There are three common ways to turn home equity into a debt payoff. Each fits different situations.
1. Refinance your mortgage
Replace your mortgage with a larger one and pay the debts at closing.
- Usually the lowest rate of the three, if you qualify with a mainstream lender
- One payment, with a fixed end date
- Watch for: a prepayment penalty if you’re mid-term. See the costs of consolidating.
2. Add a second mortgage
Keep your first mortgage and add a separate loan behind it.
- Keeps a low first-mortgage rate and avoids a penalty
- Higher rate than a first mortgage, and two payments
- Often used when mid-term or when a bank won’t refinance
3. Use a home equity line of credit (HELOC)
A revolving limit secured by your home.
- Flexible, often with low interest-only minimums
- Variable rate
- Risky for consolidation, because the limit is reusable and minimums don’t reduce the balance
How to choose
- Renewal soon? Refinancing at renewal avoids the penalty. See consolidating at renewal.
- Big penalty to break? A second mortgage may win.
- Need discipline? A refinance with a fixed payment helps more than a HELOC.
- Credit damaged? Alternative lenders may refinance where banks won’t. See consolidating with late payments.
This article is general information, not financial or legal advice. Lender requirements, rates and fees change and depend on your situation.