Using Home Equity to Pay Off Credit Card Debt: How It Works and What It Risks
Many homeowners have built up substantial equity. Borrowing against it can sharply reduce the interest on high-rate card balances, but it also puts your house on the line.
Short answer: A home equity loan or line of credit can replace high-interest credit card debt with debt that usually carries a much lower rate. That can save a lot of money. The trade-off is serious, though. Card debt is unsecured, and home equity debt is secured by your house. If you fall behind on payments, you could lose the home. The strategy works best for people who have stable income and have stopped adding new card debt.
How the strategy works
Home equity is the gap between your home's market value and what you still owe on it. U.S. homeowners collectively hold close to record levels of equity, so many of them have a large asset they could borrow against. Lenders often let you borrow up to a combined total, typically around 80% to 85% of the home's value, across your mortgage and the new loan.
There are three common ways to tap equity:
- Home equity loan: You receive a lump sum and repay it at a fixed rate over a set term. Because the payment stays the same, it fits well with a one-time debt payoff.
- HELOC (home equity line of credit): This is a revolving line, usually with a variable rate. It is flexible, but the open line can make it easy to keep borrowing.
- Cash-out refinance: You replace your current mortgage with a larger one and take the difference in cash. This makes the most sense if the new mortgage rate is not much higher than the one you have now.
The main appeal is the rate gap. Credit card APRs often sit above 20%. Home-secured borrowing is usually priced well below that because the lender holds collateral.
Example: what the rate gap can mean
The figures below are hypothetical and meant only to illustrate the math. Actual rates and fees vary by borrower and lender.
Scenario: $20,000 in card debt, repaid over five years.
- Credit card at 22% APR: about $552 per month, with roughly $13,100 in total interest.
- Home equity loan at 8.5%: about $410 per month, with roughly $4,600 in total interest.
- Difference: about $8,500 in interest saved. If closing costs ran around $1,000, the net savings would be about $7,500.
The savings hold up only if you keep the payoff timeline short. Stretching the same $20,000 over 15 or 20 years lowers the monthly payment, but it can erase much of the interest advantage.
Risks to weigh
- Your home becomes collateral. Missing card payments damages your credit. Missing home equity payments can lead to foreclosure.
- The cards can fill up again. If the habits that created the debt don't change, you may end up with new card balances on top of the home equity debt.
- Upfront costs. Appraisals, origination fees, and closing costs reduce what you save.
- Variable rates. A HELOC payment can rise when rates go up.
- Less equity cushion. If home values drop, or you need to sell soon, you could owe close to what the house is worth, or more.
- Taxes. Interest on home equity debt is generally not deductible when the money is used to pay off credit cards. A tax professional can confirm how the rules apply to you.
Alternatives and next steps
- Balance transfer card: A 0% introductory APR can work well for smaller balances you can pay off before the promotional period ends. Watch for transfer fees, which are often 3% to 5%.
- Personal consolidation loan: These loans are unsecured, so your home isn't at risk. Rates are usually higher than home equity rates but lower than typical card APRs.
- Nonprofit credit counseling: A debt management plan may lower your card rates without any new borrowing.
- Avalanche or snowball payoff: Directing extra payments to the highest-rate balance first (avalanche) or the smallest balance first (snowball) requires no new loan at all.
If you are comparing options, it helps to gather a few numbers first: your current balances and APRs, an estimate of your home's value, quotes from several lenders, and every fee each option carries. Then compare total cost over the same repayment period, not just the monthly payment.
Bottom line
Borrowing against home equity can make a large dent in the cost of credit card debt. It also turns unsecured debt into debt backed by your house. It tends to work best when income is steady, the repayment term is short, and the cards stay paid off. If any of those conditions is uncertain, unsecured options may be the safer choice. Source: Money
FAQ
Will consolidating with home equity help my credit score?
It often helps. Paying down card balances lowers your credit utilization ratio. A new loan does add a hard inquiry and a new account, which can cause a small, temporary dip.
Should I close my credit cards afterward?
Closing cards can reduce your available credit and raise your utilization ratio. Some people keep the accounts open but stop using them. Which approach is better depends on your own spending habits.
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