Should you use home equity to pay medical bills? Experts weigh in

Right now, many Americans are pinching pennies due to elevated inflation and high interest rates. For example, almost four in five Americans say that inflation has made it harder to pay their medical bills, according to a recent medical debt survey. Another 66% report having outstanding medical debt and half of them have medical debt in collections. 

When considering how to pay it off, home equity may come to mind. "Among American homeowners, their home equity is typically their largest source of accessible wealth. So, when faced with large expenses, tapping into this equity is something worth considering,"  said Meagan McCollum, Ph.D., Associate Professor of Finance at The University of Tulsa. 

But is it a good idea to use your home equity to pay your medical bills? Here's what you should know.

Find out how affordable the right home equity borrowing option could be now.

Should you use a home equity loan to pay off medical bills? Experts weigh in

Here's when experts say it does — and doesn't — make sense to take this route.

When it's worth using home equity to pay for medical bills

According to experts, there are a few scenarios in which paying your medical bills with your home equity could make sense.  

"One such scenario is if you are able to secure a low interest rate on a home equity loan or line of credit, because it may be more cost-effective than using credit cards or personal loans to pay off medical bills," says Michael Collins, CFA, founder and CEO at WinCap Financial. 

For example, the national average interest rate on a 5-year home equity loan from a bank is currently 7.37%, according to the National Credit Union Administration (NCUA). In comparison, the average rate on a 36-month unsecured personal loan is 11.65%, and on a credit card is 15.29%. 

If you paid off a $15,000 balance over three years, here's how the interest costs and payments would compare. 

Home equity loans generally have lower rates than unsecured alternatives, which can help to keep your monthly payments and total interest charges down. However, they may come with expensive fees that need to be factored into the cost equation. 

And, they often come with longer loan terms which give you the option of getting a lower monthly payment in exchange for paying more interest over time. 

For example, here's how longer terms would impact your costs on the same $15,000 medical debt. 

As you can see, the lower payments also come with a hefty overall price tag due to the total interest charged on the loan. 

"Another reason it can make sense to use home equity is because medical debt can lead to aggressive collection efforts by healthcare providers and damage to credit scores. In using your home equity to pay off your medical bills you can provide immediate relief from these stressors," Collins says. 

It may also be a good route if you already plan on tapping into your home equity for another purpose, like funding a home improvement or consolidating other debts. In this case, you can lump in the medical bill with the other expenses. 

Learn more about today's top home equity loan and HELOC rates here.

When it's not worth using home equity to pay for medical bills

Tapping into your home equity through a home equity loan or a home equity line of credit (HELOC) comes with costs and risks. 

Although the interest rates may be low overall, especially compared to the alternatives, many home equity loans come with closing costs that range from 2% to 6% of the loan amount. For example, a $50,000 loan could come with fees up to $3,000. 

Your home is also used as collateral for the loan. So, if you end up unable to pay for the loan, your home will be at risk of foreclosure. 

With that in mind, it may not be worth using your home equity to pay for medical debt if you can find a cheaper option that doesn't put your home on the line. 

"There are very few situations that I would recommend using your home equity to pay off bills. A lot of people will qualify for a payment plan or financial assistance based on their income. Only after you've exhausted all your other options should you consider taking out a loan against your home equity," says Leslie H. Tayne, Esq., a financial attorney, speaker and debt expert. 

McCollum had similar advice. 

"Before dipping into home equity, homeowners should exhaust other options. For example, can they negotiate a payment plan with the medical provider? If the debt is in collections, have they tried to negotiate a settlement," McCollum says. 

So where should you start? Tayne recommends requesting an itemized medical bill from the medical service provider to ensure there aren't billing errors. Then, contact the facility's billing department to ask for help.

"Some hospitals offer payment plans which allow you to pay down your bills interest-free over time. And if you receive care at a nonprofit hospital, you may qualify for financial assistance even if you have health insurance. You can get your medical bills reduced or even completely erased," Tayne says. 

The bottom line

Determining whether tapping into your home's equity is the best way to pay off your medical debt will require some research. For example, it may benefit you to find out if you can get a better, less risky deal elsewhere. You can also look into various options such as tapping into your emergency fund, a life insurance policy with sufficient cash value or a loan from a family member. A home equity loan may end up being the best option in the end, but it shouldn't be the only one you consider.