Using home equity to consolidate debt

A home equity loan for debt consolidation is a second mortgage that pays off your credit cards and other high-interest balances in one move, leaving you with a single fixed payment that is usually much smaller than the pile it replaced. Because the loan is secured by your house, it is generally priced well below unsecured credit. The catch is just as simple. You are moving debt that could not take your home onto a loan that can, and if the cards fill back up you will owe both. The calculator below shows roughly how much equity you could reach.

How it works

You own a home with equity, which is the gap between what it is worth and what you owe on it. You borrow against part of that gap with a second lien, either a home equity loan (a lump sum, often called a HELOAN) or a HELOC (a home equity line of credit). The money pays off the cards. Your first mortgage is untouched. Its rate, balance and payment stay exactly as they were.

In practice the payoff often happens at closing. The title or escrow company sends the funds straight to each card company, and you walk away with zero balances and one new loan. Some programs require that. Others send you the money to handle yourself. Either way, the next month you have one payment instead of four.

If you are weighing this against a cash-out refinance, which replaces your first mortgage entirely, our HELOC vs home equity loan vs cash-out refinance page runs the comparison.

The math that makes it work

The risk, stated plainly

Credit card debt is unsecured. If you cannot pay, the card company can sue and damage your credit, but it cannot take your house. A home equity loan is secured by your house. If you cannot pay it, the lender can foreclose. When you consolidate debt with home equity, you are converting debt that could not cost you your home into debt that can.

The second risk is behavioral, and it is the one we see more often. The cards get paid to zero. The limits are still open. A year later the balances are back, and now the household carries the home equity payment and the card payments. If you are not sure the cards will stay empty, close them, cut the limits, or do not do this.

The third risk is in the example above. A long term with a small payment feels like relief and can cost more in total. Watch the total interest line, not just the monthly one.

When it makes sense and when it doesn't

It tends to make sense when

• The balances came from a one-time event, such as a medical bill, a job gap or a divorce, and that event is over.
• The new rate is clearly lower than the cards, and you keep the term short enough that total interest drops.
• Your income covers the new payment with room to spare, and you can see the balance hitting zero.
• You have equity to spare and a first mortgage you want to keep.

It tends not to make sense when

• Monthly spending still exceeds monthly income. Consolidation hides that for a while and then makes it worse.
• You would be using most of your equity to do it, leaving nothing for a real emergency.
• The balances are small enough to clear in a year or two with discipline. Closing costs on a second mortgage are not worth it for a small payoff.
• Your job or income is uncertain. An unsecured debt you cannot pay is a bad year. A secured one you cannot pay is a lost house.

If you are on the fence, call (916) 755-6080 and talk it through with a loan officer.

HELOC vs home equity loan for consolidation

For paying off cards, the fixed home equity loan usually fits better. The amount is known on day one. You want a payment that does not move, and you want the balance to go down on a set schedule. Our home equity loan page walks through the structure.

A HELOC is a revolving line with a variable rate, and many programs allow interest-only payments during the draw period. That flexibility is useful for a renovation. For consolidation it is a trap for some people, because interest-only means the balance does not shrink, and a revolving line is the same shape as the credit cards you just paid off. A HELOC can still work if you are disciplined and plan to pay principal on your own. Read how a HELOC works before choosing it for this.

Self-employed and hard to document on tax returns? Our bank statement home equity loan qualifies on 12 months of business deposits and is a fixed-rate second, which suits consolidation well.

What we need

The documents for a consolidation loan are the same as for any home equity loan, plus the balances you want to pay off. We will tell you exactly what applies once we talk.

• Your most recent first mortgage statement.
• Income documentation, such as pay stubs and W-2s, or business bank statements if you are self-employed.
• Current statements for each card or loan you plan to pay off.
• Your homeowners insurance declarations page.

1. Run the number. Use the equity calculator to see roughly how much equity you could reach. No credit pull, no contact info.
2. Add up the debt. List every balance, rate and minimum payment. Call or text (916) 755-6080 and a loan officer will compare that pile against a single fixed payment.
3. Send documents and order the appraisal. We route the file to the program that fits.
4. Close and pay off the cards. Balances go to zero at closing, and you start the next month with one payment.

More questions? The full FAQ covers the rest, and pulling equity out of your home compares every route in one place.