Pros and Cons of Consolidating Debt with a Home Equity Loan

Thinking of consolidating your debt with a home equity loan? Here are a few things to keep in mind as you weigh your options:

Pros

Fewer monthly payments

By paying off your unsecured debts with a home equity loan, you’ll have fewer debts and debt payments to manage each month.

Fixed end date

If you’re only paying the minimum due on a large credit card debt, you could literally be paying for decades. Most loans usually have a clearly defined payment schedule, which spells out what you’ll pay, when it’s due, how much will go toward the principle, and when you’ll have the whole thing paid off.

Lower interest rate

By leveraging the equity in your home, you should be able to secure an interest rate comparable to a mortgage, which will likely be lower than an unsecured loan and much lower than a credit card.

Interest deductions

Moving your debt to a home equity loan could save you some money at tax time. That’s because you may qualify for a mortgage interest deduction, which would allow you to claim a reduced income based on the amount of interest paid on your mortgage (and home equity loan).

Cons

Best credit gets the best terms

If you’ve already missed a few payments and your credit score has suffered as a result, you may find it hard to qualify for loans with low interest rates and other helpful terms, even if you’re using your home as collateral.

Your home is on the line

You should always be careful using your home as collateral for a loan. If you default on a home equity loan you run the risk of facing a foreclosure.

Less flexibility

Should your situation deteriorate and you struggle to make any kind of debt payments, you may find yourself considering bankruptcy. Bankruptcy is a perfectly acceptable option, but your options may be somewhat limited if your debts have been consolidated into a home equity loan or mortgage. You may not be able to discharge your debts without losing your home in the process. Be sure to consult with a qualified attorney if you’re considering bankruptcy.

Closing fees

Most loans include a variety of fees. Keep in mind the costs of taking out a loan in the first place.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.