Using a HELOC for Debt Consolidation: Pros and Cons

Using a HELOC for debt consolidation: Pros and cons

American household debt has reached a staggering $15.84 trillion, creating financial pressure for millions of homeowners. If you're carrying credit card balances—now averaging $6,500 per person with interest rates climbing to 27.7%—you might be searching for a way to reduce these crushing interest costs. A Home Equity Line of Credit (HELOC) could offer the solution you need.

HELOCs stand out as a powerful loan for debt consolidation because of their significantly lower interest rates—typically around 8% compared to credit card rates exceeding 22% and personal loan rates averaging 12.17%. This rate gap explains why many homeowners tap their property's value to tackle high-interest debt.

Nearly 54 million adults have carried debt for a year or longer, juggling multiple high-interest payments that strain their monthly budgets. Converting these scattered obligations into a single HELOC payment can simplify your financial life while potentially saving thousands in interest charges. But is this strategy right for your situation?

This guide examines whether using a HELOC for debt consolidation makes sense for your financial goals. You'll discover the key benefits, understand the potential risks, and learn how to determine if this approach aligns with your long-term financial health.

To better understand how HELOCs work, check out our complete guide to home equity lines of credit.

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Pros of using HELOC for debt consolidation

Using your home's equity to tackle multiple debts offers several powerful advantages. A HELOC can be your financial solution when you're facing scattered high-interest obligations.

Lower interest rates: HELOCs typically carry rates between 7.5–8.5% APR, dramatically lower than credit card rates around 22%. This difference creates substantial savings over time. Since your home secures the HELOC, lenders offer these favorable rates compared to unsecured debt options like personal loans.

Simplified payment schedule: Instead of juggling multiple payment deadlines throughout the month—credit cards due on the 15th and 20th, a personal loan on the 27th—you'll have just one monthly payment to track. This streamlined approach helps you avoid missed payments that could damage your credit score.

Reduced monthly payments: Consolidating with a HELOC typically lowers your overall monthly payment amount. This financial breathing room comes from both the lower interest rate and the longer repayment timeline. For homeowners with tight budgets, this reduced payment obligation provides the flexibility needed to make real progress on eliminating debt.

Flexible access to funds: Unlike a home equity loan, which provides a single lump sum, HELOCs function more like credit cards, giving you:

• Access to funds as needed during the draw period (typically 5–10 years)
• Interest payments only on the amount you actually borrow
• Ability to reborrow funds after repayment during the draw period

Learn how HELOCs compare to home equity loans in this side-by-side comparison.

Credit score improvement: Consolidating multiple debts into a HELOC can boost your credit profile over time. By paying down high-interest debts and reducing your overall credit utilization ratio, you may see positive changes in your credit score. Lenders typically view home equity debt more favorably than maxed-out credit cards.

Potential tax advantages: Looking ahead, homeowners should note that starting after tax year 2025, IRS rules may allow HELOC interest to be tax-deductible even when used for personal expenses like paying off credit card debt.

These combined benefits make HELOCs an attractive option for debt consolidation—particularly for disciplined homeowners committed to addressing the underlying financial habits that led to debt in the first place.

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Cons of using HELOC for debt consolidation

While HELOCs offer attractive benefits for debt consolidation, they come with significant risks that you need to understand before proceeding.

Your home must have sufficient equity

Before considering a HELOC, you'll need substantial equity in your property. Most lenders require homeowners to maintain at least 15–20% equity after taking out the line of credit. If you're a newer homeowner or haven't paid down much of your mortgage, you might not qualify.

You can learn more about these requirements in our guide on key HELOC qualifications.

Using too much available equity puts you in a vulnerable position if property values decline. This could leave you "underwater" on your mortgage—owing more than your home is worth. This scenario limits your financial flexibility and makes selling your home difficult without bringing cash to closing.

You'll face closing costs

Opening a HELOC isn't free. These loans typically include closing costs ranging from 2% to 5% of your total credit limit. These expenses add up quickly:

— Application and origination fees
— Home appraisal costs to verify your property's value
— Title search fees
— Credit report charges
— Document preparation fees
— Recording fees with local authorities

While HELOC closing costs are usually lower than those for primary mortgages, they can still add hundreds or thousands of dollars to your debt consolidation efforts. For a breakdown of costs, visit our guide to what is included in closing costs and how to read your Closing Disclosure.

Your home is at risk of foreclosure

The most serious drawback is putting your home on the line. Since a HELOC uses your property as collateral, failing to make payments could result in foreclosure. Your primary mortgage takes priority in foreclosure proceedings, but if there's sufficient equity, the HELOC lender will likely pursue foreclosure to recover their funds.

Even without initiating foreclosure, HELOC lenders can pursue deficiency judgments if your state law permits. This allows them to seize bank accounts, garnish wages, or place liens on other properties. For homeowners already struggling with debt, the possibility of losing their home makes HELOCs a high-stakes option requiring careful consideration.

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When to use a HELOC for debt consolidation

HELOCs for debt consolidation require a clear understanding of your financial situation. Your timing and personal circumstances determine whether this approach will improve or potentially harm your financial health.

When a HELOC makes sense for debt consolidation

A HELOC works best when tackling high-interest debts like credit cards, which typically carry rates above 20%. With average HELOC rates around 8.04%, this difference translates into substantial savings. For example, consolidating $10,000 of credit card debt could save you approximately $4,671 in interest annually.

This strategy succeeds when you've already addressed the root causes of your debt. Consolidation only works if you've changed the financial habits that led to accumulating debt in the first place. Without this foundation, you risk creating an endless debt cycle that now puts your home at risk.

HELOCs prove particularly valuable for homeowners with:

— Stable or increasing income
— Confidence in making consistent payments over time
— Discipline to use the draw period wisely

The 5–10 year draw period offers flexibility to access money as needed while paying interest only on borrowed amounts, giving you control over your consolidation strategy.

When to avoid using a HELOC for debt consolidation

Avoid HELOC consolidation if you haven't fixed problematic spending patterns. It's a major red flag if you're consolidating debt into a HELOC without addressing the root problem that caused the initial build-up in debt. This creates risk of losing your home while potentially enabling more debt accumulation.

This approach isn't suitable for consolidating certain types of debt:

— Student loans that offer forgiveness plans or income-based repayment options
— Auto loans, which are secured by vehicles and present a lesser risk than putting your home on the line
— 0% interest credit card debt, which would actually increase your costs rather than save money

You should also avoid HELOCs if you lack sufficient home equity (ideally 20–50% ownership) or face a potential home value decline, which could put you "underwater" on your mortgage. Combined with unstable income or anticipated financial changes, the variable interest rates of most HELOCs could create payment challenges if rates increase.

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HELOC vs. Home Equity Loan: What’s the Difference?

Both a home equity loan and a home equity line (HELOC) allow you to borrow against your home’s value, but they function differently. A home equity loan gives you a one-time lump sum with a fixed interest rate and set repayment schedule—making it a good option if you know exactly how much you need to borrow. In contrast, a home equity line of credit (HELOC) is a revolving credit line that lets you draw funds as needed, often with a variable interest rate. If you're consolidating multiple debts over time, a HELOC may offer more flexibility, while a home equity loan might be better suited for paying off a single large expense all at once.

See our guide comparing home equity loans and HELOCs.

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Applying for a HELOC

If you're ready to use a HELOC to pay off debt, you'll find the application process similar to your initial mortgage, with a few key differences.

Before starting your application, verify you meet these basic eligibility requirements:

— Credit score above 640 (though scores above 700 will qualify you for better rates)
— Low debt-to-income ratio, typically no more than 43% of your monthly income going toward debt payments
— Sufficient equity in your home—usually 15–20% remaining after accounting for the HELOC

The typical HELOC application follows these steps:

1. Research and select a lender – Compare interest rates, terms, and fees from multiple financial institutions.
2. Gather documentation – Collect income verification (W-2s, pay stubs, tax returns), proof of homeownership, and information about your current mortgage.
3. Complete the application – Submit your formal loan request, which includes a hard credit pull.
4. Property appraisal – The lender will assess your home’s current value to determine how much equity you can access.
5. Review and sign documents – After approval, you’ll receive details about your credit limit and rate before signing the final paperwork.

With Better, the process is even easier! You can get pre-approved by just answering a few simple questions in as little as 3 minutes—with no impact to your credit. You'll get a custom offer and, if you lock a rate and complete your application, you could get your cash in as little as 7 days!

Once approved, your HELOC begins its draw period—typically 5–10 years—during which you can access funds as needed to pay off debt. You’ll only pay interest on the amount you actually borrow.

When the draw period ends, the repayment period begins, usually lasting about 20 years. During this time, you’ll make regular payments covering both principal and interest until the balance is paid off.

The full approval and funding process can take anywhere from five business days to eight weeks, depending on your lender. With Better's One Day HELOC, you can get a decision in 24 hours, and cash in 7 days!

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Take control of your debt with a HELOC

HELOCs offer a powerful loan for debt consolidation, but success depends on your financial discipline and personal circumstances. The appeal of 8% interest rates compared to 27.7% credit card rates is undeniable, but you must carefully weigh the risk of using your home as collateral.

Before pursuing this option, make sure you have:

— Financial stability with reliable income
— Reformed spending habits that address the root causes of debt
— Sufficient home equity (typically 15–20% remaining after the HELOC)
— A solid credit score to qualify for the best rates

Homeowners who meet these criteria can benefit significantly from simplified payments, lower monthly obligations, and potential tax advantages starting in 2025.

The right HELOC can transform scattered high-interest debts into a manageable strategy for financial recovery.

Ready to explore whether a HELOC fits your debt consolidation needs?
Start your application today to understand your potential savings and borrowing power. Better's streamlined process lets you check your eligibility quickly and access funds faster than traditional lenders.