Can I Use a Home Equity Loan to Pay Off My Debt?

One of the most common uses of a home equity loan is to consolidate higher-interest debts.

A low-interest home equity loan taps into the equity locked up in your home. Homeowners can use these funds to pay off all other debts much faster—and for less money.

What's in this article?

Can I use a home equity loan to pay off my debt?
What else can a home equity loan be used for?
Pros and cons of paying off debt with a home equity loan
Is a home equity loan or line of credit better for debt consolidation?
Apply for a home equity loan with Compass Mortgage

A home equity loan has pros and cons, but for some homeowners, it may be the perfect choice for a debt-free future.

Read on to find the answer to whether a home equity loan is best for your unique loan scenario.

Can I use a home equity loan to pay off my debt?

The short answer is, “Yes, you can use a home equity loan to pay off your debt.” The long answer digs deeper into whether this option is right for you.

Home equity loans and home equity lines of credit (HELOCs) both can be used however the borrower chooses.

What is home equity?

Equity loans tap into your home’s equity, which is built over time as you pay down your mortgage and as the home appreciates through the years.

To access your equity, your lender will require you to have a certain amount of equity in the home. Generally, this amount is 15% to 20%, so you can borrow up to 80% or 85% of your home’s value based on their requirement.

For example, if your home is $400,000 and your lender allows you to borrow up to 85% of the value, you can potentially borrow $340,000 minus whatever you owe on your mortgage.

If your mortgage balance is $300,000, you may be able to borrow up to $40,000.

Your $40,000 home equity loan can be used to pay off all your high-interest debts, such as credit cards or personal loans. You can then work on paying off your home equity loan at a much lower rate, much faster and for less money overall.

How do the interest rates compare?

Consider this: Depending on credit score, the average borrower qualifies for interest rates between 10% and 28% with a typical personal loan. On the other hand, home equity loan rates range from 3% to 12%.

It would be much easier to pay off a 5% annual percentage rate (APR) home equity loan than a 16% APR personal loan or credit card!

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What else can a home equity loan be used for?

Either a home equity loan or a HELOC can be used however the borrower chooses. 

Financial experts advise against using these loans for unnecessary large purchases because you’re putting your home on the line. What’s more, borrowers must meet certain requirements to qualify for a loan in the first place.

Common uses for a home equity loan besides paying off debts include:

  • Home improvements such as upgrades or renovations
  • Down payment on a second home
  • College tuition
  • Business expenses
  • Emergency funds

If a borrower is in a situation where they need funds, a home equity loan or HELOC is often the best solution because of lower interest rates than most other other loans.

Pros and cons of paying off debt with a home equity loan

All loan types come with certain risks and benefits. It’s up to the individual borrower to properly weigh the pros and cons of their unique situation but a trusted mortgage lender, like Compass Mortgage, can help the borrower determine the most affordable option.

Let’s look at the biggest pros and cons for paying off debt with a home equity loan.


  • You may get a lower interest rate, because your property secures the home equity loan while personal loans and credit cards are unsecured loans
  • You will simplify your debt obligations by consolidating all forms of debt into one monthly payment


  • Your home is used as collateral for home equity loans, so you risk losing your home if you can’t make payments
  • You will have to pay closing costs and fees to close on the loan
  • You will add to your debt load

If you’ve decided that consolidating debt with a home equity loan may be a good option, you can then choose between a home equity loan or a HELOC.

Is a home equity loan or line of credit better for debt consolidation?

The main difference between home equity loans and HELOCs is the way the funds are distributed.

Home equity loans provide a lump sum of money upon closing with a set rate and terms.  The fixed rates make home equity loans more predictable.

On the other hand, HELOCs are structured more like credit cards. You can pay off the debt by taking out only what you need, repaying what you took out and withdrawing again as needed.

HELOCs generally are adjustable-rate loans, meaning they begin with a lower introductory rate and start adjusting after a set period of time.

The adjustments can make this type of loan less predictable. Depending on your debt levels and goals, however, you may be able to pay down much of your debt within the introductory rate period for extra savings.

Evaluate your short-term and long-term debt goals to determine which home equity loan is right for you. An experienced lender also will be able to help you decide on the most affordable option.

Apply for a home equity loan with Compass Mortgage

Compass Mortgage is home to a better, more human mortgage experience. We will treat you like family and give you the expert personal attention you deserve.

If you’re interested in using a home equity loan to pay off debt, connect with our team of experienced lenders today.

The Compass Mortgage team cares about you and your financing needs. We promise to be your advocate and partner throughout every step of the loan process.

We can help you find the most affordable loan option for your unique situation, backed by the convenience of up-to-date, user-friendly technology.

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