Using a HELOC for medical expenses

Collectively, medical debt stood at $195 billion in 2019, according to Kaiser, with more than half of those with debt owing over $2,000. As of 2020, Americans had more medical debt in collections than any other category of debt, according to research out of Stanford.

On the other side of the equation, home equity is a significant source of wealth to possibly pay some of that medical debt, with the average homeowner holding $207,000 in tappable equity as of April 2022, according to Black Knight.

How does a HELOC work?

For those burdened by medical bills, a home equity line of credit (HELOC) could offer some relief. A HELOC allows homeowners to borrow against the equity in their home. HELOCs are a revolving form of credit, much like a credit card, giving homeowners greater flexibility around both borrowing and repaying funds.

Depending on your lender, there might be a minimum or maximum withdrawal requirement after your account is opened. Your lender might also offer access to those funds in a variety of ways, including through an online transfer, writing a check or using a credit card connected to your account.

A HELOC also has two phases: the draw period and the repayment period. During the draw period, borrowers can withdraw money from the line of credit and need to make interest-only payments. (However, you can make larger payments if desired.) The draw period usually lasts for 10 years.

During the repayment period, you can no longer use the line of credit, and you’ll begin making full principal-plus-interest payments until the loan is paid off. The repayment period usually lasts 10 years or 20 years, though can be longer or shorter depending on the terms of your loan.

Pros and cons of using a HELOC for medical expenses

A HELOC might sound like the solution to wiping out medical expenses, but consider the pros and cons carefully before you tap your home’s equity.

Pros

• You borrow only what you need. During the draw period, you can withdraw as much funds as necessary (within your limit) to pay for medical expenses as they come up. This contrasts with a home equity loan, which gives you a fixed lump sum that might be more or less than you need.
• You could qualify for a low HELOC interest rate initially. A HELOC typically has a lower interest rate compared to a credit card or personal loan.
• There are flexible repayment options. The timeline for your HELOC can vary depending on the amount you borrow and your lender, but typically lasts 20 years or 30 years. During the first 10 years, you might only be required to make small payments towards your interest with the option to put down more towards the principal. The extra money you put down during the draw period is still available to you.
• There are few restrictions. Although the HELOC is secured by your home, you can use it just like a credit card or a personal loan to pay for medical expenses or other debt.
• Pay interest compounded only on the amount you draw. A HELOC is an interest-only product where the borrower pays interest for a specified amount of time before repaying the principal. You’ll only pay interest on the amount you use.

 Cons

• You could lose your home. The biggest drawback of a HELOC: It’s a secured loan, meaning you could lose your home to foreclosure if you don’t make timely payments.
• You’ll have a variable interest rate. HELOCs usually come with variable interest rates, meaning your interest rate can change up or down over time. If you take out a HELOC for medical expenses with a low variable interest rate, there’s a chance you could pay more in the future.
• It’s still debt. Using a HELOC for medical expenses essentially replaces unsecured debt with secured debt. When you have to pay the HELOC back, you might find you’re making mortgage and HELOC payments at the same time. Another serious thorn: If home values fall, you could owe more on your home than it’s worth (in other words, have negative equity).
• Your lender could require a balloon payment. Your HELOC might come with a balloon payment, a large lump-sum payment of the outstanding balance that some lenders require at the end of the loan’s term. Generally, a balloon payment is more than twice the loan’s average monthly payment, and often it can be tens of thousands of dollars.
• You might not be able to refinance if you haven’t repaid your HELOC. Once you take out a HELOC for medical expenses, you might have to get approval from your HELOC lender to refinance your mortgage loan, which your lender could refuse until you pay off the line of credit.
• You’ll have a variable interest rate. HELOCs usually come with variable interest rates, meaning your interest rate on the outstanding balance can fluctuate based on the federal funds rate. If you take out a HELOC for medical expenses with a low variable interest rate, there’s a chance you could pay more in the future.

Medical costs and steps to avoid debt

Just three days in the hospital can cost you an average of $30,000, according to Healthcare.gov. Check out these common procedures and the typical cost associated with each — many in the tens of thousands of dollars:

Common surgeries and cost

Source: Healthgrades

Because health care needs can come up unexpectedly, many don’t have the funds to immediately cover medical expenses. If insurance doesn’t cover your costs, you might find yourself suddenly in debt and looking to your home’s equity as a solution.

What if you’re burdened by other debt, however, or your credit needs work? You can still get a HELOC with bad credit to pay your medical costs. This might make the most sense to avoid damaging your credit further by having medical bills sent to collections.

Aside from obtaining a HELOC, here are a few other ways to avoid medical debt:

• Comparison shop. Even if you have health insurance, you can still comparison shop for a healthcare provider. If you have a preferred provider option (PPO) health insurance plan, you’ll pay less visiting a doctor or hospital that’s part of your insurer’s preferred network of providers.
• Review your medical bills. Ask for an itemized bill and follow up with your doctor if you notice any discrepancy or potential error. Compare all of the itemized costs using a fair cost lookup tool. If the cost seems excessive, discuss this with your provider.
• Negotiate with your doctor’s office. If a medical bill is too high, getting a discount might be as simple as calling your doctor’s billing department.
• Establish a payment plan. Ask the billing office for payment plan. More often than not, health care staff want to work with you to create a plan for manageable payments.
• Review your health coverage. Go over your health insurance policy to see what’s covered and what isn’t. All covered expenses should be paid for by your provider.
• Establish a health savings account (HSA). If your insurance plan allows, take advantage of an HSA to save tax-free money to pay out-of-pocket medical expenses.
• Claim tax deductions for medical expenses. If your unreimbursed, out-of-pocket medical bills exceeded 7.5 percent of your adjusted gross income, you might be able to deduct medical expenses from your taxes.

Bottom line

HELOCs can be useful tools for many situations, including paying medical debt. Keep in mind, however, that the HELOC is secured by your home, meaning you could lose the property if you fail to repay the line of credit plus interest. So first try to work out a payment plan with the medical provider or consider hiring a medical bill advocate, who may be able to assist you with repayment options or even reducing your bill. If you do decide to tap your home equity, be sure to shop around for a HELOC lender and understand all repayment terms before committing to an offer. Begin with these tips to get the best HELOC rate.