How to Use Home Equity to Pay Off Credit Card Debt

Credit card debt continues to be a major hurdle for Americans. More than 40% of all U.S. adults say they can’t pay off their credit bills each month — and those unpaid balances rack up interest fast. But there could be a solution for homeowners: using home equity to pay off credit card debt.

Below, we’ll walk through some of the benefits of using a home equity loan to pay off credit card debt, how to get a home equity loan to consolidate debt, and the costs and risks involved.

How Using Home Equity to Pay Off Credit Card Debt Works

If you’re a homeowner wondering, “Can I use home equity to pay off credit card debt?” the answer is likely yes — assuming you meet a lender’s requirements. In fact, debt consolidation is one of the most common reasons people borrow against home equity according to a recent SoFi survey of home equity borrowing attitudes. The most straightforward way to do this is with a home equity loan.

Home Equity Loans, Explained

A home equity loan is an installment loan that lets you borrow against the equity you’ve already built in your house through your down payment and monthly mortgage payments. Your home serves as collateral on the loan, so technically a home equity loan is also a second mortgage.

With a home equity loan, you receive a lump sum of money (the principal, or what you borrowed) upfront, and then you’ll pay back what you borrowed in monthly installments, typically over 5 to 30 years, though terms may vary by lender. A home equity loan’s annual percentage rate (APR) includes the interest rate — typically fixed — and any fees. Home equity loans carry closing costs, much like a mortgage.

Unlike a personal loan for debt consolidation, a home equity loan uses your home as collateral. This is why when you compare a home equity loan vs. personal loan, you’ll see that home equity loans have much lower interest rates. But using your home as collateral also means you could lose your house to foreclosure if you don’t make your payments.

How Home Equity Is Determined

Your home equity is the difference between your home’s current market value and how much you still owe on your mortgage. For instance, if your home is worth $400,000 but you still owe $250,000 on your mortgage, you have $150,000 in home equity.

That doesn’t mean a lender will let you borrow $150,000, though. Lenders typically limit how much you can borrow based on your combined loan-to-value (CLTV) ratio. This measures all outstanding loans secured by your home (e.g., your mortgage) against its current market value. The maximum CLTV a lender allows vary, but many set a limit of 85%, though some may offer more wiggle room. Your credit score and income may affect how much you can borrow.

In our example, if a lender allows a maximum CLTV of 85%, the total amount owed against a $400,000 home can’t exceed $340,000 (85% x $400,000). If you still owe $250,000 on your mortgage, you could potentially borrow up to $90,000 through a home equity loan ($340,000 – $250,000).

Recommended: How to Leverage Home Equity to Pay Off Student Debt

Ways to Use Home Equity to Pay Off Credit Cards

There are two core ways to use home equity to pay off credit cards: a lump-sum home equity loan or a revolving home equity line of credit (HELOC).

Using a Home Equity Loan to Pay Off Credit Cards

A home equity loan, or HELOAN, is a traditional installment loan that lets you borrow against the equity you’ve built in your home. These lump-sum loans usually have fixed interest rates.

You’ll receive all the money you’re borrowing upfront, which you can then use to pay off your various credit cards. You’ll also immediately begin repaying what you borrowed, plus interest, in monthly installments over a set number of years.

For many, this is the easier path to using home equity to pay off your credit card debts. You can wipe out your credit card debt all at once and then simply make one manageable monthly payment until you’re debt-free.

How a HELOC Can Pay Off Credit Card Debt

Some people may prefer to use a home equity line of credit to pay off credit card debt. HELOCs are typically variable rate and allow you to withdraw funds as needed (up to your limit) during a draw period, which may last three, five or even 10 years. During this time, you may make interest-only payments on what you borrowed. You’ll begin principal and interest payments when the draw period ends.

Because the HELOC rate is usually variable and payments can be more complicated, a lump-sum home equity loan may make more sense for paying off credit card debt. But if you need help with expenses beyond paying off credit cards, such as ongoing home renovations, a HELOC could be the right move. In a recent SoFi HELOC vs. HELOAN survey, more homeowners chose a HELOC than a home equity loan after researching their options, though not all of these owners were consolidating debt.

Understanding Credit Card Debt vs Home Equity Debt

Credit card debt is notoriously difficult to get out of because of the high interest rates. For many, paying off that debt with a home equity loan makes sense — but it also involves taking on a different kind of debt.

So what are the differences between credit card debt and home equity debt? The table below breaks it down:

	Credit Card Debt	Home Equity Debt
Interest Rates	Typically higher	Typically lower
Interest Rate Type	Variable	Fixed for home equity loan; variable for HELOC
Repayment	Monthly payments on ongoing basis	Set repayment term
Collateral	No collateral	House
Risk of missed payments	Late fees, collections, and lawsuits	Foreclosure on your home
Costs	Annual fees (if applicable)	Closing costs

Benefits of Using Home Equity to Pay Off Credit Card Debt

There are several advantages to using home equity to pay off credit card debt, including:

•   Lower interest rates: Because your home serves as collateral on the loan, HELOCs and home equity loans typically have much lower interest rates than credit cards.

•   One monthly payment: Rather than juggle multiple credit card bills, you’ll have to make only one monthly payment to your lender.

•   Fixed interest rate: Home equity loans typically have fixed rates; credit card rates are variable, which makes your payments less predictable.

•   An end date: Home equity loans provide a clear path to debt payoff, with an end date in sight. Making the minimum payment on a high-interest credit card, on the other hand, could mean your debt actually increases each month.

Recommended: 5 Ways to Pull Equity Out of Your Home

Home Equity Loan Costs, Requirements, and Timelines to Know Before Applying

While home equity loans may help you save a lot of money over time by spending less on high interest rates and eliminating credit card debt, there are some costs to be aware of:

•   Interest rates: Though lower than credit card interest rates and personal loan rates, home equity loans do still accrue interest.

•   Closing costs: Home equity loan closing costs vary by lender but are often 2% to 5% of the loan cost.

•   Prepayment penalties: Some home equity loans may have fees for paying off the loan early. Check the terms and conditions of any loan to understand these and other potential fees.

Home equity loan eligibility requirements vary by lender, but generally, you’ll need to to meet certain minimums to qualify, including:

•   Credit score: Lenders often require a credit score of at least 680, though some may allow lower scores and others have stricter guidelines.

•   Income: You’ll need to demonstrate a steady source of income. Lenders may have minimum monthly income requirements.

•   Debt-to-income (DTI) ratio: Lenders will also consider your monthly debt obligations, relative to your income. Requirements vary by lender. Some lenders like to see a max debt-to-income ratio as low as 36%, while others allow up to 50%.

•   Sufficient equity: And of course, you need to have built enough equity in your home to qualify. You can build equity by making a large down payment, paying down your mortgage, or both. You may also be able to get your home reappraised for a higher value than what you paid for it, which can increase your equity.

Finally, it’s important to note that a home equity loan isn’t an overnight solution. You’ll need to take some time to compare lenders and apply for the home equity loan. Underwriting and approval can take weeks. From application to closing (including loan fund disbursement), plan for two to six weeks.

How to Apply for a Home Equity Loan to Pay Off Credit Card Debt

To apply for home equity financing to pay off credit card debt, take the following steps:

•   Determine the right type of funding: In most cases, a home equity loan makes more sense for paying off credit cards than a HELOC. Weigh both options carefully, and consider these against alternatives such as personal loans and balance-transfer credit cards.

•   Review your finances: Check your credit score, income, outstanding debts, and current equity to ensure you’ll qualify.

•   Compare lenders: Always prequalify with a few home equity lenders to compare rates, fees, and terms.

•   Apply: When you’ve found the best home equity loan lender, follow the steps to apply online or, if applicable, in person.

•   Stay on top of the process: During the process, you may need to provide additional information to keep underwriting moving. Pay attention to all communication from the lender, and respond quickly. This ensures a smooth path to closing and loan funding.

Steps to Successfully Pay Off Credit Cards With a Home Equity Loan

If you’ve been approved for a home equity loan, here’s how to pay off your credit card debt:

•   Keep making credit card payments: The home equity loan and HELOC closing process can take two to six weeks, so approval doesn’t mean you can immediately stop making payments. Until you’ve got the money in your account, keep up with all credit card payments to avoid late fees.

•   Pay off your debts directly: Once the lump-sum payment is direct-deposited into your bank account, use the funds to pay off your credit cards entirely. Once the balance is $0, treat your credit card like a debit card going forward — only swiping it for purchases you can immediately pay off.

•   Set up repayment for your home equity loan: Set up automatic payments for your home equity loan. If you keep your checking account balance relatively low, set monthly reminders to transfer money into the account to cover the loan payment.

Tips on Using Home Equity to Pay Off Credit Card Debt

Here are some tips to pay off credit card debt using your home equity:

•   Prequalify with multiple lenders: Explore multiple options for your home equity loan to find the lowest rate and fees or the best terms for your needs.

•   Compare interest rates and costs: Make sure the home equity loan’s interest rate and fees — appraisal fees, origination fees, etc. — will cost you less than your various credit cards’ interest rates.

•   Understand the risks: Before moving forward, make sure you understand that a home equity loan or line of credit uses your home as collateral. If you fall behind on payments, you could lose your home.

•   Don’t overborrow: Even if you qualify for a larger amount, borrow only the money you need to pay off your credit cards and any other higher-interest debts.

•   Address the spending habits that got you here: To avoid racking up credit card debt again, stop using your credit card unless you can immediately pay it off. Otherwise, you risk getting into the same financial situation again. “You may not be able to completely reform an overspending habit overnight. But by tracking your spending, setting up a basic budget, and altering just some of your everyday habits, you may soon gain control over your financial life,” says Brian Walsh, CFP^® and Head of Advice & Planning at SoFi.

•   Stay on top of payments: Make your mortgage payments and home equity loan payments a top priority to ensure you don’t lose your home. Set up automatic payments if it will help you stay on top of the loan repayment.

Where Can You Get a Home Equity Loan to Pay Off Credit Cards?

Banks and credit unions offer home equity loans to pay off credit cards. Similarly, mortgage lenders often offer these loans. As financial technology (fintech) companies have become more common, many borrowers have also taken out home equity loans with lenders that do business only online.

The Takeaway

A home equity loan could be a good resource to pay off your high-interest credit card debt, and a HELOC is also a smart pick for some people. In general, home equity loans have a much lower interest rate than cards, plus an easier repayment schedule, and a clear path to wiping out your debt.

SoFi offers both home equity loans and home equity lines of credit (HELOCs) to help you leverage your home's value. Access up to 85% of your equity (up to $750,000), to fund renovations, consolidate high-interest debt, or cover significant expenses. Both options offer competitive rates compared to other loan types. Plus, you’ll be paired with a dedicated SoFi Mortgage Loan Officer who can help you find the right fit for your needs.

Unlock your home’s value with a home equity loan or HELOC from SoFi.

FAQ

Does SoFi offer HELOC or home equity loan products?

Yes, SoFi offers both home equity loans and home equity lines of credit (HELOCs) to eligible homeowners. These are both good resources for consolidating high-interest credit card debt.

Should you use a home equity loan to pay off credit card debt?

Paying off credit card debt with a home equity loan could be a good idea. Generally, you’ll get a lower rate, more manageable monthly payment, and clearer path to debt freedom. However, keep in mind that a home equity loan puts your house at risk of foreclosure. Only go this route if you’re certain you can keep up with monthly payments.

Can you use a home equity loan to consolidate credit card debt?

Yes, you can use a home equity loan to consolidate credit card debt. This is a great strategy for debt payoff because you could potentially lower your monthly debt obligation and lower your interest rate.

How do you qualify for a home equity loan?

To qualify for a home equity loan, you must be a homeowner with sufficient equity in your home. Lenders typically have requirements regarding a minimum credit score, minimum monthly income, and max debt-to-income ratio. These vary by lender.

What’s the best way to get credit card debt under control?

One smart way to get credit card debt under control is to consolidate the debt with a home equity loan or personal loan. These loans typically have lower interest rates than your credit card and result in a lower monthly payment. But consolidating your debt is only half the battle; you also need to address the habits that led to the credit card debt. Make a budget and ensure you don’t overspend on credit cards going forward.

Is it smart to do a home equity loan to pay off credit card debt?

Using a home equity loan to pay off credit card debt could be a smart decision if the loan’s monthly payments (plus fees) are meaningfully lower than the rates and fees associated with your credit card. Only take out the home equity loan if you can easily afford the new monthly loan repayment. Understand the risk involved: If you fall behind on payments, your home could be foreclosed on.

What disqualifies you from a home equity loan?

You may be disqualified from a home equity loan if you don’t have sufficient equity in your home or if you don’t meet a lender’s requirements for credit score, income, or debt-to-income ratio. Lenders may also have requirements for citizenship, age, and similar factors.

How is a $50,000 home equity loan different from a $50,000 home equity line of credit?

With a $50,000 home equity loan, you’ll receive the funds upfront and then make predictable monthly payments until you’ve repaid what you borrowed, including applicable interest. With a $50,000 HELOC, you’ll be able to access the funds as needed during the draw period. You may not have to begin repayment on the borrowed amount immediately, but rather make interest-only payments until the draw period ends. Then, you’ll begin the repayment period. HELOC interest rates are often variable.

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