When should you use home equity to consolidate debt? Here’s what the experts suggest.

Debt can get expensive. Take credit cardsFor example. The average credit card user has balance about $8000 – 8% more than just two years ago. Add to this the rising credit card rates that are currently sit above 23%and debts can quickly begin to seem insurmountable.

If you’re struggling with debt, you’re not alone. Overall, American households bear Debt $17.94 trillionThis was reported by the Federal Reserve Bank of New York. These numbers can be difficult to overcome, especially in an environment of persistent inflation and rising prices of goods and services. But homeowners are uniquely positioned to meet this challenge.

This is because equity capital can be used to consolidate debt. you get home loancashing out refinancing or Home Equity Line of Credit (HELOC)and you use these funds to pay off existing debts. This combines them all into one loan payment—often at a much lower interest rate than you were previously paying.

But debt consolidation with equity not always the right choice. Are you thinking about using this strategy to solve your debts? That’s when experts say it’s a good move.

Compare today’s best home equity lending options to find the one that’s right for you.

When Should You Use Home Equity to Consolidate Debt?

Home equity can be a good option for debt consolidation if you need to reduce your monthly payments, says Christopher Mediate, a financial advisor and president of Mediate Financial Services.

“Americans have continually struggled to make monthly payments as interest rates have risen and so have minimum payments,” Mediat says. “They may feel depressed and this may affect other areas of their life. In cases like this, (using equity capital for consolidation) would make sense.”

However, it all depends on what terms and interest rate you can get, and this depends on your credit score and other financial factors. Generally speaking, home equity lending products tend to have much lower interest rates than many other types of borrowing. For example, the average credit card rate is over 23%, but the average rate home loan? Currently, this figure is just over 8%.

“Is the interest rate lower?” – asks Mediat. “Does this improve your day-to-day cash flow, allowing you to feel some relief and perhaps now put the difference into savings and create positive cash flow?”

If your answer is yes, consolidation is probably wise.

Find out how affordable a home equity loan can be right now.

When You Shouldn’t Use Home Equity to Consolidate Debt

However, using home equity to consolidate debts is not always wise. There are some scenarios where professionals say this is actually reckless. First, consolidating your debts will significantly extend your repayment time.

“Debt consolidation through home equity doesn’t make sense when the marginal benefit of lowering your monthly payment prevents you from paying off the debt on time,” says Evan Luchaco, a mortgage specialist at Churchill Mortgage in Portland.

If you extend your repayment term too long, you could end up paying a lot more in long-term interest—even if the interest rate drops markedly. For example, it may not make sense to bundle a 5-year auto loan into a 15-year HELOC.

“It’s very easy to be complacent and not worry about what it’s going to cost you in terms of overall interest and for how long,” says Mediat.

You also shouldn’t use your home equity for debt consolidation if you’re at all worried about home value is falling in your area. If the value of a home were to decline, you could end up owing more on the home than it’s worth—also called an inverted mortgage. If you have to sell your home, you won’t earn enough to pay off all your debts.

“What goes up must come down,” says Matt Dunbar, senior vice president of Churchill Mortgage’s Southeast region. “To avoid overusing your property, it is wise to recognize that at some point the value may decline and that the current market value may be inflated due to short-term factors.”

To protect yourself from falling prices, Dunbar advises researching local real estate sales and checking the latest price trends. And if you notice prices dropping, proceed with caution.

“Properties that sit on the market for many days without selling” can also signal lower prices, Dunbar says.

Most experts recommend taking out a loan no more than 80% the value of your home, leaving a 20% buffer just in case.

Bottom line

Using your home equity isn’t the only way to deal with debt. You can also ask for help from debt relief company or implement a debt management, debt settlement, or debt forgiveness plan. If you’re not sure which debt strategy is best for you, talk to a financial advisor or schedule a consultation with a credit counselor. They can help you chart a path to successful debt repayment.