Can I Use a HELOC to Pay Off Credit Card Debt?

Walking around with at least some level of credit card debt has become relatively normal in today’s society. The average American has thousands of dollars in revolving debt to their name, much of which is accompanied by a two-digit interest rate… and those numbers seem to grow higher each year. 

If you are unable to pay off your credit card balances in full each month, your issuer will usually allow you to make monthly payments and chip away at the balance over a period of time. However, this can be costly, as you’ll have finance charges added to your balance.

If you need more time to pay off credit card debt but want to reduce your overall interest paid, get out of debt sooner, and even lower your monthly payment obligation, a home equity line of credit (HELOC) may be able to help. Here’s a look at how homeowners can access their property’s value to pay off existing credit card debt, and what sort of benefits this process can have.

What is a HELOC?

HELOC is an acronym for a home equity line of credit. This open-ended line of credit is offered by a number of banks, credit unions, and other lenders. It allows you to borrow against a portion of your home’s available equity, or the difference between your home’s current market value and how much you still owe to your mortgage lender.

Generally, a HELOC can give you access to as much as 80% or 90% of your home’s value. Let’s say your home is worth $400,000 and you still owe $185,000 to your mortgage company. If your HELOC lender allows for a loan-to-value ratio (LTV) of up to 85%, this means you can borrow as much as $155,000 against your home. 

• Home value: $400,000

• Maximum LTV (85%): $340,000

• Current mortgage loan balance: $185,000

• Remaining equity you can pull with a HELOC ($340,000 - $185,000): $155,000

The HELOC is secured by your home’s equity, but you don’t actually have to borrow the full amount (or any of it), unless you need it. HELOCs have a draw period, which usually lasts about 10 years, during which time you can borrow as needed up to your maximum line of credit limit. 

If you never need that money, you’ll never have to pay anything beyond annual fees (if applicable) on the HELOC. If you do borrow, you may need to make interest-only payments during the rest of the draw period. Once you enter your repayment period (usually 15 to 20 years long), you’ll make principal and interest payments until the debt’s satisfied.

Why Use a HELOC for Revolving Debt?

Whether you have existing credit card debt or expect some big purchases in your future, a HELOC can be a great option to consider. 

You’ll usually pay less in interest

Credit card accounts have average interest rates well into the teens or even higher. This unsecured debt can easily cost you thousands (or tens of thousands) of dollars more than your original purchases… and might even keep you in debt for years to come.

A HELOC, on the other hand, is secured by the equity in your home. Because of this, the interest rate is usually a lot lower than on a credit card account. By using this line of credit to pay off your credit card balances, you’ll effectively save yourself a lot of money.

You can consolidate balances

The average American owns nearly four credit cards. If you are carrying a balance on more than one card — or also have an auto loan, personal loans, student loans, other other types of debt — your HELOC can be used to consolidate those debts.

By consolidating, you can potentially reduce your interest rates on all of those accounts. You’ll also simplify your debt management, as you’ll now only have one balance to track with one due date and monthly payment.

You’ll put your home equity to good use

As you pay down your mortgage balance and your home’s market value increases, so will your available equity. But instead of letting that equity sit unused for years (until you sell your home), taking out a HELOC allows you to tap into this resource today.

It gives you a years-long financial safety net

Depending on how much equity you have, your HELOC might have a higher available credit limit than you actually need to pay off your credit card debt. If this is the case, you don’t actually have to touch that remaining money… until you need it.

Let’s say you take out a $155,000 HELOC but only need $60,000 to pay off your balances. You can leave the remaining $95,000 open for the duration of your draw period, and it can act as a safety net for you in the years to come.

Have a sudden home repair or want to tackle a renovation project? The money is there. Experience an unexpected illness or job loss? You have money at your fingertips. Even if you want to take your family on vacation or buy a new car, your unused HELOC can help.

How to Pay Off Credit Card Debt With a HELOC

The actual process of taking out a HELOC and using the money to pay off credit card debt is relatively simple:

• Determine how much equity you (likely) have in your home. What is your property worth today and how much do you still owe to lienholders? (Your lender may also require a home appraisal just to be sure!)

• Shop around for HELOC lenders. You’ll find the best HELOC terms and interest rates by shopping around first. (Fiona can help you get matched with lenders and offers, all in one place.)

• Finalize your HELOC. Once you’ve found the right HELOC and terms, it’s time to sign on the dotted line. Once you do so, your line of credit will be available to you!

• Withdraw funds to pay off existing debt. You can withdraw from your line of credit as needed. Some lenders provide you with checks, others allow for ACH transfers; withdraw as much as you need to pay off your credit card debt or other balances. 

If you need to pull out additional funds later on — for big purchases, other debts, or unexpected expenses — you can, as long as you’re within your draw period and have available credit. You won’t have to pay off the full balance until your repayment period, either.

If you have credit card balances, a HELOC can be a great option for simplifying your debt and potentially lowering your overall interest charges. By accessing your home’s equity with a line of credit, you can also provide yourself with a financial safety net for many years to come.