Home Equity Line of Credit · Debt consolidation
Using a HELOC to Consolidate Debt
Moving credit card balances onto a line secured by your home can cut what you pay in interest sharply. It can also turn unsecured debt into debt your house backs. Here is the math, and the condition that decides which one happens.
Overview
The arithmetic is easy. The discipline is the hard part.
Credit cards are among the most expensive consumer debt there is, and a home equity line is among the cheapest, because your house secures it. Move a balance from one to the other and your monthly interest cost drops immediately. That part is simple arithmetic and it is real. The part people skip is what happens next. You have not eliminated the debt, you have moved it, and you have changed its character: an unsecured balance a card issuer can only sue over has become a lien on your home. Consolidation works when three things are true. The balances actually get paid off at closing rather than partially. The cards get closed or left alone afterward, because balances that creep back mean you now carry both. And you repay the line on a schedule at least as fast as you would have paid the cards, rather than stretching it out and paying less per month while paying more in total. If all three hold, this is one of the strongest uses of home equity. If the third one does not, you have lowered your payment and raised your lifetime cost.
Colorado · California · Georgia · Texas · NMLS 1352284 · HELOC overview · Run the numbers
Who it is for
Does consolidating make sense for you?
- You are carrying revolving balances at rates far above a home-secured line
- The balances are large enough that the interest difference is meaningful
- You can pay the line down on a defined schedule, not just minimums
- The spending that created the balances has already changed
- You have equity to spare after the payoff, not just barely enough
- Not a fit if you are using it to cover a monthly shortfall rather than a balance
Highlights
How to do it without hurting yourself
Pay them off, do not pay them down
A partial payoff leaves you servicing both. Draw enough to clear the balances completely at closing.
Match the payoff schedule
If the cards would have taken three years, pay the line down in three years. A lower payment stretched over ten can cost more in total.
Close or freeze the cards
Reloading the cards is the single most common way consolidation goes wrong. You end up with the line and the balances.
Understand what changed
Unsecured debt became debt secured by your home. That is the trade you are making for a lower rate, and it deserves a deliberate decision.
The short draw helps here
A 2 to 5 year draw period forces the timeline that makes consolidation work, instead of letting the balance ride for a decade.
Connect every account
Underwriting reads your deposits through Plaid. Linking all of your accounts gives an accurate read on the income supporting the new payment.
Questions
Debt consolidation questions
How much can I save by consolidating?
It depends entirely on the balances and the difference in rate, which is why the honest answer is a calculation rather than a number. Total your balances and current payments, then compare the interest cost against a home-secured line over the same payoff period. The HELOC calculator does the comparison, and the payment calculator shows the effect on your total housing cost.
Does consolidating hurt my credit score?
Usually it helps over time. Paying revolving balances to zero lowers your credit utilization, which is a large share of a score. The new account and the inquiry cause a small short-term dip. The real risk to your score is running the cards back up.
Is the interest tax deductible?
Only when the money is used to buy, build or substantially improve the home securing the loan. Interest on a line used to pay off credit cards is not deductible. That is federal law and it applies regardless of state. See HELOC vs. home equity loan for the detail, and ask a tax professional about your situation.
Should I use a HELOC or a fixed home equity loan?
If the payoff amount is known and fixed, a lump-sum home equity loan with a fixed rate and a firm payoff date is often the cleaner instrument. A line makes more sense when the amounts are staged or uncertain. I originate both, so the answer is not driven by what I have to sell.
Want to see the numbers on your balances?
Send me your balances and payments and I will show you the comparison honestly, including the cases where consolidating is not worth it.
Home equity lines of credit are offered through Citywide Home Mortgage, a Guaranteed Rate company. Credit limits, rates, fees, draw and repayment periods, property types and state availability depend on credit, combined loan-to-value, occupancy and program guidelines and are subject to change; full terms, rates and disclosures are provided in the application. This page is educational and is not an offer or commitment to lend, and is not financial, tax or legal advice. A home equity line of credit is secured by your home; failure to repay may result in loss of the property. All loans are subject to credit approval and property valuation. David Silva, NMLS 1352284 – Licensed in Colorado, California, Georgia and Texas – Equal Housing Lender.