When should you use home equity for debt consolidation? Here’s what experts suggest.

Debt can get expensive. Take credit cards, for example. The average credit card user carries a balance of nearly $8,000 — up over 8% from just two years ago. Throw in rising credit card rates, which currently sit above 23%, and debts can quickly start to feel insurmountable.

If you’re struggling with debt, you’re not alone. All in all, American households carry $17.94 trillion in debt, according to the Federal Reserve Bank of New York. Those numbers can be hard to overcome, particularly with stubborn inflation and the rising costs of goods and services. But homeowners are uniquely poised for the challenge. 

That’s because home equity can be used to consolidate debt. You take out a home equity loan, cashout refinance or home equity line of credit (HELOC), and you use those funds to pay off your existing debts. This rolls them all into one loan payment — often with a much lower interest rate than you were previously paying. 

But consolidating debt with home equity isn’t always the right choice. Are you thinking about using this strategy to tackle your debts? Here’s when experts say it’s a good move.

Compare today’s top home equity lending options to find the right one for you.

When you should use home equity for debt consolidation

Home equity can be a good option for consolidating debts if you need to reduce your monthly payments, says Christopher Mediate, a financial advisor and president of Mediate Financial Services. 

“Americans continually struggled to make monthly payments as interest rates rose and so did minimum payments,” Mediate says. “They might find themselves feeling overwhelmed, and it can affect other areas of their lives. In cases like this, [using home equity for consolidation] would make sense.”

It all depends on what terms and interest rate you can get though, and that varies based on your credit score and other financial factors. Generally speaking, home equity lending products tend to have much lower interest rates than many other types of borrowing. For instance, the average credit card rate is above 23%, but the average home equity loan? That sits at just over 8% currently.

“Is the interest rate lower?” Mediate asks. “Does it improve everyday cash flow, allowing you to feel some relief and maybe now put the difference into savings and create a positive flow of money?”

If your answer is yes, consolidating is probably smart.

Find out how affordable home equity borrowing could be now.

When you shouldn’t use home equity for debt consolidation

Using home equity to consolidate debts isn’t always smart, though. There are some scenarios when pros say it’s actually ill-advised. One is when consolidating your debts would extend your payoff time significantly. 

“Consolidating debt through home equity doesn’t make sense when the marginal gains of lowering your monthly payment don’t allow you to repay the debt in a timely manner,” says Evan Luchaco, a home loan specialist at Churchill Mortgage in Portland. 

If you extend your payoff timeline too long, you could end up paying much more in long-term interest — even with a notable reduction in your interest rate. For example, it may not make sense to consolidate a 5-year auto loan into a 15-year HELOC. 

“It gets very easy to be complacent and not worry about what it’s costing you in terms of overall interest and for how long,” Mediate says. 

You also shouldn’t use your home equity to consolidate debts if you’re at all worried about home values decreasing in your area. If home values were to decrease, you could end up owing more on the house than it’s worth — also called being upside down on your mortgage. Should you need to sell the home, you wouldn’t make enough to pay off all your debts.

“What goes up, must come down,” says Matt Dunbar, senior vice president of Churchill Mortgage’s Southeast Region. “To avoid over-leveraging your property, it’s wise to recognize that values may decrease at some point and that current market values could be inflated by short-term factors.” 

Dunbar says to protect yourself from falling values, research local real estate sales and check recent price trends. And if you notice prices falling, proceed with caution. 

“Properties spending substantial days on the market without selling” could also signal price declines, Dunbar says.

Most experts recommend borrowing no more than 80% of your home’s equity — leaving a 20% buffer just in case.

The bottom line

Using your home equity isn’t the only way to handle debt. You can also seek help from a debt relief company or pursue a debt management plan, debt settlement or debt forgiveness. If you’re not sure what the best debt strategy is for you, talk to a financial advisor or set up a consultation with a credit counselor. They can help you map out a path toward successfully paying off your debts.