Using a HELOC for Debt Consolidation: Pros and Cons

Many homeowners have a powerful way to fight high-interest debt.

They can use a HELOC to pay off existing debts.

The result? Making one monthly payment on the HELOC, usually at a lower interest rate, instead of making a variety of payments at higher rates on credit card and personal loans.

Pros of using HELOC for debt consolidation

Combining multiple debts into a home equity line of credit, or HELOC, can:

– Lower interest rates: HELOCs typically carry rates between 7.5–8.5% APR, dramatically lower than average credit card rates around 22%. This difference can create big savings over time. Since your home secures the HELOC, lenders can offer these favorable rates compared to unsecured debt options like personal loans.

– Simplified payment schedule: Instead of juggling multiple payment deadlines throughout the month —credit cards due on the 15th and 20th, a personal loan on the 27th, for example — you'll have just one monthly payment to track. This streamlined approach helps you avoid missed payments that could damage your credit score.

– Reduced monthly payments: Consolidating with a HELOC typically lowers your overall monthly payment amount. This financial breathing room comes from both the lower interest rate and the longer repayment timeline. For homeowners with tight budgets, this reduced payment obligation creates the flexibility needed to make real progress on eliminating debt.

– Flexible access to funds: Unlike a home equity loan, which provides a single lump sum, HELOCs function more like credit cards, giving you:

• Access to funds as needed during the draw period (typically 5–10 years)
• Interest payments only on the amount you actually borrow
• Ability to reborrow funds after repayment during the draw period

Learn how HELOCs compare to home equity loans in this side-by-side comparison.

– Credit score improvement: Consolidating multiple debts into a HELOC can boost your credit profile over time. Having fewer high-interest debts and a lower credit utilization ratio is typically good for your credit score. Plus, lenders typically view home equity debt more favorably than maxed-out credit cards.

Cons of using HELOC for debt consolidation

Like any loan, HELOCs have drawbacks:

Your home must have sufficient equity

HELOCs work only for homeowners who have enough equity built up already.

Specifically, most lenders require homeowners to leave at least 15 to 20 percent of the home's equity unborrowed.

Someone who just bought the home won't usually have enough equity unless they made a huge down payment, or unless their property value has skyrocketed.

Learn more about these requirements in our guide to key HELOC qualifications.

Lenders enforce these rules to protect themselves and homeowners from the dangers of owing too much money on the home.

Closing costs

Expect to pay at least 1 percent, and possibly as high as 5 percent, of the HELOC's credit limit in closing costs. A 2 percent fee on a $50,000 credit line, for example, would cost $1,000. Typically that cost would come out of the credit line itself.

Closing costs vary a lot by lenders. They include:

— Application and origination fees
— Home appraisal costs to verify your property's value
— Title search fees
— Credit report charges
— Document preparation fees
— Recording fees with local authorities

HELOCs typically cost less to close than primary mortgages, but homeowners should still pay attention and look for lenders with lower costs.

For a breakdown of costs, visit our guide to what is included in closing costs and how to read your Closing Disclosure.

HELOCs require a lien

HELOCs work so well and tend to charge lower interest rates because they're secured by the value of the home. This means the HELOC lender has the right to foreclose if the homeowner defaults on the loan.

Lenders aren't eager to foreclose, but homeowners should always know the risks they take in exchange for the lower borrowing rate.

For homeowners already struggling with debt, the possibility of losing their home makes HELOCs a high-stakes option requiring careful consideration.

When to use a HELOC for debt consolidation

Do the HELOC pros outweigh the cons for you?

The answer usually depends on the borrower.

When a HELOC makes sense for debt consolidation

Paying less interest and making fewer monthly payments appeals to homeowners who have lots of credit card debt.

Credit card interest rates are often higher than 20 percent. Personal loan rates may be even higher. A HELOC averages about 7 percent to 8 percent.

This difference can create substantial savings. For example, consolidating $10,000 of credit card debt could save you approximately $4,671 in interest annually.

But this strategy works only if you've already addressed the root causes of your debt. Homeowners who haven't stopped overspending run the risk of getting right back into credit card debt again. Then they'd have the HELOC to pay off along with more high interest credit card debt. That's not good.

HELOCs prove particularly valuable for homeowners with:

— Stable or increasing income
— Confidence in making consistent payments over time
— Discipline to use the draw period wisely

The five to 10-year draw period offers flexibility to access money as needed while paying interest only on borrowed amounts, giving you control over your consolidation strategy.

When to avoid using a HELOC for debt consolidation

If you haven't stopped spending more than you earn, avoid using a HELOC to consolidate debt.

Home equity is an asset that should be used to make your future better, not to create a future of more debt.

Also, keep in mind that consolidating debt into a HELOC isn't a great idea for:

— Public student loans. Consolidating public loans into a HELOC eliminates forgiveness plans or income-based repayment options
— Auto loans. These are secured by vehicles, so they shouldn't charge exorbitant rates anyway. Plus, a car depreciates in value meaning you could soon owe more than the car's value.
— 0% interest credit card debt. Unless a 0% promotional period is expiring soon, a HELOC could increase the rate on this debt.

HELOC vs. Home Equity Loan: What’s the Difference?

Both a home equity loan and a home equity line (HELOC) leverage a home's equity to get lower borrowing costs when compared to unsecured loans like credit cards.

But these loans accomplish this goal in different ways.

– A home equity loan pays a one-time lump sum with a fixed interest rate and set repayment schedule. Borrowers who know exactly how much they need to borrow can benefit from a home equity loan's predicability.

– A home equity line of credit (HELOC) is a revolving credit line that lets you draw funds as needed, often with a variable interest rate. It works a lot like a credit card but at a lower interest rate because it's secured by home equity. A borrower whose consolidating multiple debts over time might like the flexibility of a HELOC.

See our complete guide comparing home equity loans and HELOCs.

Applying for a HELOC

Opening a HELOC to pay off debt resembles the process of using a mortgage to buy a home.

Before starting your application, verify you meet these basic eligibility requirements:

— Credit score above 640 (though scores above 700 will qualify you for better rates)
— Low debt-to-income ratio, typically no more than 43% of your monthly income going toward debt payments
— Sufficient equity in your home—usually 15–20% remaining after accounting for the HELOC

The typical HELOC application follows these steps:

1. Research and select a lender – Compare interest rates, terms, and fees from multiple lenders. Online mortgage specialists as well as local banks and credit unions offer HELOCs.
2. Gather documentation – Collect income verification (W-2s, pay stubs, tax returns), proof of homeownership, and information about your current mortgage.
3. Complete the application – Submit your formal loan request, which usually includes a hard credit pull.
4. Property appraisal – The lender will assess your home’s current value to find out how much equity you can access.
5. Review and sign documents – After approval, you’ll receive details about your credit limit and rate before signing the final paperwork.

With Better, the process is even easier. You can get pre-approved by just answering a few simple questions in as little as three minutes with no impact to your credit.

You'll get a custom offer and, if you lock a rate and complete your application, you could get your cash in as little as seven days!

Once approved, your HELOC begins its draw period, which typically lasts five to 10 years. During the draw period, you can access funds as needed to pay off debt. You’ll pay interest only on the amount you actually borrow.

When the draw period ends, the repayment period begins. The repayment period usually lasts 20 years, though the homeowner can pay off the debt faster. During this time, you’ll make regular payments covering both principal and interest until the balance is paid off.

The full approval and funding process can take anywhere from five business days to eight weeks, depending on your lender. With Better's One Day HELOC, you could get a decision in 24 hours, and cash in 7 days.

Take control of your debt with a HELOC

HELOCs are a powerful tool for debt consolidation. Like any tool, a HELOC should be used for good and not to create more debt unnecessarily.

The best candidates for a HELOC have:

— Financial stability with reliable income
— Reformed spending habits that address the root causes of debt
— Sufficient home equity (typically 15–20% in equity remaining after the HELOC)
— A solid credit score to qualify for the best rates

The right HELOC can transform scattered high-interest debts into a manageable strategy for financial recovery.

Ready to explore whether a HELOC fits your debt consolidation needs?
Start your application today to understand your potential savings and borrowing power. Better's streamlined process lets you check your eligibility quickly and access funds faster than traditional lenders.