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Okay, so here's what happened last month when I was reviewing our client success data. I noticed something that honestly caught me off guard. We had dozens of homeowners calling about HELOCs, and when I dug deeper into what they were really trying to accomplish, the pattern became crystal clear. These weren't people looking to renovate their kitchens or add a second bathroom. They were drowning in credit card debt with interest rates north of 22%, and they'd finally realized their home equity could be the lifeline they needed.
The mortgage industry loves to make everything sound more complicated than it really is. A HELOC, or home equity line of credit, is essentially a revolving credit line that uses your home as collateral. Think of it like a credit card, except instead of charging you 22% interest on that balance, you're paying something closer to 8%. According to the , Americans were carrying $1.233 trillion in credit card debt as of the third quarter of 2025. That's trillion with a T, folks. And those aren't interest-free balances people are floating month to month.
When you use a HELOC for debt consolidation, you're basically taking that expensive debt and replacing it with cheaper debt. But here's where it gets interesting, and this is something I learned during my Master’s of Social Work (MSW) program when we studied financial stress and family systems. Debt consolidation isn't just about the math. It's about giving yourself breathing room to actually solve the underlying problem instead of just treading water.
The average credit card APR hit 22.83% in the third quarter of 2025 according to Federal Reserve G.19 consumer credit data, while HELOC rates averaged around 7.5% to 8.5% as of November 2025 based on Federal Reserve Economic Data. That's not just a little bit better. That's transformative. On a $30,000 balance, you'd pay roughly $6,850 per year in interest on a credit card versus about $2,350 on a HELOC. That's $4,500 every single year that could go toward actually paying down your principal instead of just making the bank richer.
Here in Louisville, I see this play out all the time with families in our neighborhood. You start with one credit card for emergencies. Then maybe you open another one because the first card's limit isn't quite enough. Before you know it, you're juggling four different cards with four different payment dates, four different interest rates, and the whole thing feels like trying to solve a Rubik's cube blindfolded.
The beauty of a HELOC for debt consolidation is twofold. First, you're consolidating multiple high-interest debts into a single payment with a dramatically lower interest rate. Second, because it's a line of credit rather than a fixed loan, you have flexibility in how you draw funds and make payments during what's called the draw period, which typically lasts about 10 years.
According to ICE Mortgage Technology's March 2025 Mortgage Monitor, HELOC withdrawals surged 22% in the first quarter of 2025, reaching nearly $25 billion. That's the highest first-quarter volume in 17 years. People aren't stupid. They're recognizing that with home equity levels at record highs and credit card rates at historic highs, this is one of those moments where the math just makes sense.
Let me break down how this actually works in practice. Let's say you have three credit cards with the following balances:
Card 1: $8,000 at 24.99% APR
Card 2: $12,000 at 21.49% APR
Card 3: $5,000 at 19.99% APR
Total debt: $25,000 with a weighted average APR around 22.4%
If you're making minimum payments of roughly 3% per balance each month, you're looking at about $750 in monthly payments, with approximately $467 of that going straight to interest in the first month alone. At that rate, you'll be paying on these cards for years, and you'll end up paying nearly $15,000 in interest over the life of the debt.
Now let's say you have $100,000 in home equity and you qualify for a HELOC at 8.05% APR. You open a $30,000 line of credit, draw $25,000 to pay off all three credit cards completely, and now you have one payment. During the 10-year draw period, if you're making interest-only payments, that's about $168 per month. But here's where it gets powerful. Instead of paying $750 per month like you were before, what if you kept paying $750 but directed it all toward your HELOC? Now you're putting $582 toward principal every single month instead of $283.
At that rate, you'd have the entire balance paid off in roughly 3.5 years and would pay approximately $6,200 in total interest instead of $15,000. You just saved yourself $8,800 and knocked more than half the time off your debt payoff timeline.
A HELOC isn't the right answer for everyone, and I'd rather you understand that upfront than make a decision you'll regret later. During my time in underwriting at Discover and later when we brought on the technology side here at AmeriSave, I saw too many situations where people used debt consolidation as a Band-Aid when they really needed surgery.
This isn't the move to make if you're worried about layoffs or your income is unpredictable. According to Equifax's U.S. National Consumer Credit Trends Report, outstanding HELOC balances reached $381.3 billion as of March 2025, up 9.7% from the prior year. Lenders are writing these loans, but they're being careful about who qualifies.
Most lenders want you to maintain a combined loan-to-value ratio of no more than 80% to 85%. If your home is worth $300,000 and you owe $200,000 on your first mortgage, that means you have $100,000 in equity. An 80% CLTV would let you borrow up to $240,000 total across both mortgages, so you could potentially access $40,000 through a HELOC. However, most lenders are more conservative and prefer you have closer to 20% to 30% equity available even after the HELOC.
The better your credit, the better your rate. At AmeriSave, we look at the full picture, your credit history, income stability, and debt-to-income ratio, to determine what makes sense.
Lenders want to see that you can afford all your debt payments, including your first mortgage and the new HELOC, while still having enough income left over for your other expenses.
This is the big one. If you ran up credit card debt because of a one-time emergency like medical bills or a period of unemployment, that's different from chronic overspending. If you consolidate your debt but don't change your spending habits, you'll end up with maxed-out credit cards again plus a HELOC payment. That's not financial freedom. That's a disaster waiting to happen.
If you have a car loan at 4.5% APR, consolidating that into a HELOC at 8% doesn't make mathematical sense. Focus on consolidating credit cards, personal loans, and other high-interest debt where the rate arbitrage actually works in your favor.
Not all debt is created equal, and understanding which debts benefit from HELOC consolidation versus which ones don't is critical. Let me walk you through the categories.
Credit cards are hands-down the best debt to consolidate with a HELOC. The Federal Reserve Bank of St. Louis reported that credit card delinquency rates have been trending upward since 2021, with the percentage of people 30 days or more delinquent growing significantly, particularly among lower-income ZIP codes. That tells me two things: people are struggling with credit card debt, and the high interest rates are making it nearly impossible to catch up.
When you're paying 22% to 25% interest on credit cards and you can refinance that into a HELOC at 8%, you're saving 14 to 17 percentage points. That's massive. On a $20,000 balance, that's the difference between paying $4,400 per year in interest versus $1,600. The $2,800 annual savings can go directly toward paying down your principal.
Personal loans vary wildly in their interest rates. Some borrowers with excellent credit might get rates in the 7% to 10% range, while others are paying 15% to 20% or more. If your personal loan interest rate is higher than what you can get on a HELOC, consolidation makes sense. However, if your personal loan is already in the 6% to 8% range, the juice might not be worth the squeeze, especially when you factor in HELOC closing costs.
Medical debt is tricky. According to the Consumer Financial Protection Bureau's research on medical debt, millions of Americans carry medical debt on their credit reports. Here's the thing though: many healthcare providers offer payment plans with little to no interest. Before you consolidate medical debt into a HELOC, check with your provider about payment plan options. You might be able to pay off that $10,000 hospital bill over 24 months interest-free, which would be far better than adding it to a HELOC where you're paying 8% interest.
That said, if you've already put medical debt onto credit cards because you needed immediate treatment and couldn't wait for payment plan approval, then yes, consolidating that credit card debt with a HELOC makes perfect sense.
Federal student loans come with protections that you lose if you consolidate them into a HELOC. Things like income-driven repayment plans, deferment options if you lose your job, and potential loan forgiveness programs under certain circumstances. Unless you have private student loans at truly astronomical interest rates and you're 100% certain you won't need those federal protections, leave your student loans alone.
The IRS and state tax authorities will work with you on payment plans, and the penalties and interest, while not fun, are often comparable to what you'd pay on a HELOC when you factor in all costs. More importantly, tax debt doesn't give creditors the right to foreclose on your home. HELOC debt does. Think very carefully about converting unsecured tax debt into secured debt against your home.
Let me be clear about this because I've seen people make these mistakes and it breaks my heart every time.
Cars depreciate. Rapidly. According to basic depreciation schedules, a new car can lose 20% to 30% of its value in the first year. By year five, it might be worth less than half what you paid. If you consolidate a car loan into a 10-year or 15-year HELOC, you'll be paying interest on that car long after it's been sold or traded in. Plus, auto loan rates for people with decent credit are often competitive with HELOC rates anyway. A 5% auto loan doesn't need to be consolidated into an 8% HELOC.
I shouldn't have to say this, but I'm going to anyway. Never, ever, ever use your home equity to pay for a vacation, a boat, jewelry, or any other luxury purchase. If you can't afford to pay cash for a vacation, you can't afford the vacation. Period. Using your home as collateral for discretionary spending is how people end up in foreclosure.
Mortgage rates and HELOC rates are different animals. As of late 2025, mortgage rates on primary loans were ranging from about 6% to 7.5% depending on credit profile and loan type, while HELOCs were running 7.5% to 8.5%. If you have a 30-year fixed-rate mortgage at 4% and you consolidate it into a HELOC at 8%, you're voluntarily doubling your interest rate. That's not financial planning. That's financial self-destruction.
The only scenario where this might make sense is if you have a very old mortgage with an interest rate above 10% from decades ago, and even then, you'd probably be better off with a traditional cash-out refinance rather than a HELOC.
Some people want to use HELOCs to invest in stocks, cryptocurrency, or other investments. The logic is that if they can borrow at 8% and earn 10% or 12% returns, they'll come out ahead. Here's the problem: investment returns aren't guaranteed, but your HELOC payment is. If the market crashes and you lose 30% of your investment, you still owe 100% of your HELOC balance plus interest. Unless you're a sophisticated investor with a high risk tolerance and significant assets elsewhere, don't gamble with your home equity.
Think of it like this: a home equity loan is like getting a dump truck full of money delivered to your driveway all at once. A HELOC is like having a tap you can turn on whenever you need it over the next 10 years. Both are secured by your home, but they work differently and serve different purposes.
A home equity loan gives you a lump sum, usually with a fixed interest rate, that you start paying back immediately with fixed monthly payments over a set term, typically 5 to 30 years. The Federal Reserve's G.19 data shows that as of late 2025, home equity loan rates were averaging around 8% to 8.5% for well-qualified borrowers.
Let's work through an example. You have $20,000 in credit card debt you want to consolidate. With a home equity loan, you'd borrow exactly $20,000 at a fixed rate, say 8.25%, for a 10-year term. Your monthly payment would be about $244. That payment never changes for the entire 10 years. You'll pay roughly $9,300 in interest over the life of the loan, for a total cost of $29,300.
A HELOC, on the other hand, gives you a credit line up to a certain amount, but you only pay interest on what you actually borrow. Most HELOCs have a 10-year draw period where you can borrow, repay, and borrow again, followed by a 10-to-20-year repayment period where you pay back everything you've borrowed. During the draw period, many HELOCs require only interest-only payments, though you can pay principal too if you want.
Using the same $20,000 example with a HELOC at 8.05% APR, during the draw period your interest-only payment would be about $134 per month. However, remember that you're not paying down any principal with that $134. If you only make interest-only payments for the full 10-year draw period, you'd pay $16,080 in interest during that time and still owe the full $20,000 principal.
That's why the smart move with a HELOC is to pay more than the minimum. If you paid that same $244 per month that you would have paid on the home equity loan, you'd have the entire balance paid off in about 9.5 years and would pay roughly $8,600 in total interest, actually saving you about $700 compared to the home equity loan.
The real advantage of a HELOC comes from flexibility. Let's say you have $20,000 in credit card debt today, but you also know you'll need to replace your roof next year for about $15,000. With a home equity loan, you'd have to either take out $35,000 now and start paying interest on all of it immediately, or take out $20,000 now and then apply for another loan next year when you need the roof money.
With a HELOC, you could get approved for a $40,000 line of credit, draw $20,000 today to pay off the credit cards, and then draw another $15,000 next year when you need it for the roof. You only pay interest on what you've actually borrowed, so you're not paying interest on that $15,000 until you actually need it.
The downside? HELOC rates are variable, meaning they can go up or down based on what the Federal Reserve does with interest rates. Most HELOCs have variable interest rates that are tied to the prime rate, which moves in lockstep with the Fed's benchmark rate. When the Fed cuts rates, HELOC rates drop within weeks. When the Fed raises rates, HELOC rates climb just as quickly.
Home equity loans have fixed rates, so once you close the loan, that's your rate forever. You get payment certainty. With a HELOC, you get flexibility, but you take on interest rate risk.
For debt consolidation specifically, I typically recommend a home equity loan if you know the exact amount you need, you want payment certainty, and you're comfortable with less flexibility. Go with a HELOC if you want to maintain access to that credit line for future needs, you're comfortable with some payment uncertainty, or you're not sure exactly how much you'll need to borrow.
At AmeriSave, we can help you run the numbers on both options to see which one makes more sense for your specific situation. Sometimes it's obvious, sometimes it requires looking at your whole financial picture to make the right call.
Applying for a HELOC isn't quite as involved as getting your first mortgage, but it's not like applying for a credit card either. Here's what the process actually looks like when you work through it from start to finish.
Before you do anything else, you need to know two numbers: what your home is worth today, and how much you still owe on your mortgage. The difference is your equity.
Let's say you bought your home five years ago for $250,000 with a 10% down payment, so you took out a $225,000 mortgage. Over those five years, between your monthly payments and home price appreciation, you might now owe $205,000 on that mortgage and your home might be worth $350,000 based on recent sales in your neighborhood. That means you have $145,000 in equity.
Most lenders will let you borrow up to 80% to 85% of your home's value minus what you owe on your first mortgage. So if your home is worth $350,000, 80% of that is $280,000. Subtract the $205,000 you still owe on your first mortgage, and you could potentially qualify for a HELOC up to $75,000.
Don't get too attached to that number yet though. That's the maximum theoretical amount. What you actually qualify for depends on your credit score, income, existing debts, and the lender's specific requirements.
Your credit score makes a huge difference in whether you'll be approved and what interest rate you'll get. According to CFPB research on credit reporting, errors on credit reports are surprisingly common, and cleaning them up before you apply can sometimes boost your score by 20 to 40 points or more.
Pull your credit reports from all three bureaus (Equifax, Experian, and TransUnion) using AnnualCreditReport.com, which is the official free source mandated by federal law. Look for any errors: accounts that aren't yours, late payments that were actually on time, balances that are reported incorrectly, or accounts that should have been removed years ago.
If you find errors, dispute them immediately with the credit bureau and the creditor who reported the information. The credit bureau has 30 days to investigate, and if they can't verify the information, they have to remove it from your report.
Most HELOC lenders want to see a credit score of at least 680, though the best rates typically go to borrowers with scores of 720 or higher. If your score is below 680, you might still qualify, especially if you have substantial equity and a low debt-to-income ratio, but expect to pay a higher interest rate.
Your DTI ratio is your total monthly debt payments divided by your gross monthly income. This includes your mortgage payment, any car loans, student loans, credit card minimum payments, and the projected payment on your new HELOC.
Here's an example. Let's say your gross monthly income is $8,000. Your current mortgage payment is $1,800, you have a car payment of $450, student loan payments of $300, and minimum credit card payments of $500. That's $3,050 in total monthly debt payments. Your DTI ratio is $3,050 divided by $8,000, which equals 38.1%.
Now, if you're consolidating those credit cards with a HELOC, your credit card payments would drop to zero, but you'd add the HELOC payment. Let's say you're borrowing $25,000 to pay off the credit cards, and during the draw period you plan to make payments of $600 per month. Your new DTI would be $3,150 divided by $8,000, or 39.4%.
Most lenders want to see a DTI ratio no higher than 43% to 50%, though some are more conservative. If you're on the edge, paying down some of your other debt before applying for the HELOC could help you qualify.
This is where people often make a mistake. They go to their current mortgage lender or their bank and just accept whatever rate they're offered. Don't do that. HELOC rates can vary by a full percentage point or more between lenders, and over a 10-year draw period, that difference adds up to thousands of dollars.
Get quotes from at least three to five lenders. This should include your current mortgage servicer, your regular bank, a few credit unions if you're eligible for membership, and online lenders.
Once you've chosen a lender, you'll need to provide documentation to verify your income, assets, employment, and identity.
If you have any unusual income sources like bonuses, commissions, rental income, or alimony, you'll need documentation for those as well. The more organized you are with this paperwork, the faster your application will move through underwriting.
The formal HELOC application asks detailed questions about your income, assets, debts, employment history, and the property itself. Some of this can be done online, but you'll likely need to sign certain forms in person or through electronic signature.
After you submit your application, the lender will order an appraisal to determine your home's current value. In some cases, especially if your loan-to-value ratio is conservative and you have recent tax assessments, lenders might use an automated valuation model instead of a full appraisal. But most of the time, you'll have an appraiser come to your home to inspect the property and compare it to recent sales of similar homes in your area.
The appraisal usually takes one to two weeks from order to completion. If the appraised value comes in lower than you expected, it could reduce the amount you're eligible to borrow.
Once the lender has your application, your documentation, and the appraisal, it goes to underwriting. An underwriter is a person whose job is to verify everything, assess the risk, and decide whether to approve your loan and at what terms.
The underwriter will verify your employment by calling your employer or checking recent pay stubs against tax records. They'll verify your bank accounts to make sure you didn't just borrow money from a friend to pad your savings right before applying. They'll review your credit report in detail and may ask for explanations about any recent late payments or collections. They'll calculate your DTI ratio and your LTV ratio to make sure both are within guidelines.
This process typically takes one to three weeks, though it can be faster with some online lenders. If the underwriter needs additional documentation or clarification, they'll send what's called a conditions letter asking for specific items. The faster you respond with what they need, the faster your approval moves forward.
If you're approved, you'll receive a closing disclosure at least three business days before your closing date. This document spells out the exact terms of your HELOC, including the credit limit, interest rate, fees, payment schedule during draw and repayment periods, and your three-day right of rescission.
That three-day rescission right is important. It means that even after you sign the closing documents, you have three business days to change your mind and cancel the HELOC without penalty. This protection exists because you're putting your home up as collateral, and consumer protection laws want to make sure you have time to think through that decision.
At closing, you'll sign a stack of documents including the deed of trust or mortgage that puts the lien on your home, the HELOC agreement itself, and various disclosure forms. Some lenders allow you to close via mail or electronically, while others require you to appear in person at a title company or attorney's office.
After you close, there's typically a three-day waiting period before you can access your funds due to that rescission right I mentioned. Once that period passes, you can draw from your HELOC by writing checks from the HELOC account, transferring funds online, or in some cases using a debit card linked to the line.
Most lenders will let you pay off your high-interest debts directly for you if you provide the account numbers and payoff amounts. This is actually the smart way to do it because it eliminates any temptation to use that money for something else, and it ensures the debts are paid off completely and promptly.
Let's talk about the less fun part: what this is going to cost you upfront and ongoing. HELOC closing costs are generally lower than first mortgage closing costs, but they're not nothing, and you need to factor them into your decision.
All told, expect closing costs on a HELOC to run anywhere from 2% to 5% of the credit line amount. On a $50,000 HELOC, that's $1,000 to $2,500. Some lenders advertise no closing cost HELOCs, but read the fine print. Usually this means they're rolling the costs into a slightly higher interest rate, or they're waiving costs but charging that early closure fee if you pay it off too soon.
When you're comparing HELOC offers, use the APR to compare apples to apples. The APR includes both the interest rate and most of the fees, giving you a true cost of borrowing. A HELOC with an 8.0% interest rate and $2,000 in closing costs might have a higher APR than a HELOC with an 8.2% interest rate and $500 in closing costs, depending on how much you borrow and how long you keep it.
This is where HELOCs can get confusing, so let me break it down in plain English. A HELOC has two distinct phases: the draw period and the repayment period.
During the draw period, which typically lasts 10 years, you can borrow money from your line of credit, repay it, and borrow again as many times as you want up to your credit limit. Think of it like a credit card in that sense. During this time, most lenders require you to make at least minimum monthly payments, which are usually interest-only on whatever balance you're carrying.
Let's work through an example. You have a $50,000 HELOC at 8% APR. You draw $25,000 in month one to pay off your credit cards. Your interest-only payment for month two would be about $167. If you pay just that minimum, your balance stays at $25,000. If you pay $500, then $333 goes toward principal and your balance drops to $24,667.
The key thing to understand is that during the draw period, you're not required to pay down principal, only interest. That makes the payments more affordable in the short term, but it means you're not making progress on actually paying off the debt unless you choose to pay more than the minimum.
After the draw period ends, you enter the repayment period, which typically lasts another 10 to 20 years. During this phase, you can no longer draw additional money from the line. Whatever you owe at the end of the draw period is what you'll be paying back over the repayment period, usually with fixed monthly payments that include both principal and interest.
Here's where people sometimes get shocked. If you borrowed $25,000 during the draw period and only made interest-only payments for all 10 years, you still owe the full $25,000 when you enter repayment. Now that $25,000 has to be paid back over the next 20 years at the current interest rate.
Let's say the rate is still 8% when you enter repayment. Your monthly payment would be about $209 per month for the next 20 years. That might be doable. But here's the risk: if interest rates have gone up since you opened the HELOC and your rate is now 11%, your payment would be about $258 per month. That $49 difference might not sound like much, but over 20 years it adds up to nearly $12,000.
This is why I always tell people: if you're using a HELOC for debt consolidation, treat it like a fixed-term loan even though it's structured as a line of credit. Decide upfront how quickly you want to pay it off, then make principal and interest payments from day one that will get you there, ideally within the 10-year draw period so you never have to worry about what rate you'll be stuck with during the repayment period.
If you borrowed $25,000 and you want to pay it off in seven years, you'd need to make payments of about $390 per month at 8% interest. If you can swing that, you'll be completely debt-free in seven years and you'll have only paid about $7,800 in interest. Compare that to paying interest-only for 10 years ($20,000 in interest) and then making payments for another 20 years ($25,160 in interest plus the original $25,000 principal) for a total cost of $70,160. The difference between making real payments versus minimum payments is literally $62,360 over the full 30-year life of the HELOC.
I'm going to be blunt about this because it's too important to sugarcoat. When you take out a HELOC, you are putting your home at risk. If you can't make the payments, the lender can foreclose on your house just like they could if you stopped paying your primary mortgage. This is not a theoretical risk. According to HUD foreclosure data, thousands of homeowners lose their homes every year because of foreclosure, and some of those are driven by people who couldn't afford their second mortgages or HELOCs.
Credit card debt is unsecured. If you stop paying your credit cards, your credit score tanks, you'll get harassing phone calls, they might sue you and get a judgment, and eventually they might garnish your wages. It's all terrible. But they can't take your house.
HELOC debt is secured by your home. If you stop making payments, the lender can and will start foreclosure proceedings after you're typically 90 to 120 days behind. In most states, the foreclosure process takes six months to a year, but at the end of it, you're being evicted from your home and your credit is destroyed for seven to ten years.
Before you consolidate debt with a HELOC, you need to be very confident that you can afford the payments not just now but for the next several years at a minimum. If your job situation is unstable, if you're in an industry that's facing layoffs, if you have health issues that might affect your ability to work, or if you're already stretched thin financially, a HELOC might not be the right answer.
Unlike a home equity loan with a fixed rate, most HELOCs have variable rates tied to the prime rate. When the Federal Reserve raises interest rates, your HELOC rate goes up, usually within one or two billing cycles. Federal Reserve meeting minutes and forecasts show that the central bank has changed rates multiple times in recent years in response to inflation and economic conditions.
Let's say you opened your HELOC when the prime rate was 7.5% and you got prime plus 0.5%, so your rate was 8%. If the Fed raises rates by a full percentage point over the next year and prime goes to 8.5%, your rate becomes 9%. On a $30,000 balance, that's an extra $300 per year in interest, or $25 per month. That's manageable.
But what if rates really take off like they did in the early 1980s when prime rate hit 21.5%? Or even like 2006-2007 when prime was over 8%? If your HELOC rate jumped from 8% to 12%, your monthly interest on that $30,000 balance would go from $200 to $300. If you're making interest-only payments, that's a $100 per month increase in your required payment.
There are some protections. Federal law requires that HELOCs have a cap on how much the rate can increase. Most HELOCs have a lifetime cap of 18% to 21%, meaning no matter how high the prime rate goes, your HELOC rate can't exceed that cap. But that's not exactly reassuring when we're talking about the debt being secured by your house.
You can protect yourself somewhat by looking for HELOCs that allow you to lock in a fixed rate on all or part of your balance, or by planning to pay off the HELOC quickly so you're not exposed to rate risk for a long period.
This is the sneaky risk that people don't think about until it's too late. You consolidate $30,000 in credit card debt with a HELOC. You pay off all the cards. Now those cards have zero balances. What happens next?
For some people, nothing. They cut up the cards or stick them in a drawer for emergencies only, they keep making payments on the HELOC, and within a few years they're debt-free. But for other people, having those credit cards available again is too tempting. They use them for a purchase here and there. Before long, the balances are creeping back up. Within a couple of years, they have $30,000 on the HELOC and $15,000 back on the credit cards. Now they owe $45,000 instead of the original $30,000, and they're in worse shape than when they started.
This is why I keep hammering on the point about addressing the root cause of your debt. If you ran up credit cards because of an emergency, that's one thing. If you ran them up because you have a spending problem, a HELOC isn't going to fix that. It's just going to give you more rope to hang yourself with.
Before you consolidate with a HELOC, have a plan for what you're going to do with those credit cards. My recommendation: keep one or two for emergencies and cancel the rest. Set up alerts so you get notified if you charge anything. Put them somewhere inconvenient so you can't impulse-spend with them. Whatever it takes to make sure you don't rebuild that credit card debt while you're still paying off the HELOC.
Every dollar you borrow on a HELOC is a dollar of equity you're extracting from your home. If home prices in your area decline, you could find yourself underwater, owing more on your mortgages than your home is worth.
According to ATTOM Data Solutions' Q1 2025 home equity report, more than 46% of mortgaged properties were equity-rich, but that still means more than half of homeowners have less than 50% equity. If you're one of those homeowners and you take out a large HELOC, you might end up with very little equity buffer.
Why does this matter? Because if you need to sell your home unexpectedly, maybe because of a job relocation, divorce, or financial emergency, you might not be able to get enough from the sale to pay off both your first mortgage and your HELOC. You'd have to come to closing with cash to make up the difference, or you'd have to negotiate a short sale with your lenders, which is a nightmare.
Options for consolidating HELOC debt that are worth thinking about
There are other ways to combine debts besides a HELOC, and sometimes a HELOC isn't the best way. Here are the main options you should think about:
A balance transfer card might be a better choice if you have good to excellent credit and all of your debt is on credit cards. Many cards let you transfer your balance with 0% APR for 12 to 21 months at first. You only have to pay a transfer fee of 3% to 5% of the amount transferred once. After that, you have the intro period to pay off the balance with no interest.
The only problem is that you have to pay it off before the intro period ends. If you don't, you'll have to pay interest at the card's standard APR, which is usually between 18% and 25%. This is a good option if you have a reasonable amount of debt and can realistically pay it off during the intro period. If you owe $10,000 on your credit card and can pay $500 a month, you will be debt-free in 20 months. If you got a card with a 0% intro APR, you would only have to pay the $300 to $500 transfer fee and you would be debt-free in less than two years.
In those same 20 months, you'd pay about $5,600 in interest on a HELOC. The balance transfer is the clear winner. But if you owe $40,000 and can only pay $500 a month, it will take you 80 months to pay it off. No balance transfer card has an intro period that long, so a HELOC is the better choice.
Personal loans are loans that don't require collateral and have fixed rates and payments for a set amount of time, usually three to seven years. Your credit score, income, and the lender all affect the rates a lot. People with good credit might pay rates between 7% and 10%, while people with fair credit might pay rates between 15% and 20%.
The good thing about this is that your home isn't at risk. If you lose your job and can't pay, the worst that can happen is that your credit rating goes down and your wages may be garnished. You won't lose your home. The bad thing is that personal loan rates are usually higher than HELOC rates, especially if your credit isn't perfect.
Also, personal loans usually have lower maximum loan amounts. Most of them are limited to $50,000, and many are limited to $25,000 to $35,000. A personal loan might not be able to combine everything if you owe more than that.
A cash-out refinance gives you a new, bigger mortgage that pays off your current first mortgage. You take out the extra money in cash and use it to pay off your debts. For instance, if you owe $200,000 on your current mortgage and your home is worth $300,000, you could do a cash-out refinance for $250,000, pay off your old mortgage with $200,000, and use the $50,000 difference to pay off other debts.
If current mortgage rates are close to or lower than your current rate, this could be a good choice. But if you have a 4% mortgage and rates are now 7%, a cash-out refi means you lose that 4% rate and have to pay 7% on the rest of your mortgage balance from now on. That doesn't make sense very often.
The other bad thing is that you still have to pay mortgage rates on the full loan amount, even though they are lower than HELOC rates. Instead of paying off your debt consolidation in 5 to 10 years with a HELOC or personal loan, you're paying interest on it for 30 years.
When mortgage rates were below 4%, cash-out refinancing made a lot of sense. These days, it's usually not the best choice unless your current mortgage rate is very high.
If your main problem is credit card debt and you can't even make the minimum payments, you might want to look into a debt management plan through a nonprofit credit counseling agency. These organizations work with your creditors to reduce interest rates, waive fees, and set up a repayment plan you can afford.
You send the credit counseling agency one payment each month, and they send it to your creditors according to the plan. The bad thing is that you have to close your credit cards and can't get new credit while you're in the program. But if you're in a lot of debt and a HELOC seems too risky, this could be your only chance.
Let me tell you what I've learned from working in underwriting for years and now on the tech side at AmeriSave. Here are the insider tips for getting the best rate.
Before you apply, raise your credit score. A difference can be made with just 20 points. Pay off your credit cards so that your balance is less than 30% of your limit, pay all your bills on time for at least six months, and fight any mistakes on your credit report.
Look at different lenders. Ask at least three banks, three credit unions, and two online lenders for quotes. The difference between the two rates can be a full percentage point or more.
Talk it out. You can talk about anything. Tell them to drop the application fee, lower the origination fee, or match a competitor's offer. The worst thing they can say is no.
Think about paying points. Some lenders will let you pay a fee up front, called "discount points," to lower your interest rate for good. If you plan to keep the HELOC for a long time and can afford the upfront cost, this makes sense.
Get the timing right. The Fed's monetary policy affects HELOC rates. If the Fed just raised rates, you should wait a few months if you can. If the Fed is lowering rates, act fast before lenders have had a chance to lower their rates all the way.
Use a bank you already have a relationship with. If you have a checking account, savings account, or first mortgage with a bank, they may give you a rate discount of 0.25% to 0.50%. Sometimes, you can get a small rate discount by setting up automatic payments from your bank.
This is important because being able to deduct taxes can change the real cost of your HELOC a lot. The Tax Cuts and Jobs Act of 2017 changed the rules, and now they are stricter than they used to be.
The IRS says that you can only deduct the interest on a HELOC if you use the money to buy, build, or make major improvements to the home that secures the loan. If you use the money from a HELOC to pay off credit cards, pay medical bills, buy a car, or consolidate debt, you can't deduct the interest. End of story.
Sometimes people get confused about an exception. You can deduct the interest on the part of the HELOC that you use for home improvements if you use some of it for debt consolidation and some of it for home improvements. But you have to keep very detailed records of how you spent the money.
Let's say you get a $60,000 HELOC, for instance. You pay off your credit cards with $40,000 and use the other $20,000 to fix up your kitchen. You could write off one-third of the interest ($20,000 / $60,000). Two-thirds would not be.
The deduction only helps if you list your deductions on your tax return instead of taking the standard deduction. For single filers, the standard deduction is $15,000, and for married couples filing jointly, it is $30,000. If your mortgage interest, state and local taxes, charitable donations, and other itemized deductions don't add up to more than that amount, it's better to take the standard deduction. Your HELOC interest deduction won't help you at all.
You can only deduct state and local taxes (SALT) up to $10,000, even if you do itemize. For a lot of homeowners, especially those who live in states with high taxes, your SALT deduction is already full before you even get to the mortgage interest.
Don't assume that the interest on your HELOC will be tax-deductible. Talk to your tax advisor about the numbers. That's great if it's tax-deductible. If not, think about that when deciding if a HELOC is better than other ways to consolidate.
Let me show you some real-life situations I've seen. These situations are based on real clients we've worked with, but the names and other details have been changed.
Jennifer from Louisville had about $45,000 in equity in her home. She spent a week in the hospital with a health problem that turned out to be not too serious but very scary. She had $22,000 in medical bills that she couldn't pay in cash after insurance. The hospital would only let her pay in 12 months, which meant she would have to pay about $1,850 a month, which she could not afford on her income.
She used three different credit cards to pay the bills, with interest rates between 19% and 24%. In just a few months, she was drowning in minimum payments of about $660 a month and not even making a dent in the principal. She came to us to talk about a HELOC.
We helped her get an 8.25% HELOC for $25,000. She paid off all three credit cards right away with $22,000. She set aside the extra $3,000 as an emergency fund. She used to pay $660 a month on her credit cards, but now she pays $550 a month on the HELOC. She was now putting $402 a month toward the principal instead of $150, even though her monthly payment went down by $110. She paid off the whole HELOC in four years and saved about $9,000 in interest compared to what she would have paid if she had just kept paying off her credit cards.
This worked because she had a steady job, lived within her means after the medical emergency, and had enough equity to borrow what she needed. Most importantly, she didn't think of the HELOC as free money. She paid it off quickly, as if it were a loan with a set term.
Michael owed $38,000 on six credit cards. He had a house worth about $280,000 and a first mortgage balance of $180,000, which meant he had $100,000 in equity. He had a steady job that paid him $75,000 a year and a credit score of 695. He looked like a good candidate for a HELOC on paper.
He got a $50,000 HELOC with a 9.25% interest rate. He paid off all six credit cards with $38,000. His monthly payments went from $1,140 on his credit cards to $288 in interest-only payments on his HELOC. Things were going well.
This is where it all went wrong. Michael never said why he had that credit card debt in the first place. He enjoyed shopping. New electronics, going out to eat four or five times a week, expensive vacations, concert tickets, you name it. He had run up five of them to almost $22,000 in new debt within 18 months of paying them off.
He now owed $60,000 in debt, which was $38,000 more than when he started. This included $38,000 on the HELOC and $22,000 on credit cards. His minimum payments were back up to more than $1,000 a month. He came back and asked to raise his HELOC limit, but by then his debt-to-income ratio was too high and he had lost equity. He didn't meet the requirements.
The last time I heard, he was thinking about bankruptcy and looking into debt settlement companies. The HELOC didn't cause his problems, but it made them worse by letting him make lower payments for a short time without changing how he spent money.
In early 2023, when rates were low, Sarah got a HELOC for $35,000. Her first rate was 7.75%, and she paid $400 a month, which was enough to slowly pay down the principal. Things were under control.
Then, to fight inflation, the Fed started raising rates quickly. By the middle of 2024, the prime rate had gone up by 2 percentage points, and her HELOC rate had gone up to 9.75%. Her $400 monthly payment, which had been going toward the principal, was now only just enough to cover the interest each month.
To keep making the same progress she had been making, she had to raise her payments to $550 a month. She had to cut back on other parts of her budget because of the $150 difference. She stopped going to the gym, stopped putting money into her retirement account for a while, and put off some car repairs that she needed to do.
This is the danger of products with variable rates. When the Fed started cutting rates in late 2024, Sarah's situation got better, but for about 18 months, she was worried about money in a way she hadn't been when she first got the HELOC. She told me recently that she would have chosen a fixed-rate home equity loan instead, even though the initial rate was a little higher, just to be sure of her payments.
Here's what it all comes down to. If you use a HELOC for debt consolidation the right way, it can be a very powerful tool. You can really save a lot of money on interest compared to credit cards. It's useful to be able to make your finances easier by combining several payments into one. It often makes perfect mathematical sense for homeowners who have a lot of equity and high-interest debt.
But, and this is a big but, it only works if you are honest with yourself about why you are in debt and whether you can stop making the same mistakes. You can only borrow money if you have a steady income and a good plan for how to pay it back. And it only works if you know and accept the risk that you could lose your home if something goes wrong.
For years, AmeriSave has been working on tools and resources to help homeowners make these choices. We're not going to try to get you to take out a HELOC if it doesn't make sense for you. We're here to help you figure out the numbers, know your options, and make a choice you'll be happy with in five years.
If you have home equity and a lot of high-interest debt, the first thing you should do is figure out how much you owe, what interest rates you're paying, and how much you're spending on debt service each month. After that, get quotes from several HELOC lenders to find out what rate you can get. Try out different payment amounts to see how much you could save and how quickly you could pay off the debt.
Tell your family about your financial goals and how you plan to use the HELOC in a responsible way. To make sure you're dealing with the real reasons for your debt and not just the symptoms, think about getting help from a financial advisor or credit counselor. And if you decide that a HELOC is the right thing to do, promise to pay it off quickly instead of just making the minimum payments.
How seriously you take these choices can make the difference between financial freedom and disaster. The most valuable thing you own is your home. Your equity is the result of years of payments and hopefully growth. It's smart to use that equity to make your money situation better. It's dangerous to use it carelessly. Before you sign, make sure you know what group you're in.
Consumer Financial Protection Bureau. "The Consumer Credit Card Market." CFPB Data and Research Reports. https://www.consumerfinance.gov/data-research/research-reports/the-consumer-credit-card-market/
Consumer Financial Protection Bureau. "As Outstanding Credit Card Debt Hits New High, the CFPB is Focusing on Ways to Increase Competition and Reduce Costs." CFPB Blog. https://www.consumerfinance.gov/about-us/blog/
Federal Reserve Bank of Boston. "Why Has Consumer Spending Remained So Resilient? Evidence from Credit Card Data." Current Policy Perspectives, Hagler and Patki, 2025. https://www.bostonfed.org/publications/current-policy-perspectives/2025/
Federal Reserve Bank of New York. "Consumer Credit Panel / Equifax." Household Debt and Credit Report. https://www.newyorkfed.org/microeconomics/hhdc
Federal Reserve Bank of St. Louis. "The Broad, Continuing Rise in Delinquent U.S. Credit Card Debt Revisited." On the Economy Blog, May 2025. https://www.stlouisfed.org/on-the-economy/2025/
Federal Reserve Board. "Consumer Credit - G.19." Monthly Statistical Release. https://www.federalreserve.gov/releases/g19/current/
Federal Reserve Board. "Federal Open Market Committee Monetary Policy Statements." https://www.federalreserve.gov/monetarypolicy/fomc.htm
Federal Reserve Board. "Financial Stability Report." https://www.federalreserve.gov/publications/financial-stability-report.htm
Federal Reserve Economic Data (FRED). "Finance Rate on Consumer Installment Loans at Commercial Banks, 24-Month Personal Loans." St. Louis Fed. https://fred.stlouisfed.org/series/TERMCBPER24NS
ICE Mortgage Technology. "Mortgage Monitor Report." First Quarter 2025. https://www.icemortgagetechnology.com/
Equifax. "U.S. National Consumer Credit Trends Report." March 2025. https://www.equifax.com/business/consumer-credit-trends/
ATTOM Data Solutions. "Home Equity Insights." First Quarter 2025. https://www.attomdata.com/
U.S. Department of Housing and Urban Development (HUD). "Single Family Housing Default Monitoring System." https://www.hud.gov/program_offices/housing/rmra/oe/rpts/sfh/
Internal Revenue Service. "Publication 936: Home Mortgage Interest Deduction." https://www.irs.gov/publications/p936
The answer really depends on how hard you go after the debt. If you don't pay it off sooner, the HELOC gives you up to 10 years to borrow and pay it back during the draw period, and then another 10 to 20 years to pay it back. You don't have to use all of your time, though. From what I've seen from clients who successfully used HELOCs to pay off their debts, the best time to do it is between three and seven years. This way, you can take advantage of the lower interest rate while lowering the chance that rates will go up over time.
According to Federal Reserve data from 2025, the average household with credit card debt would take about 5 to 8 years to pay off their balances if they only made the minimum payments at normal interest rates. You can realistically cut that time down to 3 to 5 years with a HELOC that has half the interest rate and slightly higher payments.
This is a real-life example. If you combine $30,000 in credit card debt into a HELOC with an 8% interest rate and promise to pay $700 a month, you will be debt-free in 4 years and 10 months. You'd have to pay about $10,300 in interest. In comparison, the minimum payments on a credit card could have taken 12 to 15 years and cost you $30,000 or more in interest. When you promise to make real payments instead of just the minimums, the difference is huge. The most important thing is to set a date for when you want to pay off the HELOC and then figure out how much you need to pay each month to get there. Don't just sit back and make interest-only payments, hoping that one day you'll get around to paying the principal. You won't get there unless you make a plan and stick to it.
No, and this confuses a lot of people because the rules used to be different. The Tax Cuts and Jobs Act of 2017 changed IRS rules so that you can only deduct interest on home equity debt if you use the money to buy, build, or make major improvements to the home that secures the loan.
You can't deduct the interest on a HELOC if you use the money to pay off credit card debt, medical bills, college tuition, or buy a car. Publication 936 from the IRS has a lot of information about this. It talks about the Home Mortgage Interest Deduction. The IRS is pretty clear that the money has to be used for home improvements that will make the property worth more, like adding a room, fixing up the kitchen, replacing the roof, or upgrading the electrical systems.
You can't deduct the interest just because you used your home as collateral. The main goal of the loan is what matters. If you use some of your HELOC money to make home improvements and some to pay off debt, you can deduct the interest on the part that went to home improvements. For example, if you get a $50,000 HELOC and spend $30,000 on a kitchen remodel and $20,000 on paying off credit cards, You could write off 60% of the interest because that part was used to make improvements to your home. But you need to keep very careful records of how you spent the money, because the IRS can and will ask for proof if they audit you.
Another thing to keep in mind is that you can only deduct your HELOC interest if you itemize your deductions on your tax return instead of taking the standard deduction. The standard deduction for 2025 is $15,000 for single filers and $30,000 for married couples who file together. Before you assume that getting a HELOC will help you with your taxes, always talk to a tax professional about your specific situation.
Most lenders will only give you a HELOC if your credit score is at least 680. Scores of 720 or higher will get you the best rates. But that's not always the case. People with scores between 640 and 660 have been approved before, especially if they have a lot of equity, a steady income, and a good reason for their past credit problems.
Here's a rough breakdown of what CFPB research on consumer credit says. If your score is 760 or higher, you'll be able to get the best rates, which are usually around prime plus 0% to 0.5%. The prime rate is about 7.5% as of late 2025, so HELOC rates are between 7.5% and 8%. You might also be able to get some of your closing costs lowered or waived.
If you have a score between 700 and 759, you should be able to get a loan from most major lenders at rates between prime plus 0.5% and 1.5%, which is about 8% to 9%. The costs of closing will be the same.
If your score is between 680 and 699, you'll still be able to get a loan from many lenders, but the rates will be higher, probably between 1.5% and 2.5%, or 9% to 10%. Some lenders might want a lower loan-to-value ratio, which means you can't borrow as much of your equity.
If your score is between 620 and 679, your options are limited. Some credit unions and specialized lenders will help you, but the interest rates might be between 10% and 12%. You'll need a lot of equity and strong reasons to get a loan, like a high income or very stable job.
Most traditional HELOC lenders won't give you a loan if your score is below 620. The most important thing to know is that your credit score isn't the only thing that matters. Lenders also look at your overall financial profile, your debt-to-income ratio, how stable your job is, how much equity you have, and how well you've been paying your current mortgage. If your credit score is not very good, work on it for three to six months before you apply. Pay off your credit cards so that the balance is less than 30% of the limit. Pay all of your bills on time. Do not apply for new credit. If you see any mistakes on your credit reports, fight them.
Yes, and this is one of the best ways to use a HELOC because it lets you do many things with it over time. Keep in mind that a HELOC is a line of credit that you can use over and over again, not a loan that you can only use once. You can borrow money, pay it back, and borrow it again as many times as you want during the draw period, which is usually 10 years.
This is how this could work in real life. You might be able to get a $60,000 HELOC. You need to combine your credit card debt of $25,000 today. You take out $25,000 from the HELOC and use it to pay off all of your credit cards. You have borrowed $25,000 and still have $35,000 available. You pay off the HELOC quickly over the next few years until it is only $10,000. You now have $50,000 to spend. It will cost you about $30,000 to update your kitchen. You take $30,000 out of your HELOC to pay for the work in the kitchen. You now owe $40,000 on the HELOC: $10,000 from the original debt consolidation and $30,000 from the kitchen.
From a tax point of view, this is where things get interesting. You can deduct the interest on the $30,000 you borrowed for the kitchen renovation because it made your home much better. The $10,000 that is left over from the original debt consolidation doesn't count because it was used to pay off credit cards. If you itemize, you can deduct 75% of the interest on your HELOC, but not 25%. The most important thing is to keep very detailed records of what you borrowed, when you borrowed it, and what you did with the money. One thing to keep in mind: don't use this freedom as an excuse to keep borrowing forever. Just because you can borrow more doesn't mean you should. You have to pay back every dollar you borrow against your home with interest.
This is a scary situation that happened to millions of homeowners during the 2008 financial crisis, so it's good to know how it works. You are in a negative equity or underwater situation if your home's value drops below what you owe on your first mortgage and your HELOC. The good news is that nothing will happen as long as you keep paying your first mortgage and your HELOC. Just because you're underwater doesn't mean the lender can demand payment right away. You keep making your payments as agreed, and eventually either the value of your home goes up or you pay down enough of the principal to get back to positive equity.
There are three situations in which the problems happen. If you try to sell your home while it's underwater, you won't be able to get enough money from the sale to pay off both mortgages. To make up the difference, you can either bring cash to closing, negotiate a short sale with your lenders, or walk away and let the home go into foreclosure. Second, you probably can't refinance your first mortgage to get a better rate because lenders won't do it if you're underwater. Until you build up enough equity, you're stuck with whatever rate you have. Third, if you can't pay your HELOC and you're underwater, you're in big trouble. The lender on your HELOC can foreclose, but they're second in line after your first mortgage. This means they lose money unless the foreclosure sale price is higher than what you owe on the first mortgage.
The Federal Reserve looked into home equity during the financial crisis and found that some lenders did freeze or lower credit lines on HELOCs when home values were going down. Keeping a conservative loan-to-value ratio from the start is the best way to protect yourself against this situation. If you only borrow up to 70% CLTV instead of 85%, you have a 15% cushion before you go underwater, even if home values drop.
This is a more complicated question than it seems at first because your credit score is affected by something called the credit utilization ratio, which is how much credit you're using compared to the total amount of credit you have. Let me explain the strategic approach.
As soon as you use a HELOC to pay off your credit cards, all of them will have zero balances. If you close all of them right away, you won't have much credit left. If you had five credit cards with a total credit limit of $40,000 and you owed $25,000 on them, your credit utilization was 62.5%, which is very high and hurts your score. You used a HELOC to pay off all five cards, and now you don't owe anything on them. Your credit utilization on your revolving credit accounts just went down to 0%, which will help your credit score. This is great.
But if you close all five cards right away, you'll go from having $40,000 in available credit to having none. Based on what I've seen work for clients, I usually tell them to keep their two oldest credit cards open, especially if they don't charge annual fees. If you need to, put them in a drawer or freeze them in a block of ice. But keep them open so you can keep your credit available and your credit history long. If you're not using a card that charges an annual fee, close it. It's dumb to pay $95 or $150 a year for a card you don't use. Also, get rid of any store cards or cards from stores that might make you want to shop too much. Set up a small, regular charge, like a subscription, for the cards you keep open. Then set up autopay so that the bill is paid in full every month without you having to do anything.
Be honest with yourself about how you spend your money. If you can keep those cards at zero balances or only use them for regular expenses that you pay off in full each month, then it makes sense to keep a few cards open to help your credit score. If you can't do that, close all but one card and keep that one hidden away for real emergencies only.
This is very important to understand because it will directly affect how much you pay on your HELOC, possibly by thousands of dollars over the life of the loan. Most HELOCs have interest rates that change based on the prime rate. The prime rate is affected by the federal funds rate set by the Federal Reserve. This is how it works. The Federal Open Market Committee sets a goal for the federal funds rate, which is the interest rate that banks charge each other for overnight loans. When the Fed changes this rate, banks change their prime rate to match it. The prime rate is almost always exactly three percentage points higher than the fed funds rate. The prime rate will be 7.5% if the fed funds rate is 4.5%. The prime rate plus a margin based on your credit profile is usually how your HELOC rate is figured out. Your margin could be as low as 0.5% if you have good credit. This means that your HELOC rate would be prime plus 0.5%. If your credit is good but not great, your margin could be 2%, which means your rate would be prime plus 2%. The margin stays the same for the life of your HELOC, but the prime rate part changes when the Fed changes rates.
Federal Reserve monetary policy statements say that these rate changes happen quickly. After the Fed meets and announces a rate change, banks usually change their prime rate within one or two business days. After that, your HELOC lender changes your rate for the next billing cycle. Let's look at a real-life example from 2024 to 2025. During this time, the Fed changed interest rates several times because of worries about inflation. If you had a $40,000 HELOC balance with a rate of prime plus 0.5%, changes in the rate could mean that your interest payments would be hundreds of dollars different each year. Of course, the risk is that it goes both ways. Your HELOC rate would go up if inflation came back and the Fed had to raise rates again. That's why I always tell people that if they're using a HELOC to pay off debt, they should plan to pay it off in three to five years, preferably during the draw period.
First, don't freak out, but don't ignore it either. You shouldn't just ignore the problem and hope it goes away. No, it won't. If you can't make your payments or think you might have trouble in the next few months, call your lender right away. If you reach out, most lenders have hardship programs that can help. What you need to know is that banks don't want to take your home away from you. Foreclosure costs them a lot of money and takes a lot of time, and if they're in second place behind your first mortgage, they might not even get back the full amount of their loan from the sale. That means they're usually happy to work with you as long as you talk to them and show good faith. Here are some options that might be open to you, depending on your situation and the programs your lender offers.
Temporary payment reduction: Some lenders will lower your payment to interest-only or even less for a few months while you get back on your feet. Extended repayment terms: Some lenders will extend the repayment period if you're in the repayment period and can't make your payments. This means that the remaining balance will be spread out over more years, lowering your monthly payment. Some lenders offer skip-a-payment programs that let you skip one or two payments a year without penalty. The missed payment is added to the end of your loan. Forbearance, which means that in very rare cases, some lenders will put your loan into forbearance for a while. This means that you won't have to make any payments or only make small ones for a few months. Usually, this is only for things like natural disasters or medical emergencies.
If your lender won't work with you, you have a few other choices. You might be able to refinance your first mortgage so that you can pay off both mortgages. If you still have equity in your home after paying off both mortgages, sell it. Consumer credit counseling, where nonprofit groups can sometimes work with your lender to get you a better deal. The sooner you do something, the more choices you have.
Most HELOCs don't have traditional prepayment penalties, but some do have early closure fees. It's important to know the difference. If you pay off the loan early, you will have to pay a prepayment penalty. You have to pay an early closure fee if you close the line of credit early. The Truth in Lending Act says that lenders must include any fees for paying off a HELOC early or closing it early in the agreement. Most of the time, these work in one of a few ways. Some lenders don't charge anything if you pay off your HELOC early, so there is no penalty or fee.
You can pay off the balance and close the line whenever you want for free. Early closure fee: If you close the HELOC within the first two to three years after opening it, many lenders charge a fee of $300 to $500. This is to get back the money they spent to make the loan. You can pay off the balance without any penalties, though; the fee only applies if you actually close the line of credit. Minimum draw requirement: Some lenders require that you keep a minimum balance for the first 12 months, which is usually between $10,000 and $25,000, depending on your credit limit. You might have to pay a fee if you pay less than that.
You can pay it off or down without any penalties after the first year. It's worth noting that paying down your HELOC balance to zero is almost always allowed without any fee, even if there's an early closure fee. The difference is that the line of credit stays open and available even when the balance is zero. If your HELOC has an early closure fee, it usually makes sense to pay off the balance as soon as you can and then keep the line open for the least amount of time needed to avoid the fee. Ask about prepayment penalties, early closure fees, minimum balance requirements, and annual fees before you sign your HELOC agreement. Put these in writing.
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