Can You Use a Home Equity Loan to Pay Off Credit Cards?

Leveraging the equity built in a home can provide homeowners with financial options. Home equity loans and lines of credit represent ways to access a portion of this accumulated value. These financial products can serve various purposes, including funding large expenses or consolidating existing debts.

Understanding Home Equity Loans and Lines of Credit

Home equity represents the portion of your home’s value that you own outright, calculated as the difference between the home’s current market value and the outstanding mortgage balance. This equity can be accessed through two financial instruments: a home equity loan or a home equity line of credit (HELOC). Both options use your home as collateral, effectively creating a second mortgage on the property.

A home equity loan provides a lump sum of money upfront, which is then repaid over a fixed term with a fixed interest rate. This structure results in predictable monthly payments throughout the loan’s duration, typically ranging from five to 30 years. Conversely, a HELOC functions more like a revolving line of credit, similar to a credit card.

With a HELOC, borrowers can draw funds as needed up to a set credit limit during a specified “draw period,” which often lasts around 10 years. During this draw period, payments may primarily cover interest on the amount borrowed. After the draw period concludes, a “repayment period” begins, requiring payments of both principal and interest, usually over 10 to 20 years, until the balance is retired. HELOCs commonly feature variable interest rates, meaning payments can fluctuate with market conditions.

Using Home Equity Funds for Credit Card Balances

Funds obtained through a home equity loan or HELOC can be applied to existing credit card balances, a process often referred to as debt consolidation. With a home equity loan, the borrower receives the entire loan amount as a single disbursement, typically via direct deposit to a bank account or a check. The homeowner then uses this lump sum to pay off one or more credit card accounts. This action effectively transfers the credit card debt into a new loan secured by the home.

For a HELOC, funds are accessed as needed, up to the approved credit limit. The borrower can draw money by writing checks, using a linked card, or transferring funds to a checking account, then directing these amounts to pay down credit card debt. As payments are made on the HELOC, the available credit replenishes, allowing for future draws if necessary during the draw period. This combines multiple, often high-interest, unsecured credit card debts into a single, secured loan.

Requirements for a Home Equity Loan Application

Before applying for a home equity loan or HELOC, prospective borrowers need to meet specific criteria and prepare certain documentation.

Lenders generally require a minimum credit score, often in the mid-600s, with some preferring 680 or higher for better terms. A strong payment history on existing debts is also considered.

Another important factor is the debt-to-income (DTI) ratio, which compares monthly debt payments to gross monthly income. Most lenders prefer a DTI ratio of 43% or less, though some might allow up to 50% for HELOCs, while home equity loans can be more stringent.

Homeowners also need sufficient equity in their property, usually at least 15% to 20% of the home’s value, to qualify. The combined loan-to-value (CLTV) ratio, which includes all loans secured by the home, typically needs to be 80% to 85% or lower.

Required documentation for an application typically includes:

• Proof of identity (such as a government-issued ID)
• Social Security number
• Current residential address
• Recent pay stubs
• W-2 forms for the past two years
• Federal tax returns
• Employment history
• Bank statements
• Most recent mortgage statement
• Property deeds
• Proof of homeowner’s insurance

Borrowers should also be prepared for various fees and closing costs, which can range from 2% to 5% of the loan amount. These may include appraisal, credit report, origination, title search, and attorney fees.

The Home Equity Loan Application and Closing Process

The process of securing a home equity loan or HELOC begins after a homeowner has gathered all necessary information and determined their eligibility. The initial step involves submitting a formal application, which can often be completed online, over the phone, or in person, depending on the lender. This application provides personal details, property information, and the desired loan amount.

Following the application, the lender’s underwriting team reviews the financial profile, verifying all submitted documents and assessing creditworthiness. This phase includes a property appraisal to confirm the home’s current market value and ensure the requested loan amount aligns with available equity. The underwriter evaluates the borrower’s income, assets, debts, and ability to repay the loan.

Upon conditional approval, the lender issues a commitment letter outlining the loan terms and conditions. This is followed by the closing, a formal meeting where the borrower signs all required loan documents. Closing costs, which may include appraisal, title, and legal fees, are paid at this stage, though some may be rolled into the loan. After successful closing, the funds are disbursed to the borrower, typically as a lump sum for a home equity loan or made available for draw for a HELOC. The entire process, from application to funding, can take a few weeks, though timing varies by lender and individual circumstances.