Pros and Cons of Using a HELOC to Consolidate Your Debt

If you’re feeling stressed about your debt, you’re not alone. Roughly one-third of Americans say debt is a cause of financial stress, according to a recent survey by digital bank Discover.

If you’re a homeowner, you may have access to a tool you’re not considering to help ease that anxiety. As home values soar, so do homeowners’ home equity. That equity could be tapped via home equity lines of credit (HELOCs), which could allow you to consolidate your debt, possibly lowering your monthly payments and allowing you to pay off your debt faster.

Like most lending options, HELOCs come with pros and cons. Consider both before deciding whether using a HELOC for debt consolidation is right for you.

Pros of using a HELOC for debt consolidation

Tapping your home equity can come with major benefits, depending on your lender and eligibility. Here’s a look at the biggest advantages.

Lower rates than credit cards and unsecured loans

Swapping your high-interest debt for a HELOC can make a lot of sense, since home equity lending offers more attractive rates. Because you’re using your home as collateral, HELOCs tend to come with lower interest rates than even the best personal loans and credit cards.

Flexibility

Home equity loans are similar to HELOCs since in both cases you’re borrowing against your home. But home equity loans require you to take a lump sum payment. HELOCs offer a bit more flexibility: They’re revolving lines of credit, which means you could borrow against your home as needed.

With HELOCs, there’s a draw period during which you can borrow up to a set limit that your lender establishes. The draw period, which usually lasts 5-10 years, is followed by a repayment period during which you pay the money back. The flexibility to draw money as needed means that you can limit how much debt you take on. It also means you may be able to limit how much you’re paying in interest, since you only pay money on the amount you actually borrow from the credit line — not the overall amount you’re allotted.

You can also start paying back your loan during the draw period. Lenders will usually only require monthly payments toward the interest during this time, but paying more means bringing down your loan balance faster.

Streamlined (and maybe lower) payment

If there’s one thing more stressful than trying to crawl your way out of debt, it’s doing so when you have to keep track of multiple monthly payment amounts and deadlines. Using a HELOC for debt consolidation simplifies the process by replacing multiple loans with just one.

Plus, the combination of a lower interest rate and a longer repayment term means you may be able to significantly reduce how much you’re spending on debt each month.

Possibility of tax-deductible interest

For now, the interest you pay on a HELOC can only be deducted from your taxable income if your line of credit is secured by your main or second home and used to “buy, build or substantially improve the residence.” That’s the case through tax year 2025, according to the IRS. But after tax year 2025, that will extend to HELOCs used to cover personal living expenses, like credit card debt, according to current IRS rules.

Improved credit score

Consolidating your debt usually requires some hard credit inquiries, which can temporarily hurt your credit score. Over time, though, debt consolidation could actually help strengthen your score if it helps you reduce your credit utilization and make payments on time.

Can be used for any purpose

Even if your primary purpose in taking out a HELOC is to help you pay down debt, you’re free to use leftover funds as you like. You can use a HELOC for any purpose, whether that’s a home renovation, paying college tuition or something else.

Cons of using a HELOC for debt consolidation

There are a lot of upsides to consolidating your debt with a HELOC, but the move doesn’t make sense for everyone. You should consider these disadvantages before moving forward.

Risk of foreclosure

When you’re considering a HELOC, one of the biggest downsides to keep in mind is that you’re putting your house on the line. If you fail to pay back your HELOC, your lender can take your property and sell it to recover their loss. If you choose to sell your home while you still owe the lender money, you’ll have to pay back the loan in full with the proceeds from your sale.

Variable interest rates

Unlike with home equity loans, HELOCs usually have variable interest rates. That means your rate can go up and down, based on market conditions, which makes it hard for you to forecast your monthly payments. With a variable-rate HELOC, your rate could increase up to a maximum of 18%.

While most HELOCs have variable rates, some lenders offer fixed-rate options, so be sure to shop around before landing on a line of credit.

Closing costs and other fees

Like with a mortgage, HELOCs come with closing costs like origination and appraisal fees. You can typically expect to pay between 2% and 6% of your total loan amount. Depending on the lender, you may also need to cover charges like account maintenance fees, inactivity fees and a prepayment penalty if you pay off the line of credit before the agreed upon date.

Lowers your home equity

When you borrow against your home via a HELOC, you’re lowering the amount of equity you have left in the home. This could restrict other types of borrowing you can do, since your overall net worth will be lower. In the worst case scenario, it could also mean you end up with an underwater mortgage if home values drop and you wind up owing more than your home is worth.

Withdrawal requirements

Your lender may require you to withdraw a minimum amount from your line of credit, even if that’s more than you actually need. Most lenders will require you to borrow at least $10,000.

Refinancing restrictions

Having a HELOC may limit your ability to refinance your original mortgage, depending on your lender.

Should you use a HELOC for debt consolidation?

Whether you should use a HELOC for debt consolidation will depend on your specific financial situation and goals, including how much money you need to borrow and what you want your repayment plan to look like. If you are not sure exactly how much you will need, a HELOC can work well, since you can tap the line of credit as needed. However, if you’d rather take out a lump sum of money and have a fixed interest rate, a home equity loan may make more sense. Other alternatives include a personal or debt consolidation loan, or a balance transfer credit card.

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