6 smart ways to use a home equity loan to consolidate debt

A home can be one of your greatest financial assets. As you pay down the mortgage—and your home maintains or gains value—you gain equity. Home equity is the difference between what you owe on the home and what it's worth on the open market.

So, how can you use your home equity to reach your financial goals? One possibility is to use a home equity loan to consolidate credit card debt. Using a home equity loan or line of credit, you could zero out credit card balances and potentially save money on interest, all while streamlining your monthly budget. 

Sound good? Read on to learn how to use home equity to pay off debt and when it could make sense for you. 

Why home equity could be a powerful tool for paying off debt

Home equity can be one measure of wealth. As your home's value grows and your mortgage balance decreases, your overall net worth can rise. 

How can I use a home equity loan to pay off debt? Home equity loans let you leverage your home's value. You could borrow a lump sum, use it to pay off your credit cards, then pay back the loan over time. Alternatively, you could use a home equity line of credit (HELOC), which lets you borrow, repay, then borrow again during the draw period. 

In both cases, your home is the collateral for the loan. That means your home secures, or backs up, the loan; if you stop making payments, the lender could take your home.

A home equity loan could be a good way to consolidate credit card debt if you want to:

• Reduce the number of debt payments you make each month

• Have a predictable monthly payment

• Lower your interest rate 

Using a home equity loan to pay off credit cards could help your credit scores, as well. When you pay off credit card balances, you reduce your credit utilization for those cards. Credit utilization is a measure of how much of your credit limit you're using. Reducing your utilization and adding on-time payments of a home equity loan could lead to a better credit score over time.

Should I use a home equity loan to pay off debt? It's a personal decision, but it's an option you might consider if you have sufficient equity and a steady income. Your credit could also play a role, but specific home equity loan requirements vary by lender and loan terms.

Smart way #1: Pay off high-interest credit card balances

High interest rates make debt expensive to carry, giving you less money to put toward other debts or financial goals. Reducing your overall interest rate by consolidating with a home equity loan could save you thousands of dollars in interest fees.

Want to see it in action? Let's say your debt situation looks like this:

• Three credit card balances totaling $12,000, with an average interest rate of 23%

• One retail store card with an $8,000 balance and an 18% rate

• Total debt: $20,000

• Goal: Pay off debt in five years

To reach your five-year goal, you'd need to pay $203 a month toward the store card, plus $338 a month toward the other credit card debt. That's a total of $538 in monthly debt payments. By the time you pay off all the debt, you'll have forked over almost $12,500 in interest fees.

Instead, say you could get a $20,000 home equity loan with a 12% rate and use it to consolidate your card debts. Your monthly debt payment drops to $445, and you end up paying around $6,700 in interest over five years.

In this example, consolidating cuts the interest cost nearly in half, saving $5,800 over five years. That's a lot of money that could go into building an emergency fund or saving for retirement. 

Smart way #2: Combine multiple bills into one payment

Multiple debts mean multiple payments to keep up with every month. Consolidating your credit cards with a home equity loan could simplify your life with fewer payments to make. 

If you pay off all your credit card debt—and resolve not to make any new purchases with your cards—you could have just one monthly loan payment to make. Your home equity loan lender may even give you some leeway to choose when the payment is due. 

You could pick a date that works for your situation. Even better, you could automate your monthly payment to make sure it's never late. Some home equity loan lenders offer an interest rate discount when you enroll in automatic debit payments, which is a chance to save even more.

Smart way #3: Use it alongside a debt-busting budget plan

Using a home equity loan to pay off credit cards works best when you resolve not to keep using your cards. Otherwise, you could end up with credit card debt again—plus a loan to repay. That's where your budget comes in.

A budget is the foundation of financial planning. It's your roadmap for making the most of the money you bring in each month. Your budget could help you avoid debt if you:

• Track monthly expenses so you know where your money goes

• Prioritize essential expenses before you spend anything on wants or extras

• Dedicate some of your paycheck to savings each month

If you don't have a preferred budget system, you might check out the 50/30/20 budgeting rule. It's easy to use—you just divide your monthly pay into three groups:

• 50% to needs, like housing, food, and utilities

• 30% to wants, like new clothes or dining out

• 20% to savings and debt

This budget method is easy to implement because it only takes some simple math to know how much money goes into each bucket. If you make $5,000 a month, for example, $2,500 would go to needs, $1,500 would go to wants, and the other $1,000 goes to savings and debt. 

Pairing a budget with an expense tracking app could help you stay connected to your money and committed to your spending plan. The Achieve GOOD app, for example, could help you see where your money's going and put the brakes on overspending.   

Smart way #4: Pay off medical or personal loans

A home equity loan could be a smart way to consolidate debt, and that doesn't just mean credit cards. You could also use a home equity loan to pay off other types of high-interest debt, including:

• Personal loans

• Medical debt

• Veterinary bills

The benefits are the same. You could streamline monthly payments, potentially lower your interest rates, and pay off what you owe in less time. You wouldn't have to worry about any of those other bills slipping through the cracks, since you'd have just one debt to pay off. All you'd need to do is stay focused on paying down your home equity loan. 

Smart way #5: Rebuild savings while you pay down debt

Saving money is a healthy financial habit. When a financial emergency comes along, it's a relief to know you have a rainy day fund on standby to help you cover it. You wouldn't need to use a high-interest credit card or a loan to make it through a tough situation. 

Using a home equity loan to pay off credit cards could free up money in your budget that you can save. A savings of even $100 a month is $1,200 a year that you could sock away until you need it. The lower your home equity loan rate is compared to your existing debt, the more you could reduce your monthly payments.

Smart way #6: Launch your debt-free future

Debt can keep you from moving forward with your other financial goals, but a home equity loan could give you back your future. Picture it: credit card debts are gone, you're saving money steadily, and you're paying down your home equity loan on time, without any strain on your budget.  

The trick is to pay off existing debt without allowing it to pile up again. That's where a solid budget and a little discipline could make all the difference. Here are a few tips to stay on track financially after using a home equity loan to pay off credit cards. 

• Plan monthly check-ins. Once a month, sit down to review your budget and home equity loan payoff progress. Look at all the money you brought in over the past month and where it went. A monthly budget and debt review is a chance to look for areas where you may need to adjust your spending so you don't need to use a credit card to cover gaps.

• Reward your progress. It's okay to celebrate your debt payoff—you should be proud that you're moving in the right direction. Allowing yourself a small treat when you hit a milestone, like knocking another $1,000 off your home equity loan balance, could help you stay motivated to reach the finish line. 

• Get an accountability partner. An accountability partner is a trusted family member or friend who can help you stay the course with your goals. If you struggle to stay committed to big changes, like paying off debt, having someone you can talk to could make the journey easier to manage. 

Not sure if a home equity loan is a smart way to consolidate credit cards? Talk to a debt specialist about your situation. Achieve's team of experts can evaluate your debt and help you find the best solution for dealing with it.