Trading a credit card interest rate of 21.5% for a 9% HELOC rate, for example, sounds like a good deal on the surface.
On a $25,000 credit card balance, it saves over $3,100 per year in interest.
But using home equity to pay off consumer debt isn’t a cure-all. Here are risks and rewards of the strategy.
How Much Can You Save?
The biggest advantage of consolidating credit card debt is interest savings.
The average credit card rate is 21.47%, says the St. Louis Federal Reserve. Bankrate pegs HELOC rates at an 8.99% average as of March 2024. Assuming these rates, here’s how much someone might save based on their credit card balances.
Credit Card Balance | Annual Credit Card Interest | Annual HELOC Interest | Annual Savings |
$10,000 | $ 2,147 | $899 | $1,248 |
$20,000 | $4,294 | $1,798 | $2,496 |
$30,000 | $6,441 | $2,697 | $3,744 |
$40,000 | $8,588 | $3,596 | $4,992 |
It may make more sense to pay off smaller credit card balances little by little. But homeowners might choose to consolidate bigger balances to save thousands per year in interest.
Risks of Paying Off Credit Cards With a HELOC
Those who can remain disciplined can come out ahead by using a HELOC for this purpose. But a HELOC makes it easy to extend your debt load.
Interest-only payments: You are only required to pay interest during the first 10 years of most HELOCs. You will not pay down the principal by making the minimum payment.
You could rack up credit card debt again: You could easily charge up credit cards again. Go on a credit card fast for a few months before getting a HELOC. Transition to using cash and debit cards and keep the habit.
Extended debt payments: HELOCs are often 20 to 30 years in length. Making minimum payments could lengthen the time you carry debt.
Massive limits: While credit cards may have limits of $10,000 or $20,000, HELOC limits can reach $100,000 or more. High limits could be too much temptation for some.
Closing costs and fees: While many HELOCs don’t require closing costs, you could be hit with an appraisal fee, annual fee, or early termination fee. These would eat into interest savings.
Your home is the collateral: If you don’t make your HELOC payments, the lender can foreclose.
Rewards of Paying Off Credit Cards With a HELOC
Better interest rates: While HELOC rates aren’t as low as they used to be, they still handily beat credit card rates.
A HELOC won’t affect your first mortgage: Homeowners with mortgage rates in the 2s, 3s, or 4s are rightly hesitant to get a full cash-out refinance to pay off credit cards. This could double or triple the rate on their primary mortgage.
You can improve monthly cash flow: Your HELOC payment may be less than your combined minimum monthly credit card payments.
Improved credit: Maxed-out cards hurt your credit score. Rolling those balances into a HELOC could help – if you keep credit card balances low.
Alternatives to Credit Card Consolidation With a HELOC
If you’d rather not open up a HELOC, there are other ways to tackle credit card debt.
Budget: Good old-fashioned budgeting isn’t sexy, but can help redirect funds to pay down debt.
Balance transfer: Many credit card companies advertise zero-interest balance transfers. This helps your dollar go toward principal, not interest charges.
Cash-out refinance: You can wrap debt into your primary home loan. Just make sure you can get a mortgage rate that’s similar to your current one.
Check your cash-out refinance eligibility.
Home equity loan: A home equity loan is a “closed-end” second mortgage, meaning you can’t pull out additional money, reducing the temptation to drive up debt against your house.
Home Equity: a Powerful Tool For Debt Consolidation
While it’s not right for everyone, home equity can give you breathing room to lower your interest charges and, hopefully, pay off debt.
Speak to a licensed professional to see if a HELOC might work for you.
