Should you use home equity to pay off credit cards?

Moving a 25% card balance onto a HELOC at 9% is a genuine improvement in the price of the money. That part is not in dispute. What decides whether it actually helps is the structure of the HELOC itself, which is unlike any other loan most people have had.

The draw period is the whole story

A HELOC has two phases. During the draw period — commonly ten years — you can borrow against the line, and the required payment is usually interest only.

Read that again, because it is the part that costs people years. An interest-only payment does exactly what the name says: it covers the month's interest and nothing else. The balance does not move. You can make every payment, on time, for a decade, and owe precisely what you owed at the start.

Then the draw period ends and the repayment period begins, typically 15 or 20 years. Now the payment has to cover principal as well, amortized over the remaining term. The payment does not drift upward — it steps.

Take $30,000 on a HELOC at 9%. Interest-only during the draw is $225 a month. When the draw ends and that $30,000 amortizes over 15 years at the same rate, the payment becomes about $304 — a third higher, and that is assuming the rate has not moved. On a shorter repayment period, or after a rate rise, the step is much larger.

That is the shape to hold in your head: cheap, then not. And the cheap phase is the one that makes no progress.

Which is why the payment you choose matters more than the rate

If you pay interest only for ten years on $30,000 at 9%, you will have paid $27,000 and still owe $30,000.

If you pay $625 a month from the start — treating the HELOC like a five-year loan rather than a line of credit — the same balance clears in about five years for roughly $7,400 of interest.

Same rate. Same balance. The difference is entirely what you chose to pay, and it is far larger than the difference between a 9% HELOC and a 7% one. The HELOC payoff calculator shows what each way of paying it actually does, which is the comparison worth making before the rate comparison.

Two more things that are not like a card

The rate is usually variable. HELOC rates are typically tied to a published index and reset. The 9% you start on is not a rate you have locked, and the comparison against a fixed-rate alternative should account for that.

Drawing again is easy. A line of credit stays open. Paying a card off and leaving the account open has the same risk, but a HELOC's limit is often far larger than a card's, which makes the same mistake bigger.

The tax rule people have backwards

A persistent belief is that moving consumer debt onto home equity makes the interest deductible. It does not.

IRS Publication 936 is explicit: no matter when the debt was incurred, you cannot deduct the interest to the extent the proceeds were not used to buy, build, or substantially improve the home the loan relates to. Paying off a credit card is none of the three. The suspension of the deduction for home equity borrowing that is not used for those purposes was made permanent by P.L. 119-21.

So: a HELOC used to add a room may produce deductible interest. A HELOC used to clear a card does not. And most households take the standard deduction anyway, so for many people the question never arises.

What to ask

1. How long is the draw period, and is the payment interest-only during it? If yes, ignore that payment — it is not a repayment plan.
2. What will the payment be when the repayment period starts? Ask for the figure, not the formula.
3. What index is the rate tied to, how often does it reset, and is there a cap?
4. What payment clears this in the time I would have cleared the cards? Make that the payment you actually set up, from month one.
5. Are there annual fees, draw fees, or an early-closure fee?

Used as a fixed-term loan that happens to have a good rate, a HELOC is an effective way to reprice expensive debt. Used the way it is structured to be used — minimum payments during a ten-year draw — it can leave you a decade older owing the same money, having paid a great deal for the privilege. The rate is the small decision. The payment is the big one.

The alternatives, briefly

A HELOC is one of five ways to make card debt cheaper, and one of two that put your house behind the balance. Before choosing it, the other four are worth pricing:

• A 0% balance transfer costs a fee up front and buys a fixed window with no interest. Cheapest of the five when you can clear the balance inside it, and no collateral is involved.
• A consolidation loan is unsecured and fixed-term, so it forces an end date the way a HELOC's draw period does not — but the origination fee comes out of what you receive.
• A cash-out refinance raises the same cash at a fixed rate, but it reprices your whole mortgage to do it, so it suits a mortgage rate at or above today's and costs most when yours is low. The HELOC or cash-out calculator compares the two on your numbers.
• Paying them off in order, with no new borrowing at all, costs nothing to start and is the only one of the five that cannot make the position worse.

The ranking is not fixed: it depends on your rate spread, the fee, and whether you would actually hold the higher payment. What does not change is that a HELOC and a cash-out refinance are the only options on the list secured against where you live.

Sources: IRS Publication 936, Home Mortgage Interest Deduction, for the buy-build-improve requirement. Payment figures computed with this site's own amortization.