Debt is rarely cheap, especially if it’s credit card debt. At 24.37%, the average interest rate on credit cards is at an all-time high. If you’re one of the many Americans with high-interest debt and have a home that you have built up equity in, it may be worth your time to consider consolidating debt utilizing your home’s equity.
There are two ways to tap into your home equity to pay off other debt: a home equity line of credit (HELOC) and a home equity loan. Below we walk through the pros and cons of consolidating your debt using these products so you can decide if it’s right for you.
The pros and cons of consolidating debt with your home’s equity
Pay less interest
Can simplify your payments
Easier to budget
Can lower your monthly payments
Could be easy to go deeper into debt
Often have strict requirements for approval
It costs money
Interest rates may not be fixed
You could lose your house
Benefits of debt consolidation with a HELOC:
Pay less interest If you have high-interest credit cards, then consolidating with your home equity could save you money over time.
Can simplify your payments Every debt you have has a different payment and due date to keep track of, which can easily get overwhelming. Consolidating will cut down on the number of bills you have to track and pay each month.
Easier to budget If you’re working on budgeting to take control of your finances, figuring out how much to pay on each debt every month in the smartest way can be tricky. Consolidating means you’ll have a single payment and due date, as well as a clearer picture of when you can be debt free.
Can lower your monthly payments Using a home equity loan or HELOC spreads your payments out over a longer period of time, which translates into a lower monthly payment. This increases the amount of interest you ultimately pay, but provides more budgeting flexibility.
While there are clear benefits, there are some drawbacks too.
Drawbacks of consolidating debt with a HELOC:
Could be easy to go deeper into debt
Similar to a credit card, a HELOC is a line a of credit. You can draw on the loan as much as you want up to the max limit. If you have issues setting and sticking to a budget, this access to cash could turn into a bigger problem.Often have strict requirements for approval
Lenders consider your credit score, debt-to-income ratio, the amount of equity you have in your home, and your history of paying bills to determine if you qualify for a loan. While requirements vary by lender, typically you will need a credit score of at least 620; a debt-to-income ratio of 43%; and at least 15% - 20% equity in your home. Some even require you maintain 10% - 20% equity after you take the loan.It costs money to get a new loan
Just like the mortgage on your home, both home equity loans and HELOCs often have fees. These costs can vary from lender to lender, but be prepared to pay for an appraisal, closing costs, and even origination fees. Some also charge an early closure fee; this is common if you are offered a loan with no closing costs.Interest rates may not be fixed
Typically home equity loan rates are fixed for length of the loan, but HELOCs are generally adjustable-rate loans, which means your rate and payment could go up!You could lose your house
Both HELOCs and home equity loans are secured loans, that is you put your home up as collateral. While this helps you get a lower interest rate, it also means if you default on your loan, the lender could take your house.
If you’re considering consolidating your debt with your home equity, consider a Figure’s Home Equity Line. Combining the best characteristics of traditional HELOCs and home equity loans, our unique home equity solution offers a fixed interest rate1navigates to numbered disclaimer and full access to your funds up front, while still enabling you to make additional draws once you’ve repaid your balance. Plus, you can get approved in five minutes and funding in five days2navigates to numbered disclaimer.
