Debt Consolidation: Take Control of Your Debt With A Home Equity Loan, HELOC or Cash-Out Refinance

A woman is counting US dollar bills in an effort to consolidate her debt.

Learn How You Can Unlock Your Home’s Equity To Get The Cash You Need To Pay Off High-Interest Debt

Juggling multiple debts with high interest rates can feel overwhelming. If you’re struggling to stay on top of different debt payments and staying afloat, there are options. Debt consolidation can be a powerful tool to regain control over your financial situation. As a homeowner, you get the added advantage of tapping into your home’s equity to consolidate your debt. You can secure a lower interest rate and simplify your payments by strategically using your home equity. 

In this article, we’ll be covering what you need to know about three ways you can leverage your home equity to take control of your debt – home equity loans, HELOCs, and cash-out refinances. 

What is Debt Consolidation?

Debt consolidation refers to a financial strategy that streamlines multiple debts into a single, more manageable debt payment. Rather than dealing with multiple creditors, interest rates, and due dates, consolidating your debt involves taking out a new loan or line of credit to pay off existing debts. This new loan or line of credit simplified the repayment process by allowing you to make just one monthly debt payment, often at a lower interest rate. Having only one payment to track every month makes it easier to manage your overall finances and can help you achieve your financial goals faster. In the case of this article, we are focusing on debt consolidation for homeowners using home loan lending options. 

Who Should Get a Home Equity Loan, HELOC, or Cash-out Refinance to Consolidate Debt?

A homeowner’s equity in their home can be a tremendous source of wealth. By unlocking your current home equity you can consolidate your debt while retaining full ownership of your property. A large proportion of homeowners still carry sizable credit card debt that carry an average of 27.9% interest rates at the time of this writing – this is compared to the average rates for tax-deductible home equity loans today, which currently linger around 8.5%. Over the course of several months or even years, this significant difference in interest rates can add up rather quickly. 

The best candidates for getting a home equity loan, HELOC, or cash-out refinance for debt consolidation are homeowners that have a minimum of 15% equity in their home and have multiple high-interest debts. These debts could include:

  • Credit card debt
  • Personal loans
  • Student loans
  • Medical expenses or debt
  • Car loans
  • Hard money loans
  • Cash advance loans
  • Title loans

If you’re a homeowner who has debt levels that are unsustainable and feel difficult to manage, know that you have options. Depending on your situation, your monthly mortgage rate could be much more affordable. By refinancing or tapping into your home equity to consolidate your debt, you could save hundreds, or even thousands, over the life of the loan, freeing up cash to put towards other financial goals. 

A woman is at her desk with her laptop, US dollar bills, and calculator consolidating her debt.

Why is Debt Consolidation Necessary?

While debt consolidation isn’t necessarily mandatory, it is a necessary tool to take control of your debt and achieve other financial goals when you’re overburdened with multiple high-interest debts. Keeping track of numerous bills, each with varying due dates and interest rates, can feel like absolute chaos. Here are some reasons why debt consolidation can simplify your journey to becoming debt-free:

  1. Simplified Repayment: Rather than having to stay on top of multiple debt payments, consolidating all of your debt into one loan allows you to make just one single payment every month. This makes it easier to stay organized and avoid any missed payments or late fees. 
  2. Predictable Monthly Payment Plan: With a fixed-rate home loan, you can enjoy the peace of mind that comes with predictable monthly payments. Knowing how much is going toward your debt every month makes it easier to plan and budget for the future. 
  3. Lower Interest Rates: Using a home loan to consolidate your debt usually offers lower interest rates in comparison to credit cards and other debt. Combining all of your higher-interest debt into one lower-interest loan can save you a significant amount of money on interest over the life of the loan. 
  4. Improved Credit Score: Making consistent, on-time payments on your consolidated loan, you can slowly work toward improving your credit score. Having a higher credit score can help you secure better credit opportunities and interest rates. 

What Are My Home Loan Debt Consolidation Options as a Homeowner?

What some homeowners may not know is that debt consolidation can come in different forms. If you’re just starting out on your journey to tackle your debt, it could get confusing to understand all of your options and the differences between them. When it comes to leveraging your home equity to consolidate your debt, you can choose an option that’s best for you based on your unique circumstances. Below, we’ve outlined the main features of each option that’s available for homeowners:

1. Home Equity Loan

A home equity loan is considered to be a second mortgage that’s separate from your first mortgage on your home. The equity that’s been built in your home is used as collateral for a separate loan with different terms. This loan is not a revolving line of credit, meaning that the funds will be given to you in a lump sum and the payments are fixed installments. 

Interest Rate: Interest rates are typically fixed, which makes monthly payments predictable. 

Flexibility: With a home equity loan, there’s no option to repay the amount and borrow it again as you please since the payments are fixed installments. However, this can be a great option for homeowners with one-time expenses, such as consolidating outstanding debt or home renovations. 

How Home Equity Loans Consolidate Your Debt: With the lump sum payment you receive from a home equity loan, you can pay off all of your outstanding debt. Once all of your outstanding debt has been paid off, you’ll only need to make one monthly payment towards the home equity loan. 

Who Should Use a Home Equity Loan: Homeowners who fit the criteria below should consider using a home equity loan to consolidate their debt:

  • A high-interest debt burden
  • Need a one-time lump sum to pay off debt or other expenses
  • Strong home equity
  • Stable income and credit history
  • Committed to debt repayment

2. HELOC (Home Equity Line of Credit)

A HELOC is a revolving line of credit that has a maximum amount based on your home’s equity. It has a set draw period (typically 10 years) and during this time, you can access funds from the HELOC as needed, repay, and borrow again up to your credit limit. A benefit to only taking what you need is that the interest is only charged on the money that’s been withdrawn from a HELOC rather than the entire credit line. After the draw period is up, there’s a repayment period (typically 20 years) where you’ll be required to pay back both principal and interest payments on the outstanding balance. 

Interest Rate: Interest rates for HELOCs typically fluctuate and are linked to a benchmark rate, such as the prime rate. 

Flexibility: HELOCs are the most flexible out of the three loan types mentioned in this section. Similar to a credit card, you can access funds as needed from a HELOC up to a certain limit. Having the option to repay the amount you borrowed to borrow it again shows just how flexible it is. 

How HELOCs Consolidate Your Debt: To consolidate your debt with a HELOC, you can draw money from it to pay off each of your debts, using a check, debit card, or transfers. During the draw period, you can pay it off on your own schedule since there’s no set monthly payment. Keep in mind that a minimum payment is required each month, but it’s usually a relatively small amount. If there’s still an outstanding balance after the draw period is over, you’ll have to repay it during the repayment period. 

Who Should Use a HELOC: Homeowners who fit the criteria below should consider using a home equity loan to consolidate their debt:

  • A high-interest debt burden
  • Strong home equity
  • Need ongoing access to funds for other emergencies or unexpected expenses alongside debt consolidation
  • Have the discipline to manage a revolving line of credit responsibly

3. Cash-Out Refinance

A cash-out refinance replaces your existing mortgage with a new, larger loan. With this larger loan, the difference between what you owed on the old mortgage vs. the current value of your home is paid out to you in cash. This cash can then be used to pay off your other outstanding debt. A cash-out refinance can simplify your debt repayment plan even further by combining your debt payments with your mortgage. Having one payment to combine your existing debt along with your mortgage streamlines your finances even more. For more information on refinancing, check out our refinance page.

Interest Rate: Interest rates depend on the terms of the new mortgage – they can either be fixed or variable. 

Flexibility: Similar to a home equity loan, a cash-out refinance isn’t as flexible since the funds are distributed as a lump sum and set monthly payments are required. However, a cash-out refinance can be a great way to secure a lower interest rate on your mortgage while consolidating your debt.  

How Cash-Out Refinances Consolidate Your Debt: You can unlock the equity you’ve built in your home by getting the difference between the current value of your home and the amount owing on your previous mortgage. For example, if you owe $200,000 on your current mortgage and your home is currently worth $300,000, you could refinance for a new $250,000 and use the difference of $50,000 for consolidating your debt. Going forward, you’d only have one monthly payment to pay off both the mortgage and your remaining debt. 

Who Should Use a Cash-Out Refinance: Homeowners who fit the criteria below should consider using a home equity loan to consolidate their debt:

  • A high-interest debt burden
  • Need a one-time lump sum to pay off debt or other expenses
  • Strong home equity
  • Stable income and credit history
  • Committed to debt repayment

A couple is holding a key to their new home.

When Should You Consolidate Your Debt?

If you’re facing multiple-high interest debts, you should consider consolidating it as soon as possible. Revamping your finances using debt consolidation via a home loan is an opportunity to free up extra money that’s currently being wasted on interest payments. Considering that interest on high-interest debt tends to accrue daily, consolidating your debt can help you save money immediately. That extra money can be going towards your other financial goals like savings or investments. 

As a homeowner, you have a unique opportunity to take advantage while interest rates are low and/or while property values are high. Securing a loan using your home equity can help you get a leg up and avoid:

  • Continued financial strain
  • Missing out on potential savings
  • Limited cash flow flexibility
  • A negative impact on your credit score

Reasons Why Homeowners Tap Into Their Home Equity (Aside From To Consolidate Debt)

Aside from debt consolidation, homeowners often tap into their home equity for a variety of reasons. 

  • Access to Cash: Tapping into your home equity allows you to have access to extra cash. This cash can be used for anything you might need – from necessary expenses to just having a financial safety net during a time when money is tight. 
  • Home Improvement: Many homeowners tap into their home equity to improve their home with renovations. As a homeowner, sometimes it feels like there’s always something that needs to be fixed or updated. Whether it’s a new roof or a complete kitchen remodel, use the home equity that you’ve built to help finance the cost of it. 
  • Large Expenses: Big expenses sometimes come to us unexpectedly, like medical bills or a necessary car repair. Tapping into home equity helps you cover these expenses with ease. 

Leveraging your home’s equity offers flexibility and access to capital, which allows homeowners to meet their financial needs beyond just debt consolidation. 

The Rise Of Homeowners Leveraging Their Home Equity To Consolidate Debts

In recent years, there’s been an upwards trend of homeowners leveraging their home equity to consolidate their debts. Some notable trends include:

  • Increase in Home Equity: Since the pandemic, we’ve seen a strong housing market that has led to significant increases in homeowners’ home equity. This means they have more equity available to tap into for debt consolidation. 
  • Rising Popularity of Cash-Out Refinances: These loans provide a lump sum of cash based on their home’s equity and have become a very popular debt consolidation option. Lenders reported a surge in cash-out refinance applications in 2023 and early 2024. 
  • Rising Demand in Home Equity Loans: These loans are separate loans secured by home equity and have been in high demand from borrowers who are looking to consolidate their debt. 
  • Other Motivating Factors: High interest rates on unsecured debt, such as credit cards, along with the ease of one, single monthly payment have motivated homeowners wanting to consolidate their debt. 
  • Financial Literacy: The easy access to personal finance advice all over the internet has educated many homeowners on the benefits of using home equity for debt consolidation. 

Comparing Debt Management Options

Consolidating Debt By Unlocking Your Home Equity vs. Credit Cards

Using your home equity to consolidate your debt can help you secure a much lower interest rate than credit cards. With credit cards, you can expect interest rates of 20-30%, whereas home equity loans, HELOCs, and cash-out refinances range between 8-12%. Transferring over your credit card debt to a loan that’s secured by your home equity can help you save about half of what you’d pay in interest payments over the life of the loan. 

A woman is sitting at her kitchen table with her laptop and credit card, thinking of whether to use it for debt consolidation.

Consolidating Debt By Unlocking Your Home Equity vs. Debt Consolidation Loans

The main difference here is that using your home equity to consolidate your debt can help you get a lower interest rate since it’s a secured loan, rather than unsecured. Typical debt consolidation loans are unsecured or may require other collateral. Most homeowners have experienced an increase in their home value since the pandemic, so the home equity that’s been built is an easy and simple way to secure a lower-interest loan. 

Pros and Cons of Using Home Equity to Consolidate Debt

Pros:

  • Lower interest rate compared to unsecured debt
  • Simpler payments
  • Potential tax benefits
  • Improved credit score in the long run 
  • Use home equity to secure a loan without any additional collateral or high credit scores

Cons:

  • Risk of foreclosure (rare but can happen)
  • Potential temptation to re-borrow on old lines of credit after they’ve been paid off 

FAQs:

  1. What is debt consolidation?

Debt consolidation is a financial strategy that involves combining multiple debts into one new loan, typically with a lower interest rate. This simplifies payments and can help the borrower save money on interest over the life of the loan.  

  1. Who should consider using home equity to consolidate their debt?

Homeowners with a minimum of 15% equity in their home and a credit score of at least 620 should consider using home equity to consolidate their debt. 

  1. Why should I consolidate my debt?

Consolidating your debt offers many benefits such as lower interest rates, one monthly payment, and getting on track to become debt-free faster. 

  1. What are the debt consolidation options I have as a homeowner?

As a homeowner, you can consider using a home equity loan, HELOC, or cash-out refinance to consolidate your debt. 

  1. What are the benefits of using a home equity loan, HELOC, or cash-out refinance to consolidate my debt?

The benefits of using these loan options include:

  • Leveraging your home’s equity 
  • Potentially securing a lower interest rate
  • Simplifying monthly payments
  • Flexibility with your repayment schedule
  1. When should I consolidate my debt?

If you have multiple high-interest debts, you should consider consolidating your debt as soon as possible. The opportunity cost of waiting it out is the extra money you’ll be paying toward interest at higher rates. Consolidating your debt and taking advantage of lower interest rates can save you money immediately and help you get debt-free even faster. 

  1. What’s the difference between debt consolidation loans and debt consolidation programs?

Debt consolidation loans are new loans you could take out to pay off existing debts and simplify your debt repayment plan. Debt consolidation programs involve working with a credit counseling agency to negotiate lower interest rates and payment plans with your creditors. 

  1. What credit score do I need to qualify for a debt consolidation home equity loan, HELOC, or cash-out refinance?

Credit score requirements vary between lenders. At Defy Mortage, we require a minimum FICO score of 620+ for any of those loan options. 

  1. Can a cash-out refinance help consolidate debt?

Yes, a cash-out refinance can help you consolidate your debt by replacing your existing mortgage with a larger one and using the difference to pay off your other debts. 

  1. Where can I get a home equity loan as a homeowner to consolidate my debt?

You can get a home equity loan from various financial institutions, such as banks, credit unions, and private lenders. We offer home equity loans, HELOCs, and cash-out refinances at Defy with flexible terms for underserved borrowers. 

  1. How will a home equity loan or HELOC affect my credit score?

While applying for a new home equity loan or HELOC might cause a temporary dip in your credit score, using it wisely and managing your debt responsibly can improve your credit score in the long-run. 

  1. What are the interest rates for home equity loans?

Interest rates for home equity loans may vary depending on your credit score and the current market. However, they tend to move in tandem with standard mortgage rates with slight variations.

  1. What’s the maximum LTV for a home equity loan? 

The maximum LTV for a home equity loan may vary by lender, but at Defy, we offer a maximum LTV of 85%. 

  1. What’s the maximum LTV for a HELOC? 

The maximum LTV for a HELOC may vary by lender, but at Defy, we offer a maximum LTV of 85%. 

  1. What’s the maximum LTV for a cash-out refinance? 

The maximum LTV for a cash-out refinance may vary by lender.

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