer card allows you to move all your existing debts to a card that has a promotional period of 0% interest. This period usually lasts 12 – 18 months, so ensure that you have a plan in place to pay off your debts before this period ends.

You may be required to pay a transfer fee on some cards, so be sure to double-check the terms and conditions.

401(k) Loan

A 401(k) loan is a way for you to borrow from your retirement fund. A 401(k) is an employer-sponsored savings plan that allows you to set aside pre-tax dollars from your paycheck for retirement. A 401(k) loan is still a loan – you’ll still have to repay the amount you borrow and you have 5 years to pay back the loan, according to Internal Revenue Service (IRS) regulations.

A 401(k) loan does not impact your credit score, but failure to repay it could leave you in more debt than when you started. You could also risk your retirement savings and be subject to tax penalties if you can’t repay what you borrow.

The Bottom Line

There are many avenues you can explore to consolidate your debts. Compare your financial situation to the criteria above to decide whether your home’s equity makes sense for you. If you’re okay using the roof over your head as collateral, ensure that the 10+ year payment track is for you. If not, check out less-risky methods to consolidate your debts. These could involve a cash-out refinance, personal loans, 0% balance transfer cards or 401(k) loans.

Find out how much debt you have, how much you need to pay it off and the method that allows you to do this with the least amount of risk.

Interested in tackling your debt? You can apply for a cash-out refinance online through Rocket Mortgage®.

Consolidate debt with a cash-out refinance.

Your home equity could help you save money.

1Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 2/5/2024 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Iowa is $61,000). Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. Not available in Texas. This is not a commitment to lend.

Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.