Debt Consolidation with a Home Equity Loan: Is it Right for You?
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Struggling with debt and trying to figure out how to tackle it? You’re not alone. The average American household owes nearly $100,000 in debt split between sources such as car loans, credit card debt, student loans or personal loans, which all carry different interest rates. One way to pay down that debt load is to consolidate it so you pay on one loan instead of several. If you own a home, you can do it using a home equity loan.
What Is Home Equity and How Do You Get It?
Home equity reflects the amount of your home that you own without debt. For instance, if your home is worth $500,000 and you owe $200,000 on your mortgage, then you have $300,000 of equity.
A home equity loan is a second mortgage secured against the equity in your home.
You can borrow up to 100% of your home’s value*. After the loan closes, you receive the money in a lump sum and immediately begin paying interest. This type of loan differs slightly from a home equity line of credit, where the money you borrow enters an account and you only pay interest on what you withdraw.
How Paying Off Debt with a Home Equity Loan Works
You can use your home equity loan lump sum to pay down other debts, consolidating the amount you owe under one lender with a single interest rate. The rate for a home equity loan is often lower than rates for other loans. For instance, our fixed home equity loan rate is as low as 5.99% APR**, whereas credit card interest rates are often double or triple that rate.
Here’s how using home equity to pay off debt could work. Say you take out a $50,000 HEL with a 5.99% rate. You can pay off your student loan of $25,000 with a 10.99% rate, your credit card bill of $5,000, and your car loan of $20,000 with a 6.9% rate—and lower your interest rate.
The Pros and Cons of Using a Home Equity Loan for Debt Consolidation
Benefits of this type of debt payoff include:
- Simplifying your debt payment with one payment per month
- Gaining a lower interest rate
- Paying off debt faster
Drawbacks of consolidating debt with a home equity loan include:
- Potential for higher debt load if you keep racking up credit card bills
- Securing a loan with an asset like your home always presents a risk
Who Is This a Good Idea For?
You need to own a home to use this debt payoff approach. You also must possess a significant stake in the house, like this couple who utilized their HEL, to qualify for a home equity loan. And you should be able to make on-time payments so you don’t rack up late fees and plunge further into debt.
Use our debt-to-income ratio calculator and debt consolidation calculator to determine if a home equity loan is right for you. Then, get started on your home equity loan application.
*100% financing is available on a primary residence and excludes rental properties. Sample terms: If you borrow $30,000 at 14.49% APR for a 20-year term, your estimated monthly payment may be $383.78. Other restrictions or conditions may apply. Rates are subject to change without notice. Consult your tax advisor for tax deduction information.
**APR = Annual Percentage Rate at 80% loan to value. Rates effective December 1, 2022. Minimum loan amount of $5,000.00 is required. $5,000.00 in new money is required when refinancing an existing Members 1st Home Equity Loan. Sample terms: If you borrow $30,000 at 5.99% APR for a 10-year term, your estimated monthly payment may be $332.98. If you borrow $30,000 at 6.74% APR for a 15-year term, your estimated monthly payment may be $265.31. Interest rates are based on creditworthiness and your home’s loan-to-value. Primary residence only. Property insurance is required. Pennsylvania and Maryland residences only. For non-members, you’ll be required to join Members 1st to meet eligibility requirements.
