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

Andrew Dehan7-minute read

January 10, 2023


Have you amassed some debt and need to find a way to simplify your payments? Getting a home equity loan 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 Consolidate Your Debt

Many Americans have a revolving amount of debt from non-mortgage related expenses. In May 2019 alone, there was more than $1 trillion of credit debt, according to the Federal Reserve.

If you divide that by the most recently available population estimates for 2020 according to the Census Bureau and other sources, that works out to about $3,218 per American. Fortunately, many people can use their home equity to manage their debt.

The first step to using your home as part of a solution to 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. 

Home equity loans are second mortgages that allow you to tap into your equity so you can get access to cash. You can also use the cash loan to pay off other higher-interest debts such as credit card debt and possibly student loan debt. Mortgage interest rates are often lower than those of credit card debt.

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.

How It Works

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 Loan

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 The Home Equity Loan, which is available for primary and secondary homes. 

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Home Equity Line Of Credit (HELOC)

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.


Let’s look at the pros to help you decide whether you should tap into your home equity:

  • 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.


You also might want to consider some of the challenges you’ll face if you want to consolidate certain debts through a home equity loan:

  • 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 theamount of time it takes to pay off your original

Who’s Eligible?

You can get a HELOC if you have equity in your home. In some cases, you can even 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 It?

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.

Consolidate debt with a cash-out refinance.

Your home equity could help you save money.

Consider The Alternatives To 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.

Second, interest rates are lower than a second mortgage, which is good news for your savings. You can apply for a cash-out refinance online through Rocket 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.

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.

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.

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.

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®.

Get approved to refinance.

See expert-recommended refinance options and customize them to fit your budget.

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Andrew Dehan

Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.