Using your home equity for a debt consolidation loan

Couple in their living room reviewing home equity loan options that can help them pay off their debt

Picture this: You have monthly payments on your credit card debt, student loans, and car loan. Each one is demanding a slice of your hard-earned money, and it feels like you’re playing a never-ending game of whack-a-mole just to not see your checking account balance go negative every month.

If you’re a homeowner, you might also have a mortgage payment to add to that list – possibly one that’s more than all the others combined! But you might also be sitting on a hidden treasure chest that can help you tackle your debts head-on. By using a home equity loan, you may be able to borrow against the equity in your home and receive a lump sum of funds into your bank account that you can use to consolidate your debts, pay for any home improvements, or put towards any other large expenses.

What is a home equity loan?

A home equity loan is a type of consumer debt that allows homeowners to tap into the equity they have built up in their homes. It is based on the difference between the current market value of the home and the balance due on an existing mortgage.

This type of loan is typically set up with a fixed rate — meaning the interest rate remains the same throughout the term of the loan. Borrowers make regular monthly payments, usually amortized over a period of up to 30 years.

Understand how using home equity for a debt consolidation loan works

First, you should understand exactly how debt consolidation merges your financial obligations. A debt consolidation loan may be used to pay down your credit cards, auto loans, and miscellaneous debt you want consolidated into one monthly payment at a low, fixed interest rate.

However, consider the fact that although your monthly payments may be lower, you may end up paying more in interest over the life of the loan if the term winds up being longer than your existing loans. You can make more than the minimum monthly payment on your home equity loan to try and avoid this, just check to make sure your lender doesn’t charge any prepayment penalties.

Gather documents to apply for a loan

To qualify for a home equity loan, you must first have enough equity since you'll be borrowing against the value of your home.

Before you begin to contact creditors, collect all the latest statements for the bills and loans you want to consolidate. You will want to know how much you owe, the annual percentage rate (APR) you're currently paying, and whether you pay more than the minimum amount each month. Here are some statements and bills to consider including:

Auto loans
Credit cards
Personal loans
Other equity loans

DIG DEEPER: How to qualify for a home equity loan

Calculate the costs

After you're finished compiling all the information and statements, use a free online tool like a debt consolidation calculator to help figure out your total debt, how long it will take to pay it off, and your potential savings with debt consolidation. Keep in mind that these calculators may be helpful, but they won’t take the place of a financial planner. If you find that your financial situation feels complex, consider seeking out a professional for advice on what your options may be.

Research your options

Home equity loans for debt consolidation are considered secured loans because they are tied to an asset – your home. This means that if you can’t pay it back, you run the risk of losing your home to foreclosure. Spend time comparing lenders and doing your own research to figure out if a secured home equity loan is the right kind of debt consolidation loan for your personal situation.

Discover Home Loans offers low fixed rates on home equity loans with terms of 10, 15, 20, or 30 years and $0 application fees, $0 origination fees, $0 appraisal fees, and $0 costs due at closing.

Consider the implications of using a home equity loan

Arm yourself with the knowledge to decide if debt consolidation can improve your financial situation. Then consider your options for the type of debt consolidation you would need. If you have enough equity in your home and are looking for a lower-interest loan, a home equity loan for debt consolidation could be the right choice for you.