5 Ways to Use a HELOC to Pay Off Debt

As a homeowner, you are likely to build up equity in your home over time as you pay down your mortgage loan and if market home values increase. This equity — calculated as the difference between what your home is worth and how much you still owe on the property — is a valuable asset that you will enjoy when you eventually sell your property.

However, that equity can also be utilized while you still own your home with the help of a home equity line of credit, or HELOC. Offered by a variety of banks, credit unions, and other lenders, HELOCs let homeowners use a portion of their home’s value for unexpected expenses, large purchases, or even to pay off existing debt.

How to Use a HELOC to Consolidate Debt

Rather than letting your home equity sit unused for decades, a HELOC gives you on-demand access to cash that you can put toward nearly anything. Here’s a look at the many ways a HELOC can help you pay off and get out of debt.

Reduce high interest rates

Unsecured consumer debt often comes at a hefty cost in the form of high interest rates. With average APRs in the teens or twenties, revolving credit card accounts are particularly costly. 

If you’re carrying around one or more balances, you can use a secured HELOC to essentially “refinance” that debt with a lower interest rate. Depending on how much you owe and what rates you currently have, this could save you hundreds, thousands, or even tens of thousands of dollars over the course of your debt repayment.

You can use the funds from a HELOC to pay off a combination of your

• Credit cards

• Personal loans

• Auto loans

• Student loans

• Title loans

• and more!

Additionally, lowering your interest rate means that more of your monthly payment goes toward the principal balance. If you keep contributing the same amount toward your balance each month, you’ll actually get out of debt faster!

Consolidate accounts to simplify repayment

Juggling multiple due dates, minimum payments, interest rates, and remaining balances can be frustrating. Rather than track and manage all of your accounts each month, you can use a HELOC to consolidate them into one single debt.

Simply pull the necessary funds from your HELOC during your draw period and pay off those other balances. You’ll then repay that borrowed amount as agreed, with a single monthly payment to make and just one debt to track.

Adjust your monthly payment obligation

Each month, you’re required to make a minimum payment on your debt accounts. The amount of these payments can depend on the type of account it is (revolving credit cards versus installment loans, for instance), your interest rate, and the total balance owed. 

For some consumers, though, these monthly payments can add up to a significant amount. In some cases, they could even break the budget.

By paying off those debts with the cash from a HELOC, you can effectively adjust your total monthly payment requirement. Locking in a lower interest rate and/or longer repayment period may be exactly what you need to free up funds in your monthly cash flow.

Remove a cosigner

A creditworthy cosigner can not only help you get approved for a loan or line of credit, but can also unlock lower interest rates and better loan terms. Sometimes, though, your cosigner may want, or need, to be removed from that debt before it’s completely repaid.

By using the available funds from your HELOC, you can close out cosigned debts and release your co-borrower. This can be beneficial whether you’re still repaying student loans that your parents cosigned for, you need to release a former spouse from a joint auto loan, or anything in between. 

Enjoy tax benefits

When you use the cash from a HELOC to make qualifying home improvements, you may be able to deduct the interest charged come tax time. If your options are to fund home improvements with a credit card or use the money from a HELOC to cover those expenses, the HELOC is often the better choice, especially if you fall under the IRS tax deduction umbrella. Please consult a tax expert to review your individual situation. 

Bottom Line

A home equity line of credit is a great way to simplify your existing debt balances, save money, and even get out of debt faster. Rather than letting that equity sit unused for years, you can pull from your home’s value to consolidate accounts, refinance balances, and tackle your consumer debt once and for all. 

And if you decide not to use your entire line of credit in the end? That cash will remain available to you for your entire draw period, giving you a secured safety net that you can call on as needed.