Which is better for debt consolidation: HELOC or home equity loan?

Choosing between a HELOC and a home equity loan for debt consolidation comes down to two questions: do you need flexibility, and can you accept variable interest risk? Both products let you borrow against your home’s equity to pay off higher‑cost unsecured debt (credit cards, personal loans), but they carry different costs, repayment patterns, and risks — including the fact that your home secures the debt.

Below I lay out how each product works, the financial tradeoffs, real examples, eligibility and costs to check, alternatives, and a short decision framework you can use to choose the right option.

How each product works (quick primer)

  • HELOC (Home Equity Line of Credit): a revolving credit line secured by your home. You get a maximum credit limit, a draw period (typically 5–10 years), and a repayment period (often 10–20 years) when draws stop. Interest rates are usually variable and tied to an index plus a margin. During the draw period many HELOCs allow interest‑only payments. (See Consumer Financial Protection Bureau guidance on HELOCs: consumerfinance.gov.)

  • Home equity loan (sometimes called a second mortgage): a lump‑sum loan for a fixed amount with a fixed interest rate and fixed monthly payments over a set term (often 5–30 years). You receive the money once and begin repaying principal + interest immediately.

Both are secured by the same collateral—your home—so missed payments can lead to foreclosure. The interest rules for tax deduction are specific: interest may be deductible only if the loan proceeds are used to buy, build, or substantially improve the home that secures the loan (IRS guidance; consult a tax professional).

Pros and cons for debt consolidation

  • HELOC — Pros:

  • Flexibility to borrow only what you need. Good if you have fluctuating expenses or you don’t know the exact payoff amount.

  • Lower initial payments possible during interest‑only draw period.

  • Potentially lower rates than unsecured credit cards or personal loans (depends on credit and market conditions).

    HELOC — Cons:

  • Variable rates mean monthly payments can rise if interest rates increase.

  • Interest‑only draws can leave principal outstanding and lengthen total repayment time.

  • Some HELOCs have fees, annual reviews, or early termination costs.

  • Home equity loan — Pros:

  • Predictable fixed payments and a fixed interest rate make budgeting easier.

  • Good choice when you need a one‑time lump sum to pay off existing balances.

  • If rates are low and you expect to repay on a known schedule, total interest cost is easier to forecast.

    Home equity loan — Cons:

  • Less flexible: you borrow once for a set amount.

  • Closing costs and fees can be similar to HELOCs.

  • If rates fall after you lock in, you won’t benefit without refinancing.

Real‑world comparison and examples

Example A — Lisa (HELOC): Lisa had $40,000 of credit card debt carrying ~20% APR and took out a HELOC with 6% variable interest and a $50,000 limit. She used $40,000 to pay the cards. Her monthly interest dropped immediately; because she had an interest‑only draw period she lowered payments short‑term but kept principal outstanding, so she needed a repayment plan to avoid long‑term interest costs. Over two years, as she steadily paid principal, she saved on annual interest compared with the credit cards.

Example B — Michael (Home equity loan): Michael had $30,000 of mixed unsecured debt. He took a fixed‑rate home equity loan at 5% for 10 years. His monthly payment was predictable and his repayment term guaranteed payoff in 10 years, removing the temptation to re‑accumulate credit card debt. The fixed structure made budgeting easier while avoiding variable rate risk.

In my practice, clients who value a clear payoff date and strong discipline often choose a home equity loan. Clients who need a safety net for uneven expenses or who expect to pay debt down quickly sometimes prefer a HELOC — provided they accept rate risk.

Eligibility, maximums, and key numbers to check

  • Loan‑to‑Value (LTV): Lenders generally let you borrow up to a combined LTV (first mortgage + HELOC/second mortgage) of 80%–90% depending on credit and lender policy. See our guide to Understanding Loan‑to‑Value (LTV) and Equity’s Role in Home Loans for details.
  • Credit score: many lenders want a score of 620+; better rates require higher scores.
  • Debt‑to‑Income (DTI): lenders commonly look for DTI under ~43%, though rules vary.
  • Costs: ask for APR, origination fees, appraisal, title fees, recording fees, and any annual or inactivity charges on a HELOC.

Fees and timing to watch

  • Upfront closing costs: appraisal, title search, recording fees, and origination fees can add 1%–3% of the loan amount; some lenders waive certain fees on promotional offers.
  • HELOC specific: possible annual fee, inactivity fee, cancellation fee, or a fee to convert outstanding balance to a fixed repayment schedule.
  • Prepayment penalties are uncommon on home equity loans but always confirm.

We explain common HELOC charges and how to avoid surprises in our article on Using Home Equity Lines (HELOC) Responsibly: Risks and Rewards.

How to evaluate which is better for you — a simple decision checklist

  1. Do you need a one‑time amount or ongoing access? If one‑time, a home equity loan likely fits. If ongoing access matters, consider a HELOC.
  2. Can you tolerate variable rates? If no, prefer a home equity loan or ask about HELOC conversion options.
  3. Do you need a guaranteed payoff date? If yes, pick a fixed‑term home equity loan.
  4. Are you disciplined about avoiding new unsecured debt? Consolidating without changing habits risks returning to high balances.
  5. Compare APRs and all fees for total cost — not just the advertised rate.

If you want a step‑by‑step consolidation plan that doesn’t use your home, see our coverage of personal loans for debt consolidation: Personal Loan Debt Consolidation: Setting Up a Successful Plan.

Alternatives to consider

  • Cash‑out refinance: replace your first mortgage with a larger mortgage and take the difference in cash. Often good when first‑mortgage rates are low and you want a single loan.
  • Unsecured personal loan: no home collateral, often fixed rate, but rates may be higher than secured products for some borrowers.
  • Balance transfer cards: may offer 0% intro APR for a limited time, useful if you can pay the balance during the promotional window.

See our comparison of home equity alternatives for deeper context: Home Equity Alternatives: HELOCs vs Home Equity Loans vs Cash‑Out Refinance.

Tax treatment (short note)

Interest deductibility rules changed under the Tax Cuts and Jobs Act. Interest on home equity loans or HELOCs is deductible only when loan proceeds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. That means using loan proceeds to pay credit card bills usually won’t qualify for the mortgage interest deduction (IRS guidance; consult a tax professional or see IRS Publication 936).

Common mistakes I see and how to avoid them

  • Using a HELOC for consolidation but making interest‑only payments without a plan to reduce principal. Fix: set an automatic monthly principal payment and a payoff timetable.
  • Ignoring variable rate risk. Fix: ask for examples of payment changes using different interest‑rate scenarios.
  • Consolidating and then continuing to charge on paid‑off cards. Fix: close or freeze credit cards if consolidation is part of a behavior change plan.
  • Not shopping multiple lenders. Fix: get at least three loan estimates and compare APR and fees.

Questions to ask a lender before you sign

  • What is the current interest rate and the formula for rate changes (index + margin)?
  • What is the APR including fees? Are there any prepayment penalties or conversion fees?
  • For a HELOC: is there an annual fee, inactivity fee, or review that can reduce my limit? What happens at the end of the draw period?
  • How long before the loan funds and when will my first payment be due?

Final recommendation (practical takeaway)

If you want predictability and a clear payoff date, a home equity loan often wins for debt consolidation. If you value flexibility and expect to pay balances down quickly or need ongoing access, a HELOC can be a better fit — but only if you accept variable interest risk. In either case, prioritize a written repayment plan, compare the total cost (APR + fees), and remember that you are putting your home at risk.

This article is educational and reflects general best practices and my professional experience working with homeowners. For advice tailored to your situation, consult a licensed mortgage professional and a tax advisor.

Sources: Consumer Financial Protection Bureau (consumerfinance.gov), IRS Publication 936 (irs.gov/publications/p936).