If you’re working to pay down debt, you’re not alone. Nearly 54 million adults in the U.S. have carried debt for a year or more. With higher prices and rising interest rates, keeping up with monthly payments on top of groceries, utilities, insurance, and other essentials can feel overwhelming.
One option is tapping into the equity in your home. Using a home equity line of credit (HELOC) to pay off high-interest credit cards or personal loans may help reduce interest costs, lower monthly payments, and make your finances easier to manage.
Key Takeaways
- A HELOC allows homeowners to use their home equity to consolidate high-interest debt.
- Compared to credit cards and personal loans, HELOCs often offer lower interest rates.
- Debt consolidation with a HELOC can simplify finances by combining multiple payments into one.
- HELOCs offer flexibility, letting you borrow only what you need during the draw period.
- Because your home is used as collateral, it’s important to understand the risks before applying.
What Is a HELOC?
A home equity line of credit (HELOC) is a flexible borrowing option that lets you access the equity you’ve built in your home. Unlike a personal loan or a traditional second mortgage where you receive a lump sum upfront and immediately begin repaying the full balance, a HELOC works more like a credit card.
HELOCs are revolving lines of credit based on your available home equity. You can borrow money as needed and only pay interest on the amount you actually use.
During the HELOC draw period, which typically lasts 10 years, you can access funds from your credit line. Once the draw period ends, the repayment period begins. At that point, you can no longer withdraw funds, and you’ll begin making payments toward both principal and interest. The repayment period is 15 years, which may result in more manageable monthly payments compared to shorter-term loans.
A HELOC from Freedom Credit Union comes with variable interest rates. This means your annual percentage rate (APR) can decrease when interest rates fall and increase if rates rise. Closing costs are typically $200-$500, depending on the amount borrowed.
Pros of Using a HELOC for Debt Consolidation
A HELOC allows you to use the equity in your home to address existing debt, often at a lower interest rate than other borrowing options. It can also help simplify your finances by combining multiple balances into a single monthly payment, reducing the risk of missed due dates.
Save on Interest
Credit cards often carry high interest rates, making it harder for many borrowers to pay down balances. The average credit card debt in the U.S. is roughly $6,500 per person, with an average APR of around 21%.
Personal loans can also be expensive. The average personal loan balance is $11,500, with an average APR of 12%. While these rates are typically lower than credit cards, they’re still higher than HELOC rates because personal loans are unsecured.
HELOCs generally offer lower interest rates compared to both credit cards and personal loans. A variable-rate HELOC from Freedom Credit Union is as low as the prime interest rate. These lower rates are possible because the loan is secured by your home’s equity.
Streamline Monthly Payments
Managing multiple debts often means tracking several due dates each month. The more payments you juggle, the easier it is to miss one. Consolidating debt with a HELOC can reduce that burden by rolling balances into a single, predictable monthly payment.
Lower Monthly Payments
Because HELOCs usually offer lower interest rates, consolidating debt may result in reduced monthly payments. Or, if you continue paying the same amount each month, you may be able to pay down your principal faster and shorten the life of your debt.
Possibility of Tax-Deductible Interest
Currently, HELOC interest is only tax-deductible if the credit line is secured by your primary or secondary home and used to buy, build, or substantially improve that residence. According to IRS guidelines, this applies through tax year 2025.
After 2025, current IRS rules indicate that HELOC interest may again be deductible for personal expenses, including credit card debt. Tax rules can change, so it’s always a good idea to consult a tax professional.
Improved Credit Score
Debt consolidation often involves a hard credit inquiry, which may cause a temporary dip in your credit score. Over time, though, consolidating debt could help improve your score if it lowers your credit utilization and helps you make consistent, on-time payments.
Can Be Used for Any Purpose
While many people use a HELOC primarily for debt consolidation, the funds aren’t restricted. Any unused portion of your credit line can be applied toward other needs, such as home improvements, education expenses, or other major costs.
Flexibility
Second mortgages and HELOCs both let you borrow against your home, but they work differently. A second mortgage provides a one-time lump sum. HELOCs, on the other hand, offer ongoing access to funds through a revolving credit line.
With a HELOC, you can borrow up to a set limit during the draw period, which usually lasts between 5 and 10 years. After that comes the repayment period. This structure allows you to borrow only what you need, when you need it.
Because interest is charged only on the amount you use, not the full credit limit, you may be able to keep interest costs lower. You can also begin paying down the balance during the draw period.
Cons of Using a HELOC for Debt Consolidation
While HELOCs can be helpful in many situations, they aren’t the right fit for everyone. Here are a few drawbacks to keep in mind:
- You must own a home to qualify for a HELOC, so this option isn’t available to renters.
- You’ll need enough equity in your home. Most lenders require that the total loans against your property don’t exceed about 80–85% of its current value.
Closing costs can also affect how much you actually save when consolidating debt. If your balances are relatively small, the costs may outweigh the benefits.
It’s also important to remember that your home is used as collateral. If you’re unable to repay the HELOC, you could face foreclosure. And if you decide to sell your home, the HELOC balance must be paid off in full at closing.
An Example of Using a HELOC for Debt Consolidation
To see how consolidating debt with a HELOC could work, consider the following example:
Henry has $15,500 in credit card debt with a 28% APR and $25,525 in personal loan debt at a 14% APR.
If the balances stay the same and Henry makes credit card payments that cover interest plus 3% of the $15,500 balance, his monthly credit card payment would be about $465. Assuming his personal loan has a five-year term, his monthly payment would be roughly $595. Together, Henry is paying about $1,060 each month toward his credit card and personal loan debt.
If Henry instead consolidates the full $41,025 into a HELOC with a variable APR of 6.75%, his minimum monthly payment would be approximately $363. That’s a potential monthly savings of nearly $700. The lower payment comes from both the reduced interest rate and the longer repayment timeline compared to the five-year personal loan.
What Kind of Debt Can You Consolidate with a HELOC?
A HELOC can be used to consolidate several types of debt. Common examples include credit card balances, personal loans, and medical bills.
Credit Cards
If you use a HELOC to consolidate credit card debt, you could replace multiple payments with a single monthly bill. Since HELOCs usually offer lower interest rates than credit cards, this approach may also reduce your monthly payment and total interest costs.
Personal Loans
Managing several personal loans at once can be challenging. Because personal loans are typically unsecured, they often come with higher interest rates than HELOCs or second mortgages.
Rolling multiple personal loans into one HELOC may help lower your interest rate, extend your repayment timeline, and give you access to additional funds if needed. It also simplifies your finances, making budgeting and payment tracking easier.
What to Know When Applying for a HELOC
If you’re thinking about applying for a HELOC, preparation is key. Here are a few things to keep in mind as you get started:
- Know your borrowing power: Most lenders want borrowers to keep at least 20% equity in their home. To estimate how much you may be able to borrow, multiply your home’s current value by 80% (the typical maximum combined loan-to-value ratio), then subtract your existing mortgage balance. Lenders will also review your income and debt-to-income (DTI) ratio.
- Understand fees and closing costs: Some lenders charge closing costs or annual fees, while others do not. Freedom Credit Union does not charge an origination fee for HELOCs and has no annual fee.
- Gather required information: Lenders will need to check your credit, verify your income, and confirm whether you’re applying alone or with a co-applicant. Having this information ready can help speed up the process.
What else should I know about a HELOC from Freedom Credit Union?
- It generally takes 2-3 weeks from the time a complete application is submitted until funds are available to be used.
- Rates are variable and may change after account opening. Your APR may increase or decrease based on market conditions.
- APR may range from 3.00% to 12.00%, subject to change based on credit qualifications and market conditions.
- Freedom Credit Union is an Equal Housing Lender. NMLS #640476.
