Using a Home Equity Loan to Pay Off Debt

When too much debt starts to eat away at your finances, you might want to look into debt consolidation strategies to help you manage your debt. Though there are a lot of options, using a home equity loan to pay off debt could be the most efficient way to financial freedom.

Home equity loans are great tools to help you with home remodels, educational expenses, or just to have available to absorb emergency expenses. Leveraging a home equity loan to pay off debt can also be a lower-cost way to become debt-free, but there are several factors to consider.

What is Home Equity?

The equity you have in your home is basically the portion of your property you own that you have built through paying your mortgage. Another way of thinking of equity is the difference between what your home is worth and what you still owe on your mortgage.

Home equity loans are second mortgages that tap into that equity as collateral to help you secure a new loan that generally has a lower annual percentage rate (APR) than credit card debt or other loans.

Home Equity Loan vs. Home Equity Line of Credit

A Home Equity Loan is a second mortgage with terms separate from your original mortgage, where you receive a lump sum upfront. These loans usually have a fixed interest rate on the entire loan, so you’ll pay the same amount each month, starting right when you take out the loan.

A Home Equity Line of Credit (HELOC) is similar to a second mortgage, providing a line of credit that allows you to draw funds as needed during the draw period, which typically lasts about 10 years. The great thing about a HELOC is that you only pay on the money you borrow, not the full line of credit. However, HELOCs usually have a variable interest rate, so your payments can shift over time.

Benefits of Using a Home Equity Loan to Pay Off Debt

Lower interest rates – Since you’re using your home as collateral, your secured loan will typically have lower interest rates than credit card debt or an unsecured personal loan. This should help lower the overall cost of your debt.
Easier credit qualifications – With a secured loan using your home as collateral, you don’t need as high a credit score to qualify compared to other debt consolidation loans, many of which are unsecured. If you are struggling with debt, your credit score may have taken a hit, so having high-value collateral is helpful.
Streamline your payments – By combining all your debts into one loan, you simplify your payments into a single monthly installment. You may also be able to lower the amount you pay each month, depending on your situation.

Risks of Using a Home Equity Loan to Consolidate Debt

Risk of losing your home – The biggest risk of taking out a second mortgage is that you could lose your home if you fail to make your payments. Before taking out a home equity loan, it’s important to ensure you can pay it off.
You might be extending your original mortgage – By taking out a second mortgage, you may be less able to pay off your first mortgage and potentially extend how long it takes you to pay it off.
You may be adding more debt – By consolidating your debt with a home equity loan, you are hopefully paying off all your credit card debt and any other loans. That makes putting more debt onto your credit cards tempting, but that might lead you to even more debt.

Should You Take Out a Home Equity Loan to Pay Off Debt?

Taking out a home equity loan to consolidate debt can be one of the most cost-effective ways to pay off that debt. Since you are getting a second mortgage secured by the equity in your home, you should be getting lower interest rates, allowing you to pay off your debt more quickly while saving money.

However, you are putting one of your greatest assets, your home, at risk if you cannot pay off this loan. It’s essential to carefully consider how taking out a home equity loan will impact your financial situation and whether you will be able to repay this loan. It’s also important to look at your financial habits that lead to being in debt.

Greater Nevada Mortgage is here to help you make the best decision for your financial health. Connect with one of our Mortgage Consultants, and we can explore if using your home equity to pay off debt is the right move for you.

Move to Greater

With decades of experience on our team, we have seen it all (almost everything, at least), and we regularly share our thoughts on a wide array of mortgage topics that could affect you as a new or existing homeowner. We also spotlight the incredible achievements of our team and clients because good news is meant to be shared.