Many homeowners are considering taking out a home equity loan to manage their debt and refinance into a better interest rate. If you are like many Americans, you have noticed your credit card interest rates have soared in the last three years.

The Federal Reserve started increasing interest rates to stifle inflation three years ago, and credit card rates have risen, sometimes to more than 20%. Someone with thousands in credit card debt could pay hundreds or even thousands in interest every year. Instead of paying high interest, many homeowners may want to manage debt with a home equity loan.

Homeowners in the US have trillions of dollars of equity in their properties in 2024, and home equity loans are being used to tap it. Home equity loans are fixed interest rate loans with rates usually between 8% and 10%. This is, obviously, much lower than rates on many credit cards and personal loans in 2024. Also, the Fed wants to cut rates, but inflation is still a problem, so we may continue to see higher rates, including on credit cards, for the next year or two.

Are you thinking about using a HELOC loan for consolidating debt? At HomeEquityMart.com, our team understands how debt can get out of control. Home equity debt consolidation can be a great thing and our loan professionals can qualify you for the appropriate loan today.

What Is a Home Equity Loan and Should I Consolidate My Debt with It?

A home equity loan is a second mortgage that lets you borrow some of your equity with your home as a guarantee for the debt.

Many homeowners use a home equity loan for consolidating debt. Let’s say your home is worth $300,000.

You owe $200,000 on the first mortgage, so there is $100,000 in equity.

Assuming your lender allows you to borrow 80% of your available equity, you could theoretically use $80,000 to pay off your high-interest debt.

A home equity loan program provides you with a lump sum of cash. You can use this money to pay off the credit lines on credit cards, student loans, healthcare loans, and personal loans.

You could save thousands annually in interest. Many homeowners contemplate between refinancing and and home equity options for consolidating debt. Compare the cash out refinance and HELOC before making a decision.

Is it Smart to Use a Home Equity Loan to Consolidate Debt?

Selecting a home equity loan for debt consolidation may lead to reduced monthly payments due to a probable decrease in interest rates and extension of the loan term. This adjustment can alleviate financial strain and provide the necessary relief for managing debt, especially for individuals with tight monthly budgets.

Debt consolidation becomes advantageous when you secure an interest rate lower than what you’re currently paying on your debts. Numerous home equity lenders offer the convenience of checking your potential approval rate without affecting your credit score, ensuring you’re comfortable with the terms before finalizing any agreements.

Consolidating credit card debt offers various avenues, with popular options including personal loans, bad-credit home equity loans, debt management programs, and the straightforward and often cost-effective method of leveraging 0% introductory APR offers from balance transfer credit cards. Most financial advisors suggest consolidating debt into a simple interest installment loan that features a fixed interest rate and fixed monthly payment.

Why Manage Debt with A Home Equity Loan?

There are many reasons that Americans are considering debt management such as a home equity loan:

Lower interest rates: A home equity loan almost always has lower rates than what you can get with an unsecured loan, such as a credit card. The home equity secures the loan, so the mortgage company can afford to risk a lower rate. If you have thousands in debt on student loans and credit cards, getting a home equity loan can make it less expensive to pay them off. A home equity loan offers financial security because it is a fixed rate, fixed period loan. You will pay less interest and know when the loan is paid in full. Most home equity loans in 2024 have 8% to 10% interest rates, depending on your qualifications.
Lower payments each month: You will have a lower rate than your unsecured debts and the payment term is longer, so the monthly payment should decline. If you are on a tight budget, a home equity loan can save you money.
One payment: Are you juggling three credit card due dates, plus a student loan and personal loan due date? All of these different due dates can cause you to miss a payment, which triggers late fees and could affect your credit. A home equity loan has one monthly payment.
Available even with average credit. Do you have a credit score well under 700? You still may be able to get a home equity loan to consolidate debt. The home is the guarantee for the loan, so even if you have black marks on your credit report, the lender still may extend credit.
Possibly improved credit score: Paying off your unsecured debt and taking out a second mortgage could improve your credit score over time. Having another mortgage may improve your credit mix, which is a factor in your credit score.
Interest could be tax deductible if you use the money to improve your home. If you use the money for debt consolidation, it is not tax deductible, however.

Considerations For Managing Debt with A Home Equity Loan

Home equity debt consolidation can be a smart financial choice, but there are downsides to think about, too:

The debt is secured by your property. Your home is collateral for the loan, so you need to be careful about taking out equity. If you cannot make the 2nd mortgage payment, it could put your home at risk.
More debt. Home equity debt consolidation may get rid of your credit card debt, but it is still debt. If you continue to use your credit cards, you will have a second mortgage plus more credit card debt. It’s vital to ensure that you do not use your available credit to take on yet more debt. This can lead to a debt spiral that costs you your home.
Home values could drop. Generally, homes rise in value over time. But in the short term, real estate prices can be volatile. You could see a drop in home value that leaves you with no remaining equity, or, you could owe more than the home is worth. This would make the home difficult to sell, or even impossible.
Using your home equity today means less in the future. When you sell your home, you will have less equity to take with you to your next purchase.
Closing costs and fees. Every new mortgage comes with closing costs and fees. You may wrap these costs into the loan, but you will then pay interest on them for the life of the loan.

Summary on Managing Debt with Equity Loans

Paying off debt with a home equity loan can be an effective financial tool to reduce your debt payments and interests. Before you do so, you should think carefully about the advantages and disadvantages of getting a home equity loan to pay off debt. Our loan team at Home Equity Mart are ready to talk to you about your home equity loan options.