Should you use your home equity to pay off credit-card debt? Read this before taking out a HELOC.

Andrew Keshner Banks are pitching home-equity lines of credit as a cheaper form of borrowing as Federal Reserve rate cuts could lower HELOC rates to the mid-6% range, according to one estimate An increasing number of homeowners are tapping the equity in their homes for cash, but not to finance a new kitchen. Instead, they’re turning their house into a piggy bank, sometimes to get their credit-card debt under control. It’s a sluggish moment for homeowners who are trying to sell but a brisk one for those who want to tap into their home equity. After waning in popularity for about a decade, more consumers started turning to HELOCs around 2022, as home values surged. And if the Federal Reserve cuts interest rates this year, it could help broaden the appeal of these credit lines even more. “We’re seeing borrowers use HELOCs for a variety of reasons, with debt consolidation being one of the most common, particularly when it comes to paying off high-interest credit-card debt,” said Alex Elezaj, chief strategy officer at United Wholesale Mortgage (UWMC). “With the average credit-card rate sitting at well above 20%, this can be a great option for many borrowers.” When people take out HELOCs from Better.com (BETR), debt consolidation is currently the top reason, said Kevin Ryan, president and chief financial officer at the online lending company. Rising home values, elevated mortgage rates and higher everyday costs are aligning to spur more demand. “The fact pattern is perfect,” he said. Americans are sitting on trillions of dollars in home equity and withdrew almost $25 billion through these lines of credit during the first quarter of 2025, according to Intercontinental Exchange (ICE). It was the biggest first-quarter jump to open these lines of credit since 2008, ICE said. The increase comes as Americans face mounting pressure from debt, with consumers racking up $1.18 trillion in credit-card debt as of the first quarter, and with 172 million people carrying a balance on their cards. Credit cards with unpaid balances charged an average 21.91% annual percentage rate in February and a personal loan averaged 11.66% interest, Federal Reserve data showed this month. Meanwhile, HELOCs are giving people access to pools of cash at rates below 10%. The average HELOC rate is currently 8.27%, according to Bankrate. On Wednesday, the Fed kept its benchmark rate in the range of 4.25% to 4.5% and forecast two cuts this year. Traders are thinking the first 2025 cut may come in September. Assuming the Fed cuts its rate three times by early next year, that could lower the average HELOC rate to the mid-6% range, according to ICE. On a fully utilized $50,000 line of credit, that would reduce monthly interest payments to $272 – down from $311 at the end of the first quarter of 2025. Banks are pitching customers that HELOCs have cheaper borrowing costs than credit cards and personal loans, and they’re assuring homeowners that as interest rates drop, so will the rate on their HELOC, as long as it’s the variable-rate variety. As these credit lines proliferate in a time of economic uncertainty, financial experts say homeowners should be aware of their pitfalls as well as their benefits. They shouldn’t rush the decision to take out a HELOC, especially if the goal is to pay off credit-card debt, and they should remember that there’s a reason the interest rate on a HELOC is lower than that on a credit card. That’s because in the case of a HELOC, the lender has collateral – the borrower’s home. “Just because it was the right thing for your neighbor to do, it doesn’t mean it’s the right thing for you to do,” said Donnie LaGrange, a wealth adviser at Murphy & Sylvest Wealth Management in Dallas. Last summer, he helped a client take out a HELOC that allowed him to pay off approximately $40,000 in credit-card debt and pay for a home-improvement project. Using a HELOC to pay off credit-card debt ranging from $20,000 to $30,000 might be a good idea for the right person, said Scooter Thomas, a financial adviser at Savant Wealth Management in Birmingham, Ala. But if the potential borrower has $100,000 in credit-card debt, Thomas noted, there are deeper questions that need to be answered, including how they got to there in the first place. Home-equity loan vs. HELOC Home-equity loans and home-equity lines of credit sound similar, but there are some big differences. A home-equity loan is a fixed-rate loan supplying all the money upfront. Borrowers repay the principal and interest over a set term, similar to a mortgage or a car loan. Meanwhile, a home-equity line of credit uses a homeowner’s residence to establish a revolving source of cash. Lenders set a credit limit, and the borrower can use the HELOC much like they would a credit card during what’s called the draw period. Better.com looks at an applicant’s credit score, income and assets when deciding what size HELOC a homeowner can qualify for, Ryan said. It also factors in the value of the home and the outstanding mortgage debt. Limits on HELOCs averaged approximately $120,000 in the first quarter, according to numbers from the Consumer Bankers Association. Borrowers on average used less than half of their allowed line, or about $52,000, according to the data. Balances on HELOCs have grown every quarter since 2022, and Americans now owe $400 billion, according to the Federal Reserve Bank of New York. That’s still far from the heights in 2009, when balances totaled just over $700 billion. During the draw period, borrowers can repay any principal and interest they owe, but they at least need to pay interest on the owed principal to avoid fees and credit-score dings. Draw periods typically range from five to 10 years. There’s no guarantee borrowers will have access to the money for the entire draw period. The lender might freeze the line if the homeowner misses payments or if their credit score drops noticeably, even if the dented score is from another part of the borrower’s life, said Chris Stanley, banking industry practice lead at Moody’s. After the draw period comes the repayment period. That’s when the unpaid balance has to be repaid, plus interest, and there are no more withdrawals allowed. It’s typically a 25- to 30-year window, with the HELOC as a second lien behind the mortgage itself, Stanley said. The flexibility of a HELOC may make it easier to use to tackle credit-card debt compared with a home-equity loan, said Thomas at Savant, because borrowers can vary the amount they draw depending on their other expenses. Don’t assume HELOC rates will drop even if the Fed cuts interest rates HELOCs mostly have variable interest rates, like a credit card. HELOC rates tend to follow the prime rate, according to Bankrate, but they can also change based on promotional offers from individual lenders. The prime rate typically follows the Fed’s rate, plus 3 percentage points. But HELOC lenders may also use the yield on the 10-year Treasury note BX:TMUBMUSD10Y as a guide for their rates, Stanley and Ryan said. Treasury-market volatility could complicate the picture on HELOC rates, even if the Fed starts cutting its benchmark rate, Stanley said. Consumers should not assume that HELOC borrowing costs will definitely decrease if the Fed starts cutting, Stanley noted. “You have to be aware of the risk that interest rates continue to stay high or go higher,” he said. Users also need to have a handle on their local real-estate market as well as their own plans to move or stay in their home. A HELOC, coupled with an original mortgage, could add up to more debt than a home is worth should there be a sharp decrease in the property’s value. If someone sells in that environment, they’d still have to pay back the mortgage and HELOC – possibly at a loss. “When the music stops on price increases, that’s when the trouble starts to come on this type of lending,” Stanley said. But the chance of owing more than the home’s underlying value is slim, said financial planner Rich Arzaga, owner of a planning firm called the Real Estate Whisperer. Lenders don’t often offer lines of credit that get too close to a home’s current value. Rather, they build in a buffer to ensure the borrower stays above water in the event of a decrease in value, he said. For many of his clients, Arzaga recommends using a HELOC as an emergency fund instead of stockpiling cash in a savings account. But he also issues a warning to them, remembering the recession of 2007-09, when HELOCs dried up. “When the market is bad and you need it the most, the banks can take it away,” he reminds clients. The right way to use a HELOC for credit-card debt If someone is going to use a HELOC to tackle credit-card debt, they first need to identify and address the underlying issues that landed them in debt. That’s a point financial advisers stressed repeatedly. “If it’s simply a matter of living outside your means, wiping that clean once and taking equity out of the home” delays finding a solution to the overspending and ultimately puts borrowers in a more difficult situation, LaGrange said. “It’s really important to take a look – where did the credit-card debt come from, why, and if you have a plan [to address it].” There are other ways to attack credit-card debt. A balance-transfer credit card takes the balance owed on a card and offers a period of time when there’s no interest charged on the debt. A personal loan is another option, and those are surging in popularity, according to Charlie Wise, senior vice president and head of global research and consulting at TransUnion (TRU). There’s been a big jump in personal loans to people with credit scores over 780, he noted, adding that some of those applicants might own a home but want to access money without the hassle of applying for a HELOC. Almost 25 million people had personal loans in the first quarter, up from 23.5 million a year earlier, according to TransUnion data. (MORE TO FOLLOW) Dow Jones Newswires 06-21-25 1319ET Copyright (c) 2025 Dow Jones & Company, Inc.

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