If you’re juggling multiple high-interest debts — credit cards, personal loans, or other obligations— you’ve probably wondered if there’s a better way. A home equity line of credit (HELOC) can be a powerful tool for debt consolidation, but it’s not right for everyone. Here’s what you need to know to make an informed decision.
What Is Debt Consolidation with a HELOC?
Debt consolidation means combining multiple debts into a single loan, ideally with a lower interest rate. With a HELOC, you’re using your home’s equity to pay off those debts, leaving you with just one monthly payment, typically at a much lower rate than credit cards or personal loans.
For example, if you have:
- $15,000 on a credit card at 22% APR
- $10,000 on another card at 19% APR
- $5,000 personal loan at 12% APR
You could use a HELOC at 8% APR to pay off all three, potentially saving hundreds per month in interest.
The Benefits of Using a HELOC for Debt Consolidation
1. Significantly Lower Interest Rates
This is the primary advantage. Credit card interest rates often range from 18-25%, while HELOC rates typically fall between 7-10%. The difference can be substantial:
Example: $30,000 in credit card debt at 20% APR
- Monthly interest: ~$500
- With a HELOC at 9% APR, monthly interest: ~$225
- Monthly savings: ~$275
2. Simplified Finances
Instead of tracking multiple due dates, minimum payments, and interest rates, you have one monthly payment. This makes budgeting easier and reduces the risk of missed payments.
3. Improved Qualification with Debt Consolidation Underwriting
Some lenders, such as Trovy, offer specialized debt consolidation underwriting that works in your favor. When you’re using your HELOC to pay off existing debt, these lenders calculate your debt-to-income ratio based on what your finances will look like after consolidation, not before.
This can help you:
- Qualify when you otherwise might not
- Access a larger credit line
- Secure better rates due to improved DTI
4. Flexible Access to Funds
With a HELOC, you have a credit line available for future needs. Unlike a personal loan where you receive a lump sum, you can draw what you need when you need it during the draw period.
The Risks and Drawbacks
1. Your Home is Collateral
This is the most important consideration. A HELOC is secured by your home, which means if you can’t make payments, you could lose your house. Credit card debt, while stressful, doesn’t put your home at risk.
2. Variable Interest Rates
Most HELOCs have variable rates that can increase over time. If rates rise significantly, your monthly payment could become unaffordable. Make sure you understand the rate structure and have a plan for potential increases, or look for a lender that allows you to convert your balance to a fixed rate.
3. Closing Costs and Fees
While typically lower than mortgage refinancing, HELOCs can come with appraisal fees, closing costs, and annual fees. Calculate whether your interest savings outweigh these upfront costs.
4. Doesn’t Address Spending Habits
A HELOC pays off your debts, but it doesn’t fix the behavior that created them. If you consolidate $30,000 in credit card debt but then run up another $20,000 on those same cards, you’ll be in a worse position than before, with both credit card debt and a HELOC to repay.
5. Draw Period and Repayment Period Structure
HELOCs typically have a draw period (often 10 years) where you can borrow and make interest-only payments, followed by a repayment period (often 20 years) where you must pay principal and interest. Your payments will increase significantly when you enter the repayment period.
When a HELOC Makes Sense for Debt Consolidation
Consider using a HELOC to consolidate debt if:
- You have high-interest debt: If you’re paying 15%+ on credit cards or personal loans, a HELOC at 8-9% can save substantial money.
- You have significant home equity: You need at least 15-20% equity in your home to qualify, and you shouldn’t borrow so much that you have minimal equity remaining.
- You have steady income: You need reliable income to ensure you can make consistent HELOC payments.
- You’re committed to changing spending habits or your debt to income ratio: You have a plan to avoid accumulating new debt after consolidation.
- The math works: Your interest savings exceed the closing costs and fees within a reasonable timeframe (typically 2-3 years).
When to Consider Alternatives
A HELOC might not be the best choice if:
- You have limited equity: If you’re close to owing what your home is worth, you may not qualify or may be taking on too much risk.
- Your income is unstable: Variable income or job insecurity makes it risky to use your home as collateral.
- You have spending issues: If you haven’t addressed the root cause of your debt, consolidation alone won’t solve the problem.
Smart Strategies for HELOC Debt Consolidation
If you decide a HELOC is right for you:
1. Pay more than the minimum: Don’t just make interest-only payments. Pay down the principal aggressively to reduce your balance and interest charges.
2. Close or limit credit cards: Consider closing some cards or setting very low spending limits to avoid re-accumulating debt.
3. Create a budget: Track your spending and stick to a plan that prevents new debt.
4. Build an emergency fund: Having 3-6 months of expenses saved can prevent you from relying on credit cards for unexpected costs.
5. Set up automatic payments: Ensure you never miss a HELOC payment, as missed payments can lead to default and foreclosure.
6. Monitor interest rates: Stay aware of rate changes and adjust your budget accordingly, or, if the lender allows it, convert your variable rate to a fixed rate.
How Trovy Makes HELOC Debt Consolidation Work for You
At Trovy, we’ve designed our HELOC specifically with debt consolidation in mind:
- Debt Consolidation Underwriting: We calculate your debt-to-income ratio based on your financial picture after you pay off your existing debt. This means you’re more likely to qualify for the credit line you need.
- Low Rates: Our rates are designed to deliver real savings compared to credit cards and personal loans.
- Card-Based Access: Your Trovy HELOC comes with a card for easy access to your credit line, giving you flexibility while you work toward becoming debt-free.
- Transparent Terms: No surprises. You’ll know exactly what your rate is, how your payments work, and what to expect throughout the life of your HELOC.
- No Mandatory Draw: You’re not required to borrow anything upfront, so you can consolidate exactly what you need and keep the rest of your credit line available for emergencies.
- Fixed Rate Option: You have the option to convert your balance or any draw to a fixed rate installment loan.
The Bottom Line
Using a HELOC to consolidate debt can save you thousands in interest and simplify your financial life.
A HELOC makes sense for debt consolidation when:
- You have significant high-interest debt
- You have substantial home equity
- You’re committed to not accumulating new debt
- You have stable income
- The interest savings justify the costs and risks
Before moving forward, run the numbers, consider the alternatives, and honestly assess whether you’re ready to change the habits that created the debt in the first place.
Ready to explore whether a HELOC is right for your debt consolidation needs? Trovy can help you understand your options and determine if consolidating with a HELOC makes financial sense for your situation.
