Home Equity for Debt Consolidation: A Smart Strategy for Managing Debt

Credit card interest rates over 20% can trap you in debt for years. But what if your home could help you break free faster?

Managing high-interest debt can quickly become overwhelming, especially when juggling multiple monthly payments.

With the median credit card interest rate in the U.S. at 24.20% as of March 2025, it’s easy for debt to spiral out of control.

For homeowners, tapping into home equity to consolidate debt can be a practical way to lower interest rates and simplify repayment.

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What is home equity?

Home equity is the percentage of your home’s value that you own outright.

It’s calculated by subtracting your remaining mortgage balance from the home’s current market value.

You increase the amount of equity you have in your home by paying down your mortgage.

Home equity also grows when the home’s value goes up. You can use this equity through different home equity products (e.g., home equity loans and home equity lines of credit—also called HELOCs).

How to qualify for a home equity loan or HELOC

Lenders typically consider several main factors to be eligible for a home equity loan or HELOC.

Most lenders look for homeowners with a credit score of around 620, a debt-to-income ratio below 43%, and at least 15% to 20% equity in the home.

A higher credit score and more equity can help you secure better rates. Lenders also consider your payment history and overall financial stability before approving your application.

Using home equity to consolidate debt

Debt consolidation means combining several debts into a single loan with a lower interest rate.

Lenders generally offer lower interest rates on home equity loans and HELOCs than credit cards or personal loans because your home’s value secures them.

Replacing high-interest debt with a lower-rate loan reduces interest costs and makes monthly payments easier to manage.

Home equity loan vs. HELOC

There are two main ways to use home equity for debt consolidation:

1. Home equity loan: Results in a single lump sum with a fixed interest rate and predictable monthly payments
2. HELOC: Works similarly to a credit card—i.e., a revolving line of credit that lets you tap into funds as needed

The Home Equity loan approach works well if you want a clear and consistent repayment plan.

HELOCs usually come with variable interest rates, making them a flexible choice for managing debt gradually.

How home equity can simplify debt consolidation

Home equity can be a powerful tool for streamlining debt consolidation, offering homeowners the potential to simplify their finances and lower their overall interest burden.

Lower interest rates

Interest rates on credit cards and personal loans are often high, which makes it challenging to pay off the principal balance.

In contrast, home equity loans and HELOCs often come with lower rates, helping you save on interest costs.

Simplified repayment

Consolidating multiple debts into one loan means managing only one monthly payment. Combining your payments this way can lower the risk of missing due dates or incurring late fees, making it simpler to manage your finances.

Potential tax benefits

In some situations, the interest on home equity loans and HELOCs might be tax-deductible if the money is used for home improvements.

While using these funds for debt consolidation doesn’t qualify, combining it with renovations might make you eligible for a deduction.

It’s good to check with a tax professional to see what applies.

Improved credit score

Reducing high credit card balances helps decrease your credit utilization ratio—a significant factor in your credit score.

A lower ratio can help boost your score over time, making qualifying for better loan terms easier.

Risks and considerations

Using home equity for debt consolidation can be a helpful financial strategy, but it’s crucial to proceed cautiously.

Risk of foreclosure

Since home equity loans and HELOCs are secured by your home, falling behind on payments could put you at risk of foreclosure.

It’s important to be sure you can handle the payments before using home equity to consolidate debt.

Variable interest rates on HELOCs

HELOCs usually have variable interest rates, so your payments can change over time. If rates go up, your monthly payments could become harder to manage.

Potential for more debt

While consolidating debt can provide financial relief, it doesn’t solve the habits that led to debt in the first place.

Without careful budgeting, running up new debt is easy, putting you back where you started—or worse. A solid budget and disciplined spending are essential.

When does using home equity for debt consolidation make sense?

Tapping into home equity to consolidate debt makes sense if:

• The new loan has a much lower interest rate than your existing debt
• You have a consistent income and can handle the monthly payments
• You have enough equity to cover the debt without borrowing too much against your home
• You’re committed to avoiding new high-interest debt

Alternatives to home equity for debt consolidation

If you’re not sure about using home equity—or if you don’t qualify—there are other ways to consolidate debt:

Balance transfer credit cards

Balance transfer credit cards are an option for those who want to consolidate debt without using home equity.

Some cards offer 0% introductory APR periods, allowing you to combine debts without paying interest for a limited time.

Personal loans

Unsecured personal loans are another option for consolidating debt. While they don’t require collateral, they often carry higher interest rates than low-interest home equity loans.

Debt management plans

Professional associations, such as credit counselors, can often help you negotiate reduced interest or a repayment plan if you have multiple debts.

The bottom line on using home equity for debt consolidation

Using your home’s equity for debt consolidation can be a useful way to lower interest rates and make payments more manageable.

Before moving forward, it’s important to take an honest look at your finances to ensure you can handle the new loan comfortably.

Considering the advantages and risks can help you decide if this approach is the right fit for you.