The Pros and Cons of Using Home Equity to Consolidate Debt


It’s been 15 years since you took your mortgage. Your payments are on track, and the good news is that the home’s value has skyrocketed. This means you can access a pool of cash in the form of a home equity line of credit (HELOC) or a home equity loan.


As a result, you may be thinking of tapping into this equity to consolidate your debt. While this may sound like a perfect idea, in theory, its practicality contains numerous risks. The obvious danger is you risk losing your home should you get fired or become unable to work. Other risks include falling real estate prices or, worse yet, an economic downturn.


This article will weigh the pros and cons of tapping into your home equity to settle debts. Read on to find out more.

Should You go for a HELOC or Home Equity Loan? The Differences


Both options use your home’s value as collateral, however, their operation differs in various ways.


HELOCs operate like credit lines, which means you can use a certain pre-approved amount when you want, as much as you want, and without any restrictions. However, various factors will determine the amount of money you can borrow.


They include your credit score, your income, and how big your home’s equity is. In addition, lenders will evaluate your creditworthiness, as well as the real estate market in your area. These factors will help the nation21loans lenders to come up with both the loan amount and the interest rate.


Note that you may end up with a reduced amount compared to the home equity loan. This is because lenders often want you to remain with 20% or more of your home’s equity.


On the other hand, a home equity loan comes as a one-off loan also referred to as a second mortgage. In this case, the lender will want to know the amount of equity available in your home, not forgetting how you intend to repay the loan.


In addition, the lender will also want to know what your intentions are with the funds. Often, homeowners use home equity loans to increase the home’s value through upgrades, installing a new roof, etc.

Tapping into a home’s equity to consolidate debt is a great move, but it may not work for others, especially those who have difficulties in handling consumer debt.

The biggest risk associated with this move is converting a consumer debt into a home loan. The former doesn’t require any collateral, while the latter requires one.


Here are the advantages and disadvantages attached to this option.

The Advantages

  • Home equity loans come with lower interest rates compared to credit cards. Since you’ll have your home as collateral, the lender will be at ease knowing they’ll get their money back if you default, unlike with credit cards, which don’t require any collateral.
  • You’ll only have a single payment to worry about instead of multiple payments to various card companies. In addition, since mortgages offer long repayment periods, it means you’ll pay reduced monthly installments.
  • Interest on home loans is tax-deductible, while interest on credit cards isn’t.

The Disadvantages

  • Failure to repay the loan means an imminent foreclosure since you put up your home as collateral.
  • If the real estate prices plummet, you’ll end up paying more than what the home is worth. This was the case during the 2008 real estate collapse. Also, keep in mind a countrywide collapse isn’t the only way a home’s value can fall. Local real estate market prices could severely hamper your efforts to borrow in the future, especially if a recovery isn’t in sight.
  • Taking a bigger loan than you need to pay off existing debts may result in you owing a lot more than before consolidating the debts through equity money.
  • Also, it may take longer than 10 years to repay the loan.
  • You can easily discharge credit card debt through bankruptcy.
  • Most of the time, debts are as a result of poor spending habits. Tapping into a HELOC won’t address the root cause of your spending habits. As soon as you clear the pending debt, you’ll have another to pay off due to credit card misuse.

Consider Other Options

Before settling on any debt consolidation strategy, it’s important to ask yourself two questions:

  • What is the ratio of your debt to your gross income? Is it below half?
  • Will you be able to pay off the debt in less than 5 years?

If the answer to both questions is no, this should be an indicator of excessive debt. In this case, the best move is to seek the services of a financial advisor about the possibility of a debt relief program, such as bankruptcy or debt management.


Chapter 13 bankruptcy requires one to make payments in a maximum of 5 years. After that, the debt will be retired fully. On the other hand, Chapter 7 bankruptcy will instantly wipe out all debt, enabling you to get back to credit restoration.


If you have smaller debts that don’t justify putting up your home as collateral, consider these options:

  • Personal Loan – These loans offer lower interest rates compared to credit cards. However, this will depend on your credit score and income.
  • A zero percent balance transfer card – If you have a good to excellent score, you might qualify for a 0% balance transfer card. Credit card companies issue cards with zero interest with periods ranging from 6 months up to 2 years. This is the cheapest route if you qualify.
  • Debt settlement program – This program allows you to forfeit your debts, but you’ll have to pay a certain lump sum amount. While this sounds like a good deal, it will be detrimental to your credit score, but then again, it’s already bad, so what’s another hit in exchange for debt forgiveness? Besides, there are ways you can fix your credit.


Now you know the advantages and disadvantages of using your home’s equity to consolidate debt. In addition, you’ve also learned about other options available to you when consolidating debt. The bottom line is to choose an option that fits your financial situation.