Comparing Home Equity Loan to Home Equity Line of Credit for Consolidating Your Debt


All images via Millhaven Homes

According to a Reuters report, Americans are getting deeper into debt with each passing day. The Federal Reserve has gone on record that for the first time; consumer debt has crossed $4 trillion. A recent Experian report also states that total credit card debt at over $1 trillion is also at its highest level ever and the average credit card balance is $4,293. With credit card rates of interest averaging 17.41%, the average card user is bleeding just trying to stay afloat. When you find yourself trapped in debt and you need to take on more debt just to be able to pay the monthly minimum dues, it is a sign that you need to do something drastic to get back your finances on course. As the first measure, debt consolidation is extremely popular because it is relatively easy to do and make it a success. A quick look at what debt consolidation is and the pros and cons of using your home mortgage to access funds to consolidate debt and save big on the interest expense. 

Understanding Debt Consolidation 

When you have several high-interest bearing debts like credit card balances and personal loans, the interest expense can be crippling, especially if you are paying just the minimum amount every month and rolling over the balance. It can take a very long time to become debt free under these circumstances; however, you can speed up the process by consolidating your debt. Debt consolidation is a simple process by which, you add up all the balances of your credit cards and personal loans and repay them by taking on a new loan of the same amount but which carries a far lower rate of interest. The point to remember is that debt consolidation does not reduce the amount of the total debt; it just acts to reduce the interest expense so that the monthly repayment becomes more affordable. 

There are several ways of obtaining a debt consolidation loan. If you have a good credit score, you may be eligible for a zero-percent balance transfer offer that can save you a lot of interest over the promotion period that may last only for a maximum of 21 months of you are lucky. Another popular way is taking a bank loan or a loan from a private lender like While a bank loan is cheap, they are difficult to get due to the bureaucratic approval process and conservative lending policies. Private loans are quite accessible; however, the rates of interest will be higher, though if you have a good credit score, you will still be able to save a lot. Other cheap methods are taking out a second mortgage of your home or dipping into your retirement funds. While taking a loan out of your 401(k) account may seem attractive due to the low rate of interest, according to, these loans can compromise your financial security in case of a job loss or even a change in the employment. While there are two ways of borrowing against your home equity, it is also a method that you need to carefully consider as it is not free of pitfalls. 

Home Equity Loan

In simple terms a home equity loan is a second mortgage of your home, the first one was when you purchased it. The amount of equity you have in your home is determined by the market value of your home less the amount outstanding on the mortgage. Lenders are normally willing to lend up to 80% of the equity so if you have significant equity in your home, you can use it to borrow a large amount for consolidating your debts or for any other purpose. Most home equity loans carry a fixed rate of interest for the period of the loan. While that makes the repayment amount predictable and simple to budget for, it also means that the cost of the stability is in the form of a higher rate of interest than a home equity line of credit or HELOC, as it is more commonly known. When you know the amount that you will need to consolidate all your debts and repay them, a home equity loan can be an ideal method of accessing funds. However, there is the danger of losing your home if you default.

Home Equity Line of Credit

A HELOC gives borrowers a line of credit that they can use to withdraw funds as needed if the requirement is not pre-determined. Borrowers are given a limit that they can use as they like. Repayments are due only on the amount that has been drawn; however, the lender may set conditions on the minimum withdrawal amounts or a minimum outstanding balance. Borrowers are given a specific period during which they can draw money and pay back the interest. After the expiry of this period, no more money can be drawn even though the borrower has not reached his limit. The repayment during this period will comprise both the principal repayment and the interest repayment. Typically, HELOCs carry variable rates of interest so you may end up benefiting if the rates drop or have to pay more if the markets rise. The frequency of the setting of the interest rate is governed by the terms of the contract.

The Best Method for Debt Consolidation

Borrowers who want predictability of the repayment amounts will benefit by opting for a home equity loan, however, those who are confident of being able to predict the movement of the interest rate and use it to their advantage will find HELOC to be more useful. However, in both the cases, it is important to appreciate that apart from the rate of interest, there are other charges that the lender can charge that will reduce the difference between other modes of financing. 


Home equity financing, especially home equity loans are commonly used to consolidate high-interest debts as the difference between the card APRs and the rate of home equity loan can be pretty substantial. However, borrowers need to be confident that they can pay the monthly installments without defaulting as it can put the home at risk of foreclosure. Thanks to National Debt Relief


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