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American Focus > Blog > Economy > How to use a HELOC to pay off debt (and when it makes sense)
Economy

How to use a HELOC to pay off debt (and when it makes sense)

Last updated: May 27, 2025 12:11 pm
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How to use a HELOC to pay off debt (and when it makes sense)
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Using a Home Equity Line of Credit (HELOC) to Pay Off Debt: What You Need to Know

Are you feeling overwhelmed by credit cards, personal loans, or medical bills? If so, using a home equity line of credit (HELOC) to pay off debt may be a smart financial move for you. However, before diving into this option, it’s essential to understand how it works and whether it is the right choice for your situation.

A HELOC functions similarly to a credit card, providing you with a revolving line of credit that you can access for various purposes, such as large purchases, home improvements, or debt consolidation. Unlike traditional mortgages or personal loans, a HELOC gives you the flexibility to use the funds as needed.

One of the key advantages of a HELOC is that it typically comes with lower interest rates compared to credit cards. This can make it more affordable and help you pay off high-interest debt more efficiently. However, it is crucial to understand the qualification requirements and guidelines for using a HELOC to pay off debt.

To qualify for a HELOC, lenders typically look for homeowners with 15% to 20% equity in their house. Equity is calculated by subtracting your outstanding mortgage balance from your home’s appraised value. If your mortgage balance is within 80% to 85% of your home’s value, you are more likely to get approved for a HELOC.

In addition to meeting equity requirements, borrowers must also meet basic borrower requirements, such as having a good credit score, a stable income, and a history of making on-time payments.

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A HELOC consists of two main phases: the draw period and the repayment period. During the draw period, which can last up to 10 years, you can access the approved line of credit and make interest-only payments. In the repayment period, which usually lasts for 20 years, your minimum payments will increase to cover both interest and principal until the balance is paid off.

While there are benefits to using a HELOC to pay off debt, such as lower interest rates and affordable payments, there are also risks to consider. HELOCs are secured loans, meaning your home is used as collateral. If you struggle to make payments, you could risk losing your home.

If a HELOC is not the right option for you, there are alternative ways to consolidate debt, such as a home equity loan, cash-out refinance, personal loan, credit card balance transfer, or credit counseling programs. It is essential to weigh the pros and cons of each option and choose the one that best fits your financial situation.

In conclusion, using a HELOC to pay off debt can be a viable solution for individuals with high-interest credit card debt. However, it is essential to understand the risks involved and ensure that you can afford the monthly payments. By carefully evaluating your options and seeking professional advice, you can make an informed decision about using a HELOC to improve your financial situation.

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