The “Put Your Equity to Work” series | Part 2
Your home equity could help you consolidate high-interest debt. But how you access that equity matters.
A HELOC, home equity loan, and cash-out refinance can all provide funds to pay off other balances. Each comes with different payment structures, costs, and implications for your existing mortgage.
Before choosing one, here’s what to understand.
HELOC: A flexible line of credit
A home equity line of credit, or HELOC, lets you borrow against your home equity up to an approved limit. During the borrowing period—called the draw period—you can generally access funds as needed, subject to your loan terms.
Unlike receiving a single lump sum, you have a revolving credit line.
For debt consolidation: A HELOC could provide funds to pay off selected balances while leaving your existing first mortgage in place.
What to consider: HELOCs typically have variable interest rates, so payments can change. Payments may also increase when the draw period ends and repayment begins. If your plan allows interest-only payments initially, those payments won’t reduce the principal you owe.
Flexibility can be useful, but consolidating debt still calls for a clear payoff plan—and discipline about borrowing again.
Home equity loan: A lump sum with a repayment schedule
A home equity loan provides the amount you borrow in one lump sum. These loans usually have a fixed interest rate and scheduled payments over a set term.
Like a HELOC, a home equity loan is generally separate from your existing first mortgage.
For debt consolidation: If you know exactly which balances you want to pay off, a lump sum and predictable payment schedule may be worth comparing.
What to consider: Review the rate, fees, repayment period, and total borrowing cost. A longer term can lower your monthly payment while keeping you in debt longer.
Also, confirm that the specific loan you’re considering has a fixed rate rather than assuming it does.
Cash-out refinance: A new mortgage that replaces your current one
A cash-out refinance replaces your existing mortgage with a larger new mortgage. After paying off the original loan and accounting for applicable costs, you receive the remaining cash proceeds.
For debt consolidation: Those proceeds can be used to pay off other balances, bringing the refinanced mortgage and consolidated debt into a new mortgage payment.
What to consider: You’re changing the terms on your entire mortgage—not just borrowing the extra amount needed to pay off debt.
If you currently have a low mortgage rate, a new rate could increase costs on your existing mortgage balance. Closing costs and a new repayment timeline also belong in the comparison.
A smaller combined monthly payment may improve cash flow, but it doesn’t automatically mean you’ll pay less overall.
The differences at a glance
OptionHow you receive fundsExisting first mortgageTypical rate structureHELOCDraw from an approved credit lineStays in placeVariable; some offer fixed-rate featuresHome equity loanOne lump sumStays in placeUsually fixedCash-out refinanceCash proceeds from a larger replacement mortgageReplacedFixed or adjustable, depending on the loan
Which option fits your goals?
Start with what you want to accomplish.
Are you trying to create breathing room in your budget? Reduce interest costs? Establish a predictable payoff date? Preserve your existing mortgage rate?
Those goals can lead to different answers.
Ask your lender to compare your current repayment plan with potential alternatives, including upfront costs, total monthly payments, estimated interest, and the time needed to repay the debt. For variable-rate borrowing, ask how a rate increase would affect your budget.
All three options use your home as collateral. If you cannot make the payments, you could face foreclosure. Compare alternatives that don’t involve your home, too, such as an unsecured loan or a repayment plan developed with a nonprofit credit counselor.
Let’s compare the numbers
The right debt consolidation strategy starts with understanding your options and their tradeoffs.
Jim Yarrington can help you review your current mortgage, outstanding debts, and potential next steps based on your goals.
Visit MortgageStuff.com to connect with Jim and discuss which options may fit your situation.
Next in our series: Smaller Payments. But Are You Saving?
Jim Yarrington
Senior Mortgage Loan Officer
First State Bank Mortgage
NMLS #454680
👉 Apply online
📞 Call or text: 913-915-1855
All loans subject to approval. Equal Housing Lender.