How to Use Home Equity to Pay Off Debt

Home Equity Loan: One Check That Clears Several Balances

The appeal is simple: one check, at closing, that can pay off several balances at once. A home equity loan is a specific amount borrowed against the home's equity and paid out as a lump sum. If the home already has a mortgage, the CFPB notes in its comparison of home equity loans and HELOCs, the new loan is a second mortgage, paid in addition to the first. It usually has a fixed interest rate, one that does not change, and is repaid in regular monthly installments over a set term.

The core trade is about what stands behind the debt. Credit cards, medical bills and personal loans are usually unsecured, meaning no property backs them. A home equity loan swaps those for one debt secured by the house. Because the house backs it, the interest rate is often lower than a credit card's. But a missed credit card payment brings late fees and collection calls; a missed home equity loan payment can lead to foreclosure, the legal process a lender uses to take and sell the home.

The CFPB also points out that these loans may have upfront fees and costs, so the monthly payment is not the only number that matters. For debt consolidation in particular, it suggests talking first with a nonprofit credit counselor about options that do not put the home at risk of a forced sale.

HELOC: A Line of Credit Tied to the Home

A HELOC works less like a loan and more like a credit card backed by the house. The CFPB describes it as an "open-end" line of credit that lets the homeowner borrow repeatedly against home equity, up to a limit, in its explanation of HELOCs. As payments are made, the available credit refills. The payment varies with the outstanding balance, so interest builds on what has been drawn, not on the whole limit.

A HELOC has two phases. During the draw period, the homeowner can borrow, and the FTC notes the payment may be interest only. When the draw period ends, the repayment period begins: no more borrowing, and the homeowner must repay the amount due, either all at once or through payments over time. Those payments can be noticeably larger than the draw-period payments.

HELOCs usually have adjustable, or variable, rates, so the monthly payment can change. The lender may also freeze or reduce the line, for example if the home's value drops significantly or the borrower's finances change.

The core risk matches the home equity loan. The home is collateral, and if the line is not repaid as agreed, the lender can foreclose. The CFPB offers a free booklet on how HELOCs work and how to shop around, available from the same comparison page linked above.

Cash-Out Refinance: One Larger Mortgage Replaces the Old One

A homeowner who still owes on a mortgage sometimes asks whether one bigger loan could replace everything. That is the idea behind a cash-out refinance. The homeowner takes out a new, larger mortgage. It pays off the old one, and the difference between the two amounts comes to the homeowner in cash, which can then go toward other debts.

Unlike a home equity loan or HELOC, this does not add a second loan. It replaces the first, so the homeowner ends up with one mortgage instead of two.

The trade is time and total cost. The new mortgage comes with a new interest rate and a new repayment term, which can be long. Even if the rate is lower than the old one, stretching the debt over many more years can mean paying more interest overall. It also resets the mortgage clock: a homeowner who was a few years from a paid-off house may now be decades away, possibly well into retirement.

Closing costs apply too, much as they did when the original mortgage was made. And the same central risk remains. The house is collateral for the larger loan, and falling behind can lead to foreclosure.

What Each Option Actually Trades Away

The hardest part of this decision is often not the paperwork but the honest look at what changes. All three borrowing tools turn unsecured debt into debt backed by the home. Before, the worst outcome of falling behind was damaged credit and collections. After, it can be losing the house. The FTC's home equity guidance states this directly: if the balance is not repaid, the lender can take the home.

There is also a habit risk. Paying off credit cards with home equity clears the balances, but it does nothing about how they built up. If the same spending continues, a homeowner can end up carrying both the home equity debt and new card balances.

A lower rate is not the whole story either. A loan at a lower rate, repaid over many more years, can cost more in total than a higher-rate debt paid off sooner. Comparing the full cost over the life of each loan, not only the monthly payment, shows the real picture.

Taxes are a separate question. Whether interest on a home equity loan or HELOC can be deducted depends on how the money is used and on the borrower's own situation. The Internal Revenue Service publishes guidance on home mortgage interest, and a tax professional can say how it applies.

Finally, a homeowner 62 or older has one more path, which works differently from the other three.

Reverse Mortgage: A Different Path for Homeowners 62 and Older

A reverse mortgage answers a different worry: the monthly payment itself. With a reverse mortgage, borrowers do not make monthly mortgage payments, and the title stays in the homeowner's name, as the CFPB explains in its overview of reverse mortgages. The most common type, the Home Equity Conversion Mortgage (HECM), is only for homeowners 62 and older. HUD's HECM program page explains that it is the only reverse mortgage insured by the federal government and is available only through a Federal Housing Administration (FHA)-approved lender.

It is still a loan, not income, a gift or a government benefit. Interest and fees are added to the balance each month, so the amount owed grows, and the FTC warns this can use up much, or even all, of the equity. The borrower must live in the home as a principal residence, meaning where they live the majority of the year, pay property taxes and homeowners insurance, and keep the house in good condition. A HECM must be paid off when the last surviving borrower or Eligible Non-Borrowing Spouse dies, sells, or no longer lives in the home as a principal residence, and it may come due sooner if taxes, insurance or repairs fall behind, according to the CFPB's explanation of repayment. The CFPB also warns that a borrower could face foreclosure by running out of money for those housing costs.

Any existing mortgage must be paid off at closing, possibly with the reverse mortgage's own funds. Federal debt, such as federal income taxes or federal student loans, must not be owed, though reverse mortgage money may pay it off, as the CFPB's eligibility page states. Before a HECM, the borrower must meet with an independent HUD-approved counselor, found through HUD's HECM Counselor Roster or by calling (800) 569-4287. Comparing a reverse mortgage and home equity loan side by side can help, as one option among several.

Other Options That Do Not Involve the House

Sometimes the most useful step is the one that does not involve the house at all. A family looking hard at the budget may find costs that can be trimmed, which can address the debt where it started before any new loan is added.

Nonprofit credit counseling is another path. The CFPB suggests talking with a qualified nonprofit credit counselor before using a home equity loan to consolidate debt. A counselor may help set up a repayment plan with creditors without putting the home at risk. The CFPB also suggests checking a counseling organization's complaint history with the local Better Business Bureau or state attorney general's office.

A benefits check can free up cash too. The CFPB notes that state and local programs can help with utilities, fuel and home repairs, and that many localities have property tax programs; the county or town tax office can say what exists. Information about these and other benefit programs, which can include help with Medicare costs, is available through benefitscheckup.org.

Selling or downsizing is a real option when the house is more than the household needs. The CFPB notes that moving to a more affordable home may lower overall expenses.

Help from family is the last path. A loan from an adult child, or shared costs, can take pressure off, though it raises its own questions about repayment and fairness among relatives. Families sorting this out together may find a look at how parents can use equity helpful, along with these ways seniors access home equity. Where the debt is tied to care costs, there is also guidance on paying for long-term care.