Home equity loans can be appealing options if you’re looking to consolidate debt. That’s because they offer some of the lowest interest rates available, especially compared with personal loans or credit cards. With a lower interest rate, you’ll pay less over the life of the loan and repay your debt faster.
Debt consolidation with home equity loans or home equity lines of credit, or HELOCs, are best if you have a stable financial history and know you can make payments on time. Home equity loans and HELOCs use your house as collateral, so if you fail to make timely payments, you risk losing your home.
The amount you can borrow against the equity you’ve built up in your home will depend on factors like your credit score and combined loan-to-value ratio (CLTV), as well as your financial history. While you may be familiar with loan-to-value, CLTV is a little different in that it considers all debt secured on your house, not just your primary mortgage.
Understanding your LTV vs. CLTV
Your LTV, or loan-to-value ratio, is a percentage that reflects the difference between your home value and the amount you still owe on your mortgage.
Let’s say your home is worth $350,000, you have only one mortgage, and you still owe $200,000 on that mortgage. Your LTV is calculated by dividing the amount you still owe on your mortgage ($200,000) by the property value ($350,000).
200,000/350,000 = 0.57, or 57% LTV.
Your CLTV takes into account all loans or lines of credit that use your house as collateral, plus the amount you want to borrow. If you already have a second mortgage or HELOC, that will be taken into account when determining your CLTV for a new HELOC.
Let’s say your home is worth $350,000, you still owe $100,000 on your mortgage, and you want to borrow $50,000 through a HELOC. In this case, your CLTV would be:
100,000 + 50,000 / 350,000 = 0.43, or 43% CLTV.
You can estimate your CLTV by adding up the amount remaining on your mortgage, other loan balances backed by your home, and the amount you want to borrow through a second mortgage or HELOC. Next, take that total and divide it by your estimated property value to get your CLTV. Lenders typically look for a CLTV of 80 percent or less, though some institutions allow even higher percentages.
If you’re sure a home equity product is right for you, it’s important to choose a lender that offers favorable terms. Our home equity lender reviews highlight our top five picks for debt consolidation:
Bankrate’s Best Debt Consolidation Home Equity Lender Picks for 2019
- Best for flexible payment terms and low costs: Discover
- Best for low interest rates: Third Federal Savings & Loan
- Best for homeowners with little home equity: Lower
- Best for digital application process and fast funds: Figure
- Best for fair to poor credit: Spring EQ
No. 1: Discover home equity loans
Best for: People who want flexible payment terms and low out-of-pocket costs
Discover home equity loans offer fixed interest rates, a variety of payment terms and fewer out-of-pocket expenses than other lenders.
With a home equity loan from Discover, you can expect:
- Loan amounts from $35,000-$200,000
- Zero application fees, appraisal costs or cash due at closing
- No mortgage taxes
- No origination fees
- Flexible repayments terms: 10, 15, 20 or 30 years
Keep in mind that Discover offers a fixed interest rate on home equity loans. While this rate might be higher than the low end of a variable interest rate, it’s guaranteed to stay the same over the life of the loan. That means your monthly payment stays the same, too. This kind of predictability can be helpful when you’re working to get out of debt.
No. 2: Third Federal home equity loans and lines of credit
Best for: People who want the lowest variable interest rate they can find
Third Federal Savings & Loan offers 5, 10 and 30-year home equity products with rates that tend to be lower than other lenders — often a quarter percentage point lower (think 3.7 percent when other lenders are offering 4 percent).
You can choose from:
- Loan amounts from $10,000 to $200,000
- Fixed and adjustable rates for a traditional home equity loan
- Adjustable rate for a HELOC
- Adjustable rate for a Third Federal 5/1 Adjustable Home Equity Loan
A Third Federal 5/1 loan offers a very low interest rate that could save you more than $800 during the first five years of repayment. After five years, your rate will be adjusted to reflect the prime rate (an index used by banks to set rates for loans and other products) minus 1 percent.
The great thing about a Third Federal 5/1 loan is that your adjustable rate will always be lower than the prime rate, and you’re guaranteed a low interest rate for the first five years of your loan. But after five years, if the prime rate spikes, expect your interest rate to spike, too.
No. 3: Lower home equity loans and lines of credit
Best for: People who don’t have much equity in their home
Lower is a mortgage company that also offers home equity products. Its HELOC, or home equity line of credit, can be used to consolidate large amounts of debt — up to $350,000.
Your line of credit limit will be determined by your financial history, credit score and CLTV, or combined loan to value ratio. A CLTV measures the ratio of what you owe on your home vs. what it is worth.
While most lenders look for a CLTV that’s less than 80 percent, Lower offers its HELOC to borrowers with up to 95 percent CLTV.
So, if you have a high CLTV or you don’t have much equity in your home, don’t worry — you still may be able to get a HELOC through Lower.
With a CLTV above 80 percent, you may have to pay a higher interest rate to get a HELOC, however. Lower’s interest rates for HELOCs start as low as 3.625 percent APR and go up from there.
With Lower, you can expect:
- HELOCs ranging from $15,000 to $350,000; no home equity loans
- Minimum FICO score requirement of 620
- Variable and fixed-rate repayment terms
- Origination fee of 1 percent
- $495 application fee
No. 4: Figure home equity loans
Best for: People who like fast funding and hate paperwork
Figure offers a completely digital home equity debt consolidation loan. You can apply, get pre-qualified, verify your identity, notarize documents and get your funds — all without printing, mailing or faxing a thing.
With a home equity loan from Figure, you’ll also get:
- Loans from $15,000 to $150,000
- Loan terms of 5, 10, 15 and 30 years
- Approval in as little as 5 minutes
- Funds in as little as 5 days
- Average APR of 4.99 – 13.74 percent
- Fixed monthly payments
- No appraisal fees
Figure looks for a minimum credit score of 600 and a combined LTV (CLTV) of 95 percent or less.
If your CLTV is higher than 95 percent, or your credit score is lower than 600, you might want to consider:
- Lower: No. 3 for debt consolidation and offers a HELOC up to 95 percent CLTV
- Spring EQ: No. 5 for debt consolidation and is more flexible on credit scores
- A personal loan for debt consolidation
- A balance transfer credit card
No. 5: Spring EQ home equity loans
Best for: People who want a low monthly payment or need to boost their credit
With a Spring EQ home equity loan, you can get a low, fixed rate with a low monthly payment — even if your credit needs work. Spring EQ offers longer loan terms (up to 30 years) so you can pay less each month while rebuilding your credit.
Another benefit of Spring EQ is the more you borrow, the less you’ll pay in fees. If you need to borrow a larger sum between $80,000 and $250,000, you’ll pay less in application and closing fees than borrowers who borrow less.
Spring EQ also offers:
- Free quote without a credit check
- Pre-qualification in 5 minutes
- Funding in about 14 days
- No in-home appraisal for loans less than $175,000
- 10, 15, 20 and 30-year loan terms
Borrowers need a FICO score of 640 or greater and a debt-to-income ratio of 50 percent or less.
Spring EQ home equity debt consolidation loans come with fixed rates, so it’s possible you’ll pay more in interest than you would with a lower, adjustable interest rate. However, an adjustable interest rate could rise above the average fixed rate, so consider that risk before deciding.
Factors to consider when choosing a home equity loan
There are as many reasons to consolidate debt as there are loan products on the market. Because of this, it’s a good idea to understand your financial situation before applying for a new loan. Your home’s equity, your credit score, the timeline you need the money, and whether you would rather start with an interest-only variable rate or a fixed-rate interest and principal loan will all factor into your final choice. Bankrate’s home equity rates page can help you compare the latest rates and find the right product for you.
Some of the benefits of debt consolidation include lower payments, a fixed monthly payment, and lower interest rates. In many cases, you can combine all the money you were using to pay multiple, high-interest debts into one payment and be debt-free much more quickly.
More interested in an adjustable rate home equity product? Try one of the other lenders featured in our home equity lender reviews.
Finally, consider your financial habits before deciding on a home equity loan. If you use the proceeds from your loan to wipe clean the balances on your credit cards and other accounts, do you have the discipline and resources to refrain from rebuilding those balances? If it’s likely that in a few years you’ll have the home equity loan and another pile of credit card bills, it may be time to consider credit counseling. The non-profit National Foundation for Credit Counseling can put you in touch with a local agency that can help you get a handle on your debts.