It can be tempting for some homeowners to tap their equity to pay down large credit card bills — especially now, with credit card debt and home equity at a record high.
That's because home equity loans and home equity lines of credit (HELOCs) have lower interest rates than credit cards. But this method isn't foolproof: Most notably, you're trading an unsecured debt for a secured one that uses your home as collateral. If you fail to make payments on time, your lender could force you into foreclosure.
Below, we dive into the benefits and pitfalls of using your home to pay off high-interest debt.
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Should you use your home equity to pay off a credit card?
Pros and cons of using a home equity loan to pay off debt
- You'll receive a lower interest rate that's fixed.
- Monthly payments are usually smaller
- Your lender can foreclose if you fail to make payments
- The loan repayment period may be longer
- There is a greater risk of owing more on the home than it's worth
- You'll lose equity in your house
How does a home equity loan or a HELOC work?
If you own your home, you can take out a home equity loan or a HELOC and use the funds to pay off high-interest debt, like credit card bills or private student loans.
Home equity loans
A home equity loan gives you a lump-sum payment with a set period to repay it, usually between 10 and 30 years. Borrowers typically need at least 15% to 20% equity to qualify, a credit score of 680 and a debt-to-income ratio of 43% or less.
Rocket Mortgage lends homeowners up to 90% of their house's value, higher than most of the competition, while Third Federal has some of the lowest rates in the industry.
Rocket Mortgage Home Equity Loan
Annual Percentage Rate (APR)
Apply online for personalized rates
Loan minimum and maximum
Minimum: $45,000; Maximum: $500,000
Terms available
10, 20 years
Credit needed
680
Minimum equity required
10%
Third Federal Savings & Loan
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loan, jumbo loan, refinancing, HELOC
Terms
10 – 30 years
Credit needed
Unavailable
Minimum down payment
3%
Terms apply.
HELOCs
A HELOC is more like a credit card in that it's a revolving line of credit — but one that uses your house as collateral. Your lender sets the maximum initial withdrawal amount and the terms of the draw period, which is usually 10 years. During that time, you only have to make payments on the interest.
After that, you can't take out any more money and you'll have to start repaying both the principal and interest.
The requirements for a HELOC are similar to a home equity loan, though you can get approved with a credit score as low as 620.
Figure offers HELOCs with an entirely online approval process, from application to closing. If you prefer an in-person experience, Bank of America has nearly 6,000 branches nationwide.
Bank of America Home Mortgage Loans
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loans, FHA loans, VA loans, Affordable Loan Solution® mortgage, Doctor loans
Terms
Varies
Credit needed
Conventional loans typically require a 620 credit score
Minimum down payment
3% with Bank of America's Affordable Loan Solution® mortgage loan
Terms apply.
Offers first-time homebuyer assistance?
Yes — click here for details
Figure
Loan types
HELOC, DSCR, cash-out refinance, crypto-backed loan, small business loans
Minimum credit score
600
Maximum loan-to-value
85%
HELOC draw amount
$15,000 to $750,000
HELOC draw period
2 years or 5 years
Repayment period
10 years, 15 years, 20 years, 30 years
Availability
Figure HELOCs are available in all states but Hawaii.
Available APRs range from 6.75% to 14.35%, which includes the payment of a higher origination fee in exchange for a reduced interest rate, which is not available to all applicants or in all states. The lowest APRs are only available to the most qualified applicants, depending on credit profile and the state where the property is located, and those who also select ten year loan terms; APRs will be higher for other applicants and those who select longer loan terms. Your actual rate will depend on many factors such as your credit, combined loan-to-value ratio, loan term, occupancy status, and whether you are eligible for and choose to pay a higher origination fee in exchange for a lower rate. Rates change frequently so your exact APR will depend on the date you apply. APRs for home equity lines of credit do not include costs other than interest. You will be responsible for an origination fee of up to 4.99% of your initial draw, depending on the state in which your property is located and your credit profile. You may also be responsible for paying the costs of valuation if an AVM is not available for your property ($180), or an appraisal if your loan amount exceeds $400,000 ($500-$2,000, depending on property type, property value, and state), manual notarization if your county doesn't permit eNotary ($350), and recording fees ($0 - $315) and recording taxes, which vary by state and county ($0- $1,400 per one hundred thousand dollars borrowed). Property insurance is required as a condition of the loan and flood insurance may be required if your property is located in a flood zone.
Is a home equity loan or HELOC better for credit card debt?
If you're dealing with ongoing payments, say for a home renovation or college tuition, a HELOC is the right call. But a home equity loan makes more sense if you need a one-time cash infusion to tackle credit card bills. You get all the money at once and the rates are significantly lower: The average credit card interest rate in April was 23.75%, according to Lending Tree, compared to rates as low as 6.10% for home equity loans.
Should you use a home equity loan to pay off your credit card?
Leveraging your home to pay astronomical credit card bills might seem like a no-brainer. But card debt is unsecured: Creditors can tack on fees and higher interest rates, send your account to collections, tank your credit score and even seek legal action. But they can't repossess the vacations, dinners and groceries you charged on your card.
A home equity loan, though, is a secured debt that uses your property as collateral. If you fall behind on payments, your lender can take possession of your house. So, only use it to pay off credit cards if you are confident you can make payments in full for the life of the loan.
Additionally, home equity products typically have a minimum loan amount — which can range between $10,000 and $35,000 — plus lender fees and closing costs — which can range from 2% to 5% of the loan amount.
Therefore, using home equity makes more sense if you owe at least $25,000 in credit card debt.
There are other ways to chip away at high-interest debt. For example, a cash-out mortgage refinance enables you to take out a home loan that's larger than your current one and use the difference to pay off your bills. You're still using your home as collateral, but interest rates are generally lower.
You can also take out a debt consolidation loan: The interest rate is higher than a home equity loan but lower than a credit card, and you don't have to put your home at risk.
Home equity FAQs
Is it better to use a home equity loan or a HELOC to pay off credit card debt?
Usually, it's better to pay off credit card debt with a home equity loan because it is issued in one lump sum and the rate tends to be lower than a HELOC. You're still swapping an unsecured debt for one that uses your home as collateral, however, so think seriously about your ability to keep up with payments.
How long does it take to get approved for a home equity loan?
Home equity loans are usually funded within two to six weeks, from application submission to loan closing. The specific timeline can vary based on the lender, your financial situation, and how quickly you can schedule an appraisal.
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