Why Using a HELOC for Debt Consolidation Could Cost You More Than You Think

Debt consolidation can simplify your finances, replacing multiple high-interest payments with one manageable bill. But not all consolidation methods offer the same benefits—or the same risks. A Home Equity Line of Credit (HELOC) might seem like an easy solution due to its low initial rates and flexible borrowing, but it comes with hidden costs and potential financial pitfalls.

Let’s break down why using a HELOC for debt consolidation might not be the best choice.

HELOC Basics

A Home Equity Line of Credit (HELOC) is a revolving credit line that allows homeowners to borrow against the equity in their homes. Unlike a traditional home equity loan, which provides a lump sum with a fixed interest rate, a HELOC functions more like a credit card, offering a borrowing limit that you can draw from as needed.

Key differences between a HELOC and a home equity loan include:

• Variable vs. fixed interest: HELOCs typically have variable interest rates, which means payments can increase over time. Home equity loans, on the other hand, usually have fixed interest rates and predictable monthly payments.
• Draw vs. repayment period: During the draw period (typically 5–10 years), you may only be required to pay interest, keeping monthly payments low. But when the repayment period begins, principal and interest payments kick in—often causing monthly payments to spike dramatically.

Debt Consolidation Strategies

Debt consolidation is the process of combining multiple debts into a single loan, usually with better terms, to simplify repayment and ease financial strain. Consolidating debts enables borrowers to replace multiple high-interest payments with a manageable single monthly payment—often at a lower rate or with a longer repayment term, improving cash flow.

Common types of debt that people consolidate include:

• Credit card debt: Typically carries high variable interest rates that can make it difficult to pay down balances efficiently. Consolidation can provide a more structured and cost-effective way to manage repayment.
• Outstanding personal loans: Borrowers may refinance existing loans with a personal loan, like those offered by BHG, to secure better terms. Even if the new loan has a similar interest rate, a longer repayment period can significantly lower monthly payments, freeing up cash for other expenses.

While a HELOC might seem like an attractive option for consolidation due to its low introductory rates and flexible access to funds, it comes with key risks that could ultimately cost you more in the long run.

Using a HELOC for debt consolidation might seem like a great idea at first. After all, a HELOC offers low initial rates and easy access to cash. However, the risks often outweigh the benefits. With variable interest rates that can drive up monthly payments, the potential for payment shock, and the risk of losing your home if you can't keep up with repayments, a HELOC may not provide the stability or savings you’re looking for.

Variable Interest Rates and Monthly Payments

One of the biggest drawbacks of a HELOC is its variable interest rate. While the initial rate might be appealing, it’s subject to market fluctuations. If interest rates rise, your monthly payments could increase significantly, potentially making your debt more expensive than expected.

Additionally, many borrowers only make interest payments during the draw period, keeping their monthly bills low. However, once the repayment period starts, they must start repaying the principal as well—often leading to payment shock and financial strain.

Risk of Foreclosure

Using a HELOC for debt consolidation means turning unsecured debt, like credit cards, into a loan secured by your home—you’re literally putting your home on the line. If you struggle to make payments, you’re not just facing late fees or a credit score hit—you could risk foreclosure. This is a serious consequence that borrowers don’t fully consider when looking for ways to manage their debt.

A HELOC also comes with upfront costs, like an appraisal, and the risk of rising rates. What seems like a cost-effective solution at first can quickly become a financial burden, putting both your budget and your home at risk.

Factors Affecting HELOC Payments

During the draw period, HELOC borrowers often make interest-only payments. This keeps monthly costs low—but once the repayment period begins, payments can jump dramatically as the principal repayment kicks in.

For instance, a borrower making interest-only payments on a $50,000 HELOC at 6% interest would pay about $250 per month during the draw period. But once the repayment period starts, that payment could jump to over $550 if repaid over 10 years—more than doubling the monthly obligation.

Additional Costs and Fees

Beyond interest rate fluctuations, HELOCs often come with upfront and ongoing costs, including:

• Closing costs: Similar to a mortgage, HELOCs may have origination fees, appraisal fees, and other closing costs.
• Annual fees and penalties: Some lenders charge annual maintenance fees or penalties for early repayment.
• Rate caps and adjustments: Even with an initially low rate, lenders may impose rate caps that allow interest to rise significantly over time.

When factoring in these costs, a HELOC may not be the affordable debt consolidation tool it initially appears to be.

Not all debt is created equal. “Good debt” typically helps build wealth or improve financial stability—such as a mortgage or a student loan that increases earning potential. “Bad debt,” on the other hand, often comes with higher interest rates and no long-term financial benefit, like carrying a large credit card balance. Given these risks, it’s worth asking: Is a HELOC really a good debt consolidation tool? While it’s secured by your home, its unpredictable costs and long-term risks make it less ideal than other options.

HELOC vs. Other Types of Debt

Compared to unsecured debt like high-interest credit cards and personal loans, a HELOC has a few key differences:

While a HELOC isn’t inherently “bad debt,” its risks—especially for debt consolidation—may outweigh its benefits. Understanding how it compares to other financing options can help you make the right choice for your financial situation.

Assessing Your Financial Situation

Before jumping into debt consolidation with a HELOC, it’s crucial to assess whether it’s the best fit for your financial needs. While the initial lower interest rate may seem like a good deal, it’s important to weigh the potential for rising rates in the future. You also need to consider the risk of foreclosure. If you are unable to make payments, you’re putting your home at risk, which is something that doesn’t happen with unsecured debt like credit cards or personal loans.

Evaluating your current financial health and your long-term financial goals will help determine whether this move makes sense. A HELOC might be beneficial if you have significant home equity, a stable income, and are comfortable with variable rates. However, it’s vital to factor in the potential for payment shock once the repayment period begins and the interest rate adjusts.

Alternative Debt Consolidation Options

If you're uncertain about using a HELOC for debt consolidation, consider these alternatives that may provide similar benefits without the added risk:

• Personal loans: Fixed-rate personal loans, like those offered by BHG, are a predictable way to consolidate debt. These loans offer structured repayment terms and are typically not tied to your home, reducing the risk of foreclosure.
• Balance transfer credit cards: For those with good credit, a balance transfer card with a 0% intro APR can offer temporary relief. However, be mindful of balance transfer fees and ensure you can pay off the debt before the rate jumps.
• Credit unions and specialized lenders: Many credit unions offer competitive rates and flexible loan terms for debt consolidation. Specialized lenders may offer tailored solutions that are better suited for professionals or those with specific financial needs.

By considering these alternatives, you can make a more informed decision about which consolidation option is best for you, without exposing yourself to the risks that a HELOC might pose.

At BHG Financial, we believe financing should fit seamlessly into your life and goals. That’s why we offer personal loans tailored to your needs, with amounts up to $250,000² and flexible terms of up to 10 years^2,3. Consolidate your high-interest debt with a BHG loan designed to help you move forward confidently.

Plus, our dedicated, U.S.-based concierge service is available on your schedule — because your time is valuable. Ready to see what’s possible? Check your personalized offerin just seconds.