Here's When You Should Use a HELOC to Consolidate Your Debt

Debt is a problem for many Americans. Nationwide, household debt has reached nearly $18 trillion, and for those who have credit cards, the average balance is a whopping $6,000-plus.

If you’re one of the many consumers dealing with debt, consolidation could help you get a handle on your bills. This rolls all your outstanding balances into a single loan or credit card, allowing you to streamline and sometimes lower your monthly payments, plus reduce the interest rate you pay.

If you’re a homeowner, you even have an extra consolidation tool at your disposal: A home equity line of credit (HELOC). Should you use one to tackle your debt, though? And what are the risks if you do? Here’s what you need to know to find the best HELOC for debt consolidation.

How using a HELOC for debt consolidation works

With a HELOC, you borrow from the equity you have in your home, getting a line of credit in return. This works much like a credit card, allowing you to withdraw funds over an extended period of time (usually 5 to 15 years).

If you’re using a HELOC for debt consolidation, you’d simply take cash from your line of credit and pay off the balances you have on any credit cards, car loans, medical debts or other debts you’re dealing with. This effectively rolls them into your HELOC, giving you just one monthly payment.

Since you’re using your home as collateral, HELOCs typically come with lower interest rates than other financial products, so this strategy will usually reduce your interest costs, too. For example, Achieve’s HELOCs average a 12.75% APR. The average credit card rate right now? Around 22%.

“It is a good way to consolidate high-interest debt into a normally much lower interest rate,” says Rob Burnette, an investment advisor representative at Outlook Financial Center in Troy, Ohio.

When using a HELOC for debt consolidation is smart

A HELOC can be a helpful debt consolidation tool, especially if you can get a lower interest rate than what you’re currently paying on your debts.

“For many that own a home, they also have other debt such as high-interest credit cards, personal loans, auto loans or medical debt,” says Colby Van Sickler, founder and CEO of F3 Wealth Management in Arlington, Texas. “This is where your ‘brick bank’ can become valuable to you. If you have a high-interest credit card at 18% and a car loan at 7%, you can use the equity within your house to pay them off.”

HELOCs can also be smart if you know you need extended access to cash since they let you borrow funds, pay them back and re-borrow, usually for a period of 5 to 10 years. So, for example, you could consolidate your debts, pay that balance off and then use the funds again to cover a home repair or renovation project.

Finally, HELOCs are only smart if you feel confident that your income will be stable or even increase over time. Not only do you need to be sure you can make the payments (or risk foreclosure), but because HELOCs often have variable interest rates, you’ll need the flexibility to cover a higher bill if your rate ticks up. (Alternatively, if you don’t want to deal with the chance that your payment may change, you can shop around for a lender that offers HELOCs designed for debt consolidation, as these usually have a fixed interest rate.)

When you should avoid a HELOC for debt consolidation

A HELOC isn’t the best option if you’re not sure you can handle the payments, as it could mean losing your house.

"They’re a great choice for those with a lot of home equity who have stable jobs and can easily pay off the loans,” says Mike Chadwick, founder of Fiscal Wisdom Wealth Management in Canton, Ohio. “If you fail, though, the bank will foreclose on the home, so there is a risk that other unsecured loans do not have.”

It’s also not a smart move if you could be tempted to use the line of credit irresponsibly, unnecessarily racking up debt yet again.

“I find that when people see the option for consolidation, the pressure to pay off the debt decreases significantly and can actually reinforce the poor financial habits that led to this debt in the first place,” says Stephan Shipe, owner of Scholar Advising in Winston-Salem, North Carolina. “You are playing with fire moving debt from one place to another without stomping out the root cause of the issue.”

Qualifying for a HELOC to consolidate debt

To get a HELOC, you’ll need to have plenty of equity in your home (usually at least 10% to 20% left over after borrowing the HELOC). You will also need to meet certain credit score and financial requirements, which are set by the lender. According to credit bureau Experian, you can expect to need at least a 680 credit score to qualify, though several lenders will accept borrowers with a score as low as 620.

If you can’t meet these qualifications, there are other options for consolidating your debt. You could also use a home equity loan, which gives you a lump sum payment instead of a credit line, like a HELOC, or you could explore products like personal loans, which you may be able to access with a lower credit score. There’s also balance transfer credit cards. These typically have a low or 0% interest rate for a limited period of time, allowing you to potentially pay off your debts with no extra interest (as long as you repay it before that rate expires).

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