Using your home equity for a debt consolidation loan

Picture this: You’re making monthly payments toward a credit card, student loan, and car loan. Each one demands a slice of your hard-earned money, and you’re trying to keep your checking account balance from going negative every month.

If you’re a homeowner, you may also have a mortgage payment – possibly one that’s more than all your other debts combined! However, you may also be sitting on home equity that can help you tackle your debts head-on. 

A home equity loan, which could function as a debt consolidation loan, lets you borrow against the equity in your home and receive a lump sum of cash to pay off debts.

This type of loan typically has a fixed interest rate — meaning the interest rate remains the same throughout the loan term. You'll typically make regular monthly payments over a set time frame, which may range from five to 30 years.

You can use a home equity loan for whatever you like, including debt consolidation, home improvements, and unexpected expenses. 

Understand how using home equity for a debt consolidation loan works

A debt consolidation loan may allow you to pay down your credit cards, auto loans, and other debts. It combines their balances into a new loan, resulting in a single monthly payment and a potentially lower interest rate. 

Although monthly interest payments may be lower on the new loan, you may end up paying more in interest if the term is longer than your existing debts.

Paying more than the minimum amount due each month may mean you pay less interest over time on the loan. However, your lender may charge you a prepayment penalty if you pay off your loan balance early.

What to consider before applying for a debt consolidation loan 

If you're interested in a debt consolidation loan, here are some things to consider before applying:

Gather documents 

Collect all the latest statements for the debts you want to consolidate. You will want to know how much you owe, the annual percentage rate (APR) you're currently paying.

DIG DEEPER: How to qualify for a home equity loan

See how much you may save

Use a free online tool to see if debt consolidation is right for you. For example, this debt consolidation calculator tells you how much you may save by consolidating debts with a fixed-rate home equity loan from Discover® Home Loans.  

Online tools like this may be helpful, but they won’t take the place of a financial planner. If your financial situation is complex, consider seeking out a professional for advice. 

Research your options

Various loan types can be used to consolidate debt, including home equity loans and personal loans. Home equity loans are secured loans because they are tied to an asset — your home. If you can't repay your loan, you may lose your home to foreclosure. Personal loans may be secured or unsecured. 

Spend time researching loan options for debt consolidation and comparing lenders.