Home equity loans can be appealing if you’re looking to consolidate debt; they offer lower rates than personal loans or credit cards, meaning you’ll pay less over the life of the loan and repay your debt faster. The amount you can borrow depends on your equity, your credit score, your combined loan-to-value (CLTV) ratio and your financial history.
A home equity loan for debt consolidation is best if you have a stable financial history and know that you can make payments on time, since your house is at stake if you fail to make payments. However, if you’re willing to accept that risk, these home equity lenders could help you get out of debt and improve your credit score.
Home equity loans for debt consolidation
Once you’re approved for a home equity loan for debt consolidation and complete closing, you’ll receive a lump-sum amount. You’ll then use the loan funds to pay off your other high-interest debt. From there, you’ll repay the home equity loan at a lower interest rate over a number of years, saving you money overall.
For example, let’s say you were approved for a home equity loan for $25,000 at 4 percent APR over a 10-year term. You also have two credit cards with a total balance of $25,000 — and for simplicity, both cards have a 16 percent APR.
If you repay those credit cards over 10 years, your monthly payment would be $419, and you’d spend about $25,254 on interest alone. However, if you paid off those cards using the 4 percent home equity loan, your monthly payment on your loan would drop to $253, and you’d pay only $5,374 in interest over the loan’s repayment term. That’s a savings of $19,880.
To learn more about how much you could save, try using a debt consolidation calculator.
No-appraisal home equity loans
In order to qualify you for a home equity loan, the lender has to verify that there’s enough equity available to borrow against. This is usually done through a home appraisal, which is a detailed analysis of your home’s value completed by a licensed appraiser.
Some lenders, however, will give you a home equity loan without an appraisal. If you’ve recently purchased your home or refinanced and want to stick with the same lender, you may be able to use the same appraisal instead of getting an updated one.
During the COVID-19 pandemic, automatic valuations and drive-by appraisals have become more accepted by lenders. Automatic valuations use software programs to review comparable home sales in your area and come up with a value. If the lender uses this option, you shouldn’t have to pay an appraisal fee.
An exterior-only, or drive-by, appraisal is one where the appraiser only considers the condition of the home’s exterior. This is a less costly option, as the appraiser doesn’t have to enter the home and take more pictures and measurements.
Understanding your LTV vs. CLTV
Your LTV, or loan-to-value ratio, is a percentage that reflects the difference between your home’s value and the amount you still owe on your mortgage.
Let’s say your home is worth $350,000 and you still owe $200,000 on your 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 percent 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 home equity line of credit (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 percent CLTV.
Lenders typically look for a CLTV of 80 percent or less, though some institutions allow even higher percentages. To estimate how much you might be able to borrow, try a home equity calculator.
Bankrate’s best debt consolidation home equity lender picks for 2021
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.
- Best for flexible repayment terms and low costs: Discover
- Best for quick funding and low credit requirements: Spring EQ
- Best for large loans: U.S. Bank
- Best for short repayment terms: BMO Harris
- Best for high CLTV limits: KeyBank
1. Discover home equity loans
Best for flexible repayment terms and low 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 to $200,000.
- Zero application fees, origination fees, appraisal costs or cash due at closing.
- Flexible repayments terms of 10, 15, 20 or 30 years.
- Fixed interest rates from 3.99 percent to 11.99 percent APR.
2. Spring EQ home equity loans
Best for quick funding and low credit requirements
With a Spring EQ home equity loan, you can get a low, fixed rate even if your credit needs work — Spring EQ accepts borrowers with credit scores as low as 680 and debt-to-income ratios as high as 50 percent. Spring EQ offers longer loan terms (up to 30 years), so you can pay less each month while rebuilding your credit.
Spring EQ also offers:
- Funding in as little as 11 days.
- No in-home appraisal for loans less than $175,000.
- Loan terms of up to 20 years.
- Loans from $25,000 to $500,000.
3. U.S. Bank home equity loans
Best for large loans
U.S. Bank offers fixed-rate home equity loans for homeowners who need one-time funding. If you have a debt-to-income ratio of 43 percent or lower, you won’t pay closing costs. If you’re in need of a high loan amount, U.S. Bank offers sizable loan amounts for those with eligible credit history and CLTV.
U.S. Bank home equity loans feature:
- Loan amounts from $15,000 to $750,000 (up to $1 million for homes in California).
- Terms of up to 30 years.
- An autopay discount of 0.50 percent.
- No upfront fees.
4. BMO Harris home equity loans
Best for short repayment terms
Home equity loans from BMO Harris offer a handful of repayment terms to choose from, starting at only five years, so you can choose to repay your loan as quickly as possible and save on interest costs.
BMO Harris doesn’t specify a maximum LTV ratio to be eligible for its home equity loan product. To improve your chances of getting approved, keep your CLTV as low as possible before applying for a home equity loan.
BMO Harris home equity loan offers:
- Loan amounts of $25,000 to $150,000.
- Five, 10, 15 or 20-year loan terms.
- No application fees and low to no closing
- A 0.5 percent interest rate discount with autopay from an eligible BMO Harris account.
5. KeyBank home equity loans
Best for high CLTV limits
KeyBank lets you borrow up to 90 percent of your home’s CLTV. It offers two types of home equity loans: the Standard Home Equity Loan that requires 80 percent or lower CLTV and the High-Value Home Equity Loan that allows a CLTV of 80.01 percent to 90 percent for eligible homeowners. However, keep in mind that KeyBank does charge a $295 origination fee.
KeyBank home equity loans feature:
- As high as 90 percent CLTV for qualified applicants.
- Flexible terms from five to 30 years.
- A rate discount of 0.25 with a KeyBank checking and savings account.
- In-person customer support.
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 and how soon you need the money 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 using a home equity loan for debt consolidation include lower interest rates and a fixed monthly payment. 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. However, if you’d rather have more flexibility in your monthly payments, something like a HELOC could be a better choice.
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 nonprofit National Foundation for Credit Counseling can put you in touch with a local agency that can help you get a handle on your debts.
How to apply for a home equity loan
If you feel that a home equity loan is right for your financial situation, you can start your search by reaching out to your existing mortgage lender. It already knows the details of your existing loan, and having an established relationship with your home equity loan lender could help you get approved or qualify for discounts.
You can also compare loan rates and terms from online lenders and other financial institutions to find the most affordable home equity loan possible. Always shop around before accepting a loan. Once you’ve found your preferred lender, you’ll need to provide your personal information, including:
- Proof of income and employment history for at least two years.
- Proof of homeownership and home insurance.
- Your current mortgage loan statement.
- A home appraisal.
- Documents of existing debt.
This list isn’t exhaustive, and your lender might ask for additional documentation to make its decision. Many lenders accept home equity loan applications online, though they might contact you over the phone to update you about your loan status.
Other options for debt consolidation
Although consolidating debt with a home equity loan can be an effective method, it’s not for everyone. If you fail to repay the loan, the lender can foreclose on your home. There are other ways to consolidate your debt if you’re unwilling to risk your home or don’t qualify for a home equity loan.
A few options include:
- Debt consolidation loan. A debt consolidation loan is a type of personal loan that’s designed specifically for debt consolidation. These products might have more favorable terms compared to a credit card, and they’re unsecured — meaning you don’t put your home on the line.
- Balance transfer credit card. The best balance transfer credit cards offer a 0 percent introductory APR for a limited time. If you’re able to transfer your debt to a balance transfer card and repay it completely within the promotional window, you can save a significant amount in interest.
- Debt management plan. If you’re likely to fall into debt again after using one of these debt consolidation strategies, you might need support from a nonprofit credit counseling agency. A certified credit counselor can help you negotiate your interest rates and repayment plan with creditors and create a financial plan tailored to your goals.