A young adult sorting his home finances out.

Debt Consolidation

Home equity loan for debt consolidation

Jul 24, 2023

Aaron Crowe.jpg

Written by

glp head shot 23.jpg

Reviewed by

Key takeaways:

  • Home equity loans can be a good choice for paying off credit card debt because they tend to have lower interest rates compared to other borrowing options. 

  • Typically, home equity lenders will let you borrow against 75%-85% of your home’s market value.

  • Consolidating debt doesn’t reduce what you owe. But moving your credit card debt and other bills to a home equity loan could give you a more affordable monthly payment.

Credit cards can be really hard to pay off. That’s because they carry higher interest rates than most other types of consumer debt.

Consolidating credit card balances with a home equity loan can help you simplify your debt and de-stress your financial life. You could combine multiple debts into one loan with a lower interest rate and a lower monthly payment—so you can free up more cash to cover other expenses. 

Your home, your equity: Understanding home equity loans for debt consolidation

Home equity loans are sometimes called second mortgages. Like your first mortgage, a home equity loan uses the home as security for repayment of the loan. That makes them safer for lenders and cheaper for you compared to most personal loans and credit cards.

When you get a home equity loan, you’re borrowing against your home’s equity. What’s home equity? It’s the difference between what your home is worth and what you owe on it. Example: if the value of the home you own is $500,000 and you still owe $300,000 on your mortgage, you have $200,000 in home equity.

Current market value - current loan balance = equity

When you consolidate debt with a home equity loan, you don’t wipe out debt. If you take a $40,000 consolidation loan to pay off $40,000 in credit card balances and other debts, you still owe $40,000. People do this when they can get a lower interest rate. And a lower rate could give you a lower monthly payment to help out if your budget is strained.  

Loan-to-value ratio explained

Your loan-to-value ratio, or LTV, is how much you owe on your mortgage compared to how much your home is worth. To find your LTV, divide your total mortgage balance by your home’s current market value. 

Current loan balance / current market value = LTV

If your loan balance is $300,000 and your home’s market value is $500,000, your LTV is 60%. 

When you apply for a home equity loan and you are still paying off your original mortgage, lenders perform another calculation—the combined loan-to-value, or CLTV. The CLTV is the total of your first mortgage balance plus the new second mortgage balance, divided by your home’s value. 

If you wanted to take a home equity loan for $100,000, your total mortgage debt would be $400,000 ($300,000 + $100,000). Your CLTV would now be 80%.

$400,000 / $500,000 = .8 (or 80%)

How much can you borrow with a home equity loan?

Maximum CLTVs vary among lenders and may depend on the type of property you have (single family, condo, manufactured, duplex, etc.), the property use (primary residence, vacation home, or rental), and your credit rating. 

To calculate how much you can borrow with a given lender, you need to know their maximum CLTV, your estimated home value, and your mortgage balance. 

For example:

  • Lender’s maximum CLTV: 80%

  • Home value: $500,000

  • Mortgage balance: $300,000

First, you multiply your estimated home value by your lender's maximum CLTV. In this case, 80% of $500,000 is $400,000. That’s the most you can owe on the home.

Next, you subtract your current mortgage balance from the lender’s borrowing limit:

$400,000 - $300,000 = $100,000

Your maximum home equity loan amount for an 80% CLTV is $100,000.

Homeowners, get help with your high-interest debt

Use the equity in your home to consolidate debt, lower your monthly payments, and reduce your stress.

How to use a home equity loan for debt consolidation

Your lender may issue you a check when your loan is ready to be funded or wire the money to your bank account. But many lenders don’t give the loan funds directly to you when you borrow for debt consolidation. Instead, they send the funds to your creditors directly to pay off your balances. 

To repay the home equity loan, you’ll make a payment separate from your primary mortgage payment. Your home equity loan payment amount depends on your loan amount, interest rate, and loan term. Home equity loan repayment typically lasts 10 to 30 years. The longer you take to repay the loan, the more interest you will pay overall. The faster you pay off the loan, the bigger your monthly payment will be. You’ll have to decide what repayment terms work for your budget and goals.

Pros and cons of home equity loans

Home equity loans have a few advantages when it comes to consolidating debt:

  • They tend to have lower interest rates than unsecured debt like credit cards and personal loans.

  • The lender could pay your other creditors directly. 

  • You could qualify with a lower credit score if you are using the loan to consolidate other debts. At Achieve, you can apply for a debt consolidation home equity loan with a credit score of 640.

  • Consolidating multiple accounts simplifies your finances.

  • A fixed interest rate and steady monthly payments make budgeting easier.

These are a few potential drawbacks that you should be aware of before you make a borrowing decision.

  • If you don’t pay back the loan, you could lose your home.

  • Closing costs on home equity loans can be 2%-5% of the loan amount. That means if you borrow $100,000, your closing costs might be $2,000 to $5,000. However, most lenders allow you to include those costs in your loan so you don’t have to pay them out of pocket. 

  • Debt consolidation doesn't reduce the amount you owe.

Also, consolidation loans have a built-in risk. It’s a common pitfall to pay off your credit cards with a loan and then charge the credit card balances back up. If you do that, you could end up even deeper in debt and with bigger financial problems. 

If you are still working on money management skills, it’s a good idea to close the credit card accounts once you pay them off with the loan. Although this could have a temporary negative impact on your credit profile, it’s in your best interest to focus on getting out of debt. Getting rid of debt will put you in the best position for a healthy credit profile later on.

How to get a home equity loan for debt consolidation

Make sure you understand what it takes to get a home equity loan. Before you apply, talk to a mortgage advisor. Find a lender that can do a soft pull on your credit, so you can find out what you might qualify for before you apply. The actual application can have a small, temporary, negative impact on your credit once a hard pull of your credit is done.

Get a free copy of your credit report from annualcreditreport.com. Check it for errors because some errors can hurt your credit. If you find anything that looks wrong, you can dispute it while you’re viewing your credit report online.

If you have collection accounts, you might need to pay them off. Some lenders will automatically reject your application if you have open collections. Your lender can go over your credit report with you and tell you what steps are needed.

Try not to add to your debt while you’re in the application process. Debt can affect your eligibility for the loan you want. 

Don’t apply for any other new credit accounts. Also, unless the lender asks you to, don’t close any of the accounts you have. That’s another thing that can affect your credit profile and your eligibility for the loan you want.

Be available for the property appraiser if one needs to visit your home. Make sure everything they need to look at, like your bathroom shower or bedroom closets, is accessible and tidy.

If the lender asks you for documents, provide them right away. 

If your loan application isn’t approved, consider it a “yet,” not a permanent rejection. Talk to your mortgage advisor and find out what factors went into the decision. You might be able to address them and reapply in the future.

Exploring your choices: other ways to consolidate debt

Home equity loans aren’t the only way to consolidate debt. Other options could make more financial sense in your situation. Here are a few:

Cash-out refinance mortgage

A cash-out refinance replaces your existing first mortgage with a larger loan. You get the difference in cash, which you can use for debt consolidation or pretty much any other purpose. Cash-out refinancing is an option to consider if you qualify and the new loan has a lower interest rate than your current mortgage. If mortgage rates have gone up since you got your first mortgage, you might want to keep it the way it is and apply for a home equity loan to get the cash you need.

Personal loan

You don’t have to pledge anything of value as collateral to get an unsecured personal loan to pay off credit card debt. It’s based on your creditworthiness and other factors.

0% balance transfer card

You might qualify for a credit card that allows you to transfer a balance and pay zero interest for a period of time. The main risk is charging the paid-off card back up again. That would leave you in even deeper debt, and it’s a common pitfall. 

Debt resolution

Debt resolution means negotiating with your creditors to accept less than the full amount you owe. They might be willing to do this if it’s clear that you can’t afford to fully pay back your debt. You can negotiate with creditors yourself or work with a professional debt resolution company.

Debt management plan

Some nonprofit credit counseling agencies offer debt management plans. It’s a three to five-year plan for paying off your debts in full. Usually, you have to agree not to use credit while you’re in the plan.

Weighing your options: Is a home equity loan the right choice for your debt consolidation?

Before committing to a home equity loan, ask yourself a few questions:

  • How much debt do I have? Home equity loans are ideal for larger amounts.

  • How much equity do I have? Will I be eligible for a home equity loan?

  • How fast do I need the money? Personal loans generally fund more quickly.

  • Can I get a lower interest rate on my debts?

  • Can I get an affordable monthly payment?

  • Am I capable of avoiding new debt while I’m paying off the loan?

Your home equity is a tool you can use to build your financial house. Apply here today to find out if it might be appropriate for you.

Author Information

Aaron Crowe.jpg

Written by

Aaron Crowe is an Achieve contributor. He is a freelance journalist who specializes in writing about personal finances. He has worked as a reporter and editor at newspapers and websites for his entire career.

glp head shot 23.jpg

Reviewed by

Gina Freeman has been covering personal finance topics for over 20 years. She loves helping consumers understand tough topics and make confident decisions. Her professional history includes mortgage lending, credit scoring, taxes, and bankruptcy. Gina has a BS in financial management from the University of Nevada.

Frequently asked questions

Home values aren't guaranteed. It’s possible that your home’s value could fall. If that happens and you’ve borrowed the maximum amount against your home, you might have a harder time selling it for enough money to pay off your outstanding home loans. 


Home values aren't guaranteed. It’s possible that your home’s value could fall. If that happens and you’ve borrowed the maximum amount against your home, you might have a harder time selling it for enough money to pay off your outstanding home loans.

Home equity loan terms usually range from 10 to 30 years. You should choose a loan with the shortest term you can afford to save the most on interest charges.

The monthly payment always depends on your interest rate and loan term (the number of years you have to repay the loan), and any fees. If you can afford to pay more, you could save a lot of money on interest charges.

Example: For a $50,000 loan with a 15-year term and an 11% interest rate, the payment is $568. 

For the same loan with a 10-year term, the payment is $687. By taking the 10-year term, you’d get rid of the debt five years faster and save more than $19,800 in interest.

Related Articles

online-debt-consolidation.jpg

Debt Consolidation

Paying off multiple high-interest credit cards at the same time can be expensive and daunting. We show you how online debt consolidation can help.

is-debt-consolidation-a-good-idea.jpg

Debt Consolidation

Debt consolidation can help you pay off what you owe, but it isn't the only way to resolve the debt. Learn more here.

what-is-debt-consolidation.jpg

Debt Consolidation

If you have high credit card debt, debt consolidation may be able to help you lower your monthly payments. Here’s how.

Achieve Logomark

Achieve is the leader in digital personal finance, built to help everyday people move forward on the path to a better financial future.

Footer Trust Pilot Marker

TrustScore 4.8/5

Footer BBB Marker

.

Personal loans are available through our affiliate Achieve Personal Loans (NMLS ID #227977), originated by Cross River Bank, a New Jersey State Chartered Commercial Bank and may not be available in all states. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, credit usage and history. Loans are not available to residents of all states. Minimum loan amounts vary due to state specific legal restrictions. Loan amounts generally range from $5,000 to $50,000, vary by state and are offered based on meeting underwriting conditions and loan purpose. APRs range from 8.99 to 35.99% and include applicable origination fees that vary from 1.99% to 6.99%. The origination fee is deducted from the loan proceeds. Repayment periods range from 24 to 60 months. Example loan: four-year $20,000 loan with an origination fee of 6.99%, a rate of 15.49% and corresponding APR of 19.54%, would have an estimated monthly payment of $561.60 and a total cost of $26,956.80. To qualify for a 8.99% APR loan, a borrower will need excellent credit, a loan amount less than $12,000.00, and a term of 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to pay off qualifying existing debt directly; or showing proof of sufficient retirement savings, could help you also qualify for lower rates. Funding time periods are estimates and can vary for each loan request. Same day decisions assume a completed application with all required supporting documentation submitted early enough on a day that our offices are open. Achieve Personal Loans hours are Monday-Friday 6am-8pm MST, and Saturday-Sunday 7am-4pm MST.

Home Equity loans are available through our affiliate Achieve Loans (NMLS ID #1810501), Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Home loans are a line of credit. Loans are not available to residents of all states and available loan terms/fees may vary by state where offered. Line amounts are between 15,000 and $150,000 and are assigned based on debt to income and loan to value. Example: average HELOC is $57,150 with an APR of 12.75% and estimated monthly payment of $951 for a 15-year loan. Minimum 640 credit score applies to debt consolidation requests, minimum 670 applies to cash out requests. Other conditions apply. Fixed rate APRs range from 8.75% - 15.00% and are assigned based on credit worthiness, combined loan to value, lien position and automatic payment enrollment (autopay enrollment is not a condition of loan approval). 10 and 15 year terms available. Both terms have a 5 year draw period. Payments are fully amortized during each period and determined on the outstanding principal balance each month. Closing fees range from $750 to $6,685, depending on line amount and state law requirements and generally include origination (2.5% of line amount minus fees) and underwriting ($725) fees if allowed by law. Property must be owner-occupied and combined loan to value may not exceed 80%, including the new loan request. Property insurance is required as a condition of the loan and flood insurance may be required if the subject property is located in a flood zone. You must pledge your home as collateral and could lose your home if you fail to repay. Contact Achieve Loans for further details.

Affiliated Business Arrangement Disclosure: Achieve.com (NMLS #138464) and Achieve Loans are both wholly owned subsidiaries of Achieve Company. Because of this relationship, your referral to Achieve Loans may provide Achieve.com a financial or other benefit. Where permitted by applicable state law, Achieve Loans charges: 1) an origination fee of 2.50%, and 2) an underwriting fee of $725. You are NOT required to use Achieve Loans for a home equity line of credit. Please click here for the full Affiliated Business Arrangement disclosure form.

Resolution is available through our affiliate Achieve Resolution (NMLS ID # 1248929). All estimates for Achieve Resolution’s services are based on prior results, which will vary depending on your specific enrolled creditors and your individual program terms. Not all Achieve Resolution clients are able to complete their program for various reasons, including their ability to save sufficient funds. Achieve Resolution does not guarantee that your debts will be resolved for a specific amount or percentage or within a specific period of time. Achieve Resolution does not assume your debts, make monthly payments to creditors or provide tax, bankruptcy, accounting or legal advice or credit repair services. Achieve Resolution’s services are not available in all states, including New Jersey, and their fees may vary from state to state. Please contact a tax professional to discuss potential tax consequences of less than full balance debt resolution. Read and understand all program materials prior to enrollment. The use of Achieve Resolution services will likely adversely affect your creditworthiness, may result in you being subject to collections or being sued by creditors or collectors and may increase the outstanding balances of your enrolled accounts due to the accrual of fees and interest. However, negotiated settlements Achieve Resolution obtained on your behalf resolve the entire account, including all accrued fees and interest. C.P.D. Reg. No. T.S.12-03825.

© 2024 Achieve.com. All rights reserved. NMLS #138464