3 reasons your home equity could help cut costly debt

By Rebecca Lake

Reviewed by Kimberly Rotter

Dec 07, 2023

Read time: 3 min

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Debt happens, and sometimes it feels like you’ll never be free. You don't have to stay stuck. If you own a home, you might be sitting on (in) an asset that could help you check off your financial goals one by one.  

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What is home equity and how do you borrow against it?

Good question, and here's the simple answer. Home equity is the difference between what you owe on your mortgage and what your home is worth. 

For example, say you still owe $250,000 on a home you bought several years ago. Today, the home's value is $550,000. Your equity would be $300,000 ($550,000 in value minus $250,000 in mortgage debt). 

When you get a home equity loan, you’re borrowing against the equity you have in your home. It’s a mortgage. So the way to get a home equity loan is to chat with a loan advisor about their requirements, and then apply.  

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How home equity loans work

Here’s the gist of how home equity loans work.

  • The amount you can borrow is partly based on how much equity you have. It’s also based on how much income you have, and what other debts you’ll still be responsible for paying after you get the new loan. Other underwriting conditions could apply.  

Read more: What is DTI

  • You can use your loan to consolidate debts or pay for pretty much any large expense, such as home renovations.

Read more: 6 ways to use a home equity loan

  • You’ll pay the home equity loan back with interest, separately from your regular mortgage payment if you still have a mortgage. At Achieve, you can choose a 10- or 15-year repayment term.

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Using a home equity loan to manage debt

Debt consolidation is one of the most popular ways to use a home equity loan. You could use a home equity loan as leverage to get rid of credit card debt, personal loans, medical bills, and other debts. 

Here's what a long-term debt plan might look like.

  • You apply for a home equity loan. 

  • Once approved, you could use the loan proceeds to pay off credit cards, medical bills, personal loans, or other debts, up to the amount of your home equity loan.

  • You then make one monthly payment to the home equity loan, according to the schedule your lender sets. 

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How does borrowing help me get out of debt?

Technically, yes, a home equity loan is a type of debt. But borrowing against your home to pay off other debts could be a smart financial move. The advantage you have with home equity loans is two-fold. 

One, home equity loans tend to have lower interest rates compared to credit cards. A lower interest rate could save you money, help you get rid of your debt faster, or give you some breathing room in your budget by bringing your monthly payment down.

Two, a home equity loan is designed with a firm end date. Credit card minimum payments are designed to keep you in debt until the first of Neverember. 

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How to know if a home equity loan is right for you

Using home equity to manage debt isn’t an ideal solution for everyone. If you're interested in whether it might be a good option for you, here are a few questions to consider:

  • How much equity do you have?

  • How much would you need to borrow to consolidate your other debts? 

  • Would the monthly payment be affordable?

  • Are you comfortable offering your home as a guarantee that you’ll repay the loan?

  • Could a home equity loan help you save money or budget better?

If you think a home equity loan is the right way to go, you can take the next step and get a rate quote. That can give you a better idea of how much you might be able to borrow and what you'll pay so you can make your final decision confidently.

Rebecca Lake - Author

Rebecca is a senior contributing writer and debt expert. She's a Certified Educator in Personal Finance and a banking expert for Forbes Advisor. In addition to writing for online publications, Rebecca owns a personal finance website dedicated to teaching women how to take control of their money.

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Kimberly is Achieve’s senior editor. She is a financial counselor accredited by the Association for Financial Counseling & Planning Education®, and a mortgage expert for The Motley Fool. She owns and manages a 350-writer content agency.

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