Home equity loan vs. HELOC: Which option is right for your credit card payoff plan?

Credit card debt has become increasingly expensive to carry over the last few years, and for borrowers who are already struggling to make progress on their balances, today's high interest rates can make the problem even harder to solve. With average credit card rates now hovering above 22%, it's easy for a significant amount of each monthly payment to go toward interest rather than reducing the balance. That can leave borrowers searching for a less expensive way to pay off what they owe.

There are a few different ways to do that, but homeowners, in particular, may have an option that other borrowers don't. Home values have risen considerably over the last several years, allowing many homeowners to build sizable amounts of home equity, even as higher mortgage rates have slowed activity in the housing market. And that equity can be borrowed against, often at rates that are substantially lower than those charged on credit cards, which could make it useful for consolidating high-rate balances.

But while a large portion of homeowners have equity they can tap into, the question is how to access that equity. Two common options are home equity loans and home equity lines of credit (HELOCs), and while both use your home as collateral, the similarities largely end there. The way you receive the funds, how your interest rate works and how you repay what you borrow all differ, so it's important to understand which option is better suited to paying off credit card debt.

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If you're considering using your home's equity to eliminate credit card debt, it's important to understand that home equity loans and HELOCs work differently. A home equity loan provides a lump-sum loan with a fixed interest rate and predictable monthly payments. A HELOC functions more like a credit line, allowing you to borrow as needed during the draw period, typically with a variable interest rate. The choice often comes down to how much debt you have, whether your balances are still growing and how much payment certainty you want. Here's what to consider when weighing your options:

When a home equity loan is the right credit card payoff option

If your credit card balance is a fixed figure and your main goal is certainty, the home equity loan is usually the better fit. With this route, you borrow the exact amount you need, pay off the card balances and lock in one rate for the life of the loan. Your payment never changes, which keeps budgeting simple.

For example, if you have $40,000 in credit card debt spread across several accounts, a home equity loan allows you to consolidate those balances into one loan with a set repayment schedule. Rather than dealing with fluctuating minimum payments and varying interest rates, you'll know exactly how much you owe each month and have a clear idea of when the debt will be paid off.

And, the fixed-rate nature of home equity loans may be especially appealing in today's environment. While home equity rates remain far below average credit card rates, economic uncertainty and persistent inflation concerns mean interest rate volatility remains a possibility. The Federal Reserve is also signaling the possibility of future rate increases, so locking in a fixed rate can provide peace of mind for borrowers who want certainty.

The tradeoff, though, is flexibility. Once you receive the funds from your home equity loan, you begin repaying the full loan amount immediately, even if you don't end up needing every dollar you borrowed.

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When a HELOC is the right credit card payoff option

On the other hand, a HELOC may be the better option for homeowners who want more borrowing flexibility or who expect their debt repayment strategy to evolve. That's because a HELOC gives you access to a revolving line of credit, and during the draw period, you can borrow what you need, when you need it, up to your approved credit limit.

In turn, this approach can work well if you're paying off credit card balances gradually or you expect more expenses to arise while you're eliminating debt. It can also be a smart move if your goal is more flexibility in terms of borrowing, as the line of credit remains available to draw from for an extended period.

However, that flexibility can come with risks. Most HELOCs have variable rates, meaning borrowing costs can change over time (though there may be fixed options available). If you have a variable-rate HELOC and rates rise, your payments could increase as well, and there's a real likelihood of that happening in today's inflationary environment. Because a HELOC functions like a revolving credit account, some borrowers may be tempted to continue borrowing after paying off their credit cards, potentially creating a new debt cycle.

For homeowners who are highly disciplined and want access to funds without borrowing more than necessary, though, a HELOC can be an effective debt management tool. It just generally requires more financial restraint than a traditional home equity loan.

The bottom line

Both home equity loans and HELOCs can be powerful tools for wiping out high-rate credit card debt, but the right choice hinges on your specific situation. If you have a fixed balance you want to eliminate and value predictable payments, a home equity loan delivers the certainty and built-in discipline that makes consolidation stick. A HELOC, on the other hand, offers flexibility that a lump-sum loan simply can't match — provided you have the restraint to avoid falling back into old habits. 

Either way, you'll likely secure a far lower rate than what your credit cards are charging, but it's worth remembering that you're trading unsecured debt for borrowing tied to your home. Before you move forward, weigh your monthly budget, your repayment timeline and your tolerance for rate fluctuations, and consider speaking with a lender or debt relief expert to confirm that tapping your equity is the best path toward becoming debt-free.