Should You Use a Home Equity Loan To Pay Off Debt?

It’s risky, and there are better options

A man sitting on a sofa using a laptop on the coffee table as he sorts through a stack of bills and statements

JGI / Jamie Grill / Blend Images / Getty Images

There are a variety of ways to pay off or consolidate debt, but not all options are created equal. If you’re thinking about using a home equity loan to pay off debt, you’ll need to consider the risks, which include losing your home.

Key Takeaways

  • Although a home equity loan may be easier to qualify for than other kinds of credit, if you aren’t able to pay it off, you could lose your house.
  • Due to additional fees such as closing costs, you might not save as much as you think by consolidating your debt using a home equity loan.
  • There are other options if you want to consolidate or reduce your debt, like taking out a debt consolidation loan or working with a credit counselor.

Home Equity Loans

A home equity loan, sometimes called a second mortgage, allows a homeowner to use some or all of the equity in their home as collateral for a new loan.

Equity is the amount the home is currently worth, minus the money still owed on any existing mortgage. For example, if the current market value of your home is $400,000 and you still owe $250,000, the equity you have in your home is $150,000.

Home Equity Loan vs. Home Equity Line of Credit (HELOC)

A home equity loan is different from a home equity line of credit (HELOC). A home equity loan pays out a single lump sum upfront and typically has a fixed interest rate and equal monthly payments.

A HELOC usually has a variable interest rate, which causes payments to change over time. A HELOC also allows borrowers to draw from a line of credit as needed over time.


While home equity loans and HELOCs can be good ways to pay for home improvement projects that increase the value of your home, it’s not recommended to use either for paying off debt.

The main reason people use home equity loans for debt pay-off is because the collateral lowers the risk for lenders, which may make home equity loans easier to qualify for than unsecured loans. A home equity loan may also have a lower APR than an unsecured loan.

But there are strong reasons to avoid going this route if you can avoid it.

Downsides of Using a Home Equity Loan To Pay Off Debt

If you’re a homeowner with debt from a variety of sources—credit cards, student loans, and a car loan, for example—it may seem tempting to use a home equity loan to pay them all off, leaving you with a single payment instead. However, it’s a risky financial decision. Let’s look at a couple of major reasons it’s not recommended to take this route.

Secured vs. Unsecured Debt

First, it’s helpful to distinguish between secured and unsecured debt.

Secured debts such as car loans and home loans are protected by collateral. The collateral is the car or the home itself. So if you default on your car loan, for example, the lender can repossess the car, then sell it to cover the unpaid portion of the loan.

Unsecured debts such as credit card balances and student loans require no collateral to “secure” them. If they go unpaid, there’s no piece of property the lender can take from you and sell.

Risk of Foreclosure

The biggest problem with using a home equity loan to pay off debt is a substantial increase in the risk of a foreclosure on your home. When you consolidate unsecured debts using a home equity loan, you convert them into one debt secured by your home. Whereas previously, your home was vulnerable to foreclosure only if you couldn’t pay your mortgage; now it’s also at risk if you default on your home equity loan.

Lien Is Not Affected by Bankruptcy

While you may have no plans to file for bankruptcy, another downside of using a home equity loan to pay off debts is that a creditor can take your property if you default on a secured debt, even if your personal liability (your obligation to pay) is erased in a Chapter 7 bankruptcy.

In contrast, unsecured debt can be wiped out during the Chapter 7 process.


Depending on the terms of a particular home equity loan, the fees involved in obtaining and closing the loan could counteract your overall effort to reduce debt. Even if the interest rate on a home equity loan is lower than what you would have paid on your other debts, you’ll need to consider whether expenses such as appraisal fees and closing costs outweigh the potential savings.


Many home equity loans require a full appraisal to determine the home’s current market value. However, some lenders only require an automated valuation method or drive-by appraisal. These are less expensive and less time-consuming appraisal methods.

Better Options To Pay Off Debt

Let’s look at other routes to reducing debt that may be a better fit for you.


If you have any spare room in your budget, tightening your spending may be a viable alternative to using a home equity loan to pay off debt. This starts with making—or revising—a budget and sticking to it. Make sure you know exactly how much money comes in and goes out of your accounts each month. Take note of which expenses you can reduce, make a plan for cutting them, and do your best to stick to it.

Debt Consolidation Loan

Consolidating your debt means using one loan to pay off all other debts so that you only have one payment to make each month rather than multiple payments. It does not eliminate debt, although it can make managing debt simpler.

A debt consolidation loan is a personal loan specifically designed for debt consolidation. It may be harder to qualify for or carry a higher APR than a home equity loan. But if you’re able to get a consolidation loan with a lower interest rate than your other debts carry, you may be able to reduce your total monthly cost this way.

However, evaluate all your options to understand whether consolidation will help in the long run. Fees, higher or variable interest rates, and a longer term for the loan could end up costing you more.

Balance Transfer Credit Card

If most of your debt is on credit cards, you can transfer your balances to a balance transfer card with a 0% interest deal. These rates are promotional, so they don’t last forever. But some of the best balance transfer deals last more than a year-and-a-half.

As with a consolidation loan, balance transfer cards may be harder to get than home equity loans. And there are usually fees associated with transferring a balance, so calculate whether you’ll actually save money once you factor that in.

If you can’t pay off your debt within the promotional period, a balance transfer card may not be right for you. The post-promo APR could be worse than what you started off with.


Even if you reduce your payments with a consolidation loan or balance transfer card, be sure to stick to a budget to avoid incurring more debt.

 Debt Management Plan

You may want to work with a credit counselor who can help you come up with a personalized debt management plan (DMP). A credit counselor should be certified and trained in debt management, consumer credit, and budgeting. Most reputable credit counseling agencies are nonprofit organizations.

When choosing a credit counselor, check with the National Foundation for Credit Counseling or the Financial Counseling Association of America. Both associations require counselors to be accredited, and both have search tools to help you find an agency in your area. You may also be able to find credit counseling through a university, military base, credit union, or housing authority.

Your counselor should fully review your financial situation before the two of you determine whether a DMP is right for you.

Here’s how a DMP works:

  • Your counselor will work with you and your creditors to come up with a payment schedule, which may include reduced interest rates.
  • You’ll make one payment to the credit counseling organization each month, and it will pay your creditors from that.
  • It can take four years or more to complete your DMP.
  • You’ll have to make your payments regularly and on time for the plan to work.
  • You may not be able to apply for or use any additional credit while enrolled in a DMP.

Your counselor should also give you advice on budgeting, saving, and staying out of debt in the future.


Don’t confuse a debt management plan with a debt settlement program, also sometimes known as a debt relief program. Debt settlement programs wreck your credit by telling you to withhold all payments to creditors for years typically, in hopes of forcing them to forgive some of your debt. And there’s no guarantee it will work.

Frequently Asked Questions (FAQs)

If you use a home equity loan to pay off debt, how will the lender calculate your debt-to-income ratio?

Your debt-to-income ratio (DTI ratio) is calculated by adding up all your monthly debt payments, then dividing by your gross monthly income. How much you can borrow depends on your DTI ratio in combination with other factors. Although some lenders allow a DTI of 43% or more, a DTI of 36% or lower is recommended for homeowners.

How long does it take to get a home equity loan?

Approval time varies, depending on your lender. As with a primary mortgage, it takes time to complete an appraisal and underwrite your loan. In general, expect it to take 30 to 45 days after applying. Many home equity loans are subject to a three-day waiting period and cancellation rule. As the borrower, you can cancel within three business days of signing the final papers. Funds will not be released to you until after that period. But you may be able to waive the right to cancel in order to get the money sooner.

Was this page helpful?
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Alabama Consumer. “Is It Legal for My Second Mortgage To Foreclose on Me?

  2. Morgan & Morgan Attorneys at Law. “What Happens to My Secured Debt if I File Chapter 7 Bankruptcy?

  3. New York City Bar. “Types of Debt.”

  4. Discover. “Importance of the Appraisal Before You Apply for a Home Equity Loan.”

  5. Consumer Financial Protection Bureau. "Defining Debt Consolidation." Pages 2-3.

  6. Federal Trade Commission. “Choosing a Credit Counselor.”

  7. Federal Trade Commission. “Coping With Debt.”

  8. Consumer Financial Protection Bureau. "Debt-to-Income Calculator." Page 2.

  9. Mutual of Omaha Mortgage. "What Is a Home Equity Loan?"

  10. Federal Trade Commission. "Home Equity Loans and Home Equity Lines of Credit."

Related Articles