Each year, millions of Americans face debt and struggle to find the best way to manage or reduce it. While options like personal loans or transferring balances between credit cards are available, homeowners often find that leveraging their home equity can provide lower interest rates, making debt more manageable.

Building and Utilizing Home Equity

Home equity is the difference between your home's market value (what it could sell for) and your remaining mortgage balance. For example, if your home is valued at $250,000 and you owe $200,000 on your mortgage, you have $50,000 in equity.

Typically, equity increases over time as you make mortgage payments, reducing your debt and increasing your ownership stake. For many Americans, home equity is one of their most significant financial assets. By using a home equity loan, a home equity line of credit (HELOC), or both, homeowners can access this asset without having to sell their property.

If you're thinking about using your home equity to manage debt, here are some important points to consider.

1. Consumer Debt Is on the Rise
   You're not alone in facing increasing debt. In Q4 2024, the average consumer debt per borrower was around $6,360, a figure that has been climbing in recent years. Besides credit card debt, homeowners often deal with vehicle loans, educational expenses, medical bills, legal fees, and home repairs, all contributing to their financial burdens.
2. Using Home Equity for Debt Consolidation
   Managing multiple debts with varying balances and due dates can be challenging. Missed payments can lead to additional fees and higher interest rates, perpetuating the debt cycle. Home equity loans or HELOCs can help consolidate credit card debt, auto loans, and other debts into a single payment, simplifying management and helping you work towards becoming debt-free.
3. Distinguishing Between Home Equity Loans and Lines of Credit
   Home equity loans and HELOCs can be effective for paying off debt, completing home improvements, or funding new ventures. Although both are based on the equity of your home, they operate differently. A home equity loan provides a lump sum to the borrower upon closing, with fixed payments according to the loan agreement. In contrast, a HELOC is a revolving line of credit with a variable interest rate. The borrower is approved for a specific amount but is not required to use the entire sum. They can draw from it as needed during the draw period, with repayment based on the amount used and possibly fluctuating interest rates. For example, Figure's HELOC offers both fixed rates and the option to take additional draws as needed.
4. Lower Interest Rates Compared to Credit Cards
   Home equity loans and HELOCs generally offer lower interest rates than credit cards because they are secured by your property. While some people consolidate credit card debt by transferring balances to a new card with a low or zero percent introductory APR, they must consider balance transfer fees and the potential for a significant APR increase if a payment is missed or late.
5. Home Equity Loan Limits Depend on Your Existing Equity
   Typically, lenders require you to have at least 20 percent equity in your home to qualify for a home equity loan or line of credit. The amount you can borrow is influenced by factors such as your credit score and income, but generally, lenders do not approve loans or lines of credit for more than 85 percent of your home’s total equity value.
6. Home Equity Loans Offer Fixed Limits and Terms for Easier Budgeting
   Unlike some types of debt where payments can grow despite regular payments, home equity loans provide a lump sum with a fixed repayment term. This fixed structure helps homeowners manage their budget and pay down debt more consistently over the term of the loan.
7. Secured vs. Unsecured Debt: Home Equity Loans vs. Personal Loans and Credit Cards
   Home equity loans and lines of credit are secured debts, meaning they are backed by an asset—in this case, your home. If you default, the lender may claim the asset to recover their losses. This contrasts with unsecured debts, like personal loans and credit cards, which do not require collateral. Secured debts usually come with lower interest rates, making them more affordable. However, because your home is the collateral for a home equity loan, it’s crucial to ensure you can make timely payments throughout the loan term.