Using Home Equity to Pay Off Medical Bills and Reduce Medical Debt

Key takeaways

• Medical debt is debt owed specifically to a medical provider, such as a doctor’s office, hospital or lab. When you pay off that debt by taking on another source of debt, like using a credit card, you move the debt from medical debt to credit card debt; it is no longer identifiable as “medical debt.”

• Unlike most other forms of debt, there are special protections associated with medical debt. For example, debt collectors are subject to certain limitations requiring them to verify the accuracy and validity of the debt.

• You can use home equity to repay medical debt by using a home equity loan, home equity line of credit, home equity agreement or certain mortgage refinance options. Many options require you to use your home as collateral.

Many of us struggle with medical bills. The exorbitant costs of health insurance and medical services can leave even financially secure individuals vulnerable.

One way to manage medical expenses and medical debt is to access home equity. If you own your home and have established equity, you may be able to use that equity to pay off these expenses and debt. This can prevent providers from sending the debt to collections, adversely affecting your credit score.

Debt collectors must follow different guidelines regarding medical debt than when they collect other debts as well.

The extent of medical expenses in America

Many American families keep a budget to plan for their financial future.

An unforeseen medical emergency is one of the great unknowns that can throw a budget into chaos. A recent study found that about 10% of Americans owe medical debt, with 11 million people owing more than $2,000 and 3 million people owing more than $10,000.

When medical bills come due, it can be difficult to find a pay them. Some of the most common and most expensive medical procedures include:

• Appendectomy: $13,910

• Normal birth: $10,002

• C-Section birth: $15,240

• Cataract removal: $3,762

• Knee replacement: $25,398

Even if you have health insurance, it’s not a given that it will cover most of the procedure. And even if it does, only covering a portion of a $20,000 procedure can still leave you with a large burden.

If you have large medical bills that you’re finding difficult to pay, take the following steps:

• Review bills for accuracy: Obtain an itemized listing of the services you received and dispute any discrepancies.

• Work with the provider: A provider may be willing to create a payment plan or negotiate down the price of services.

• Establish a Health Savings Account (HSA): With some high-deductible insurance plans, you can create this type of tax-favored savings account from which to pay out-of-pocket medical expenses.

• Claim tax deductions: Keep good records, because you may be able to deduct out-of-pocket medical expenses that are unreimbursed and exceed 7.5% of your adjusted gross income from your taxes.

You can use home equity to pay off medical debt

When you’ve exhausted the above strategies – or otherwise have an unmanageable amount of medical debt – you may be able to use an unlikely asset to pay off medical debt: your home.

First, determine how much equity you’ve established in your home. The equity is the difference between your home’s current value and the amount you owe on it. A home appraisal can provide an authoritative source of the home’s current value.

For example, let’s say your home is worth $500,000. If you still owe $300,000 on it, you’ve built $200,000 in equity. That $200,000 is yours – but you can’t use it without some way to tap into it.

Options for tap into that home equity include:

1. Home equity line of credit

A home equity line of credit (HELOC) functions like a credit card. However, your property secures the HELOC. If you fail to make payments, the lender could take your home.

With a HELOC, you have a draw period and a repayment period. During the “draw,” you take out money as needed. After the draw ends (usually 10 to 20 years), you repay the line of credit for another period of years.

However, the repayment period may end with a balloon payment. This is a large lump-sum payment of the remaining balance due, which is usually more than double the loan’s average monthly payment.

Before the repayment period begins, you may choose to make payments toward interest only during the draw period. A HELOC usually has a lower interest rate than a credit card, but the Fed’s recent rate hikes have increased HELOC rates, too, making them more expensive to use.

2. Home equity loan

Like a HELOC, a home equity loan also provides money in exchange for providing your home as collateral. Instead of functioning like a credit card, a home equity loan works like a traditional personal loan.

The lender provides a one-time lump-sum payment that you can use as you need (such as pay medical bills or medical debt). Rather than having a draw and repayment period like the HELOC, you repay the money monthly, beginning right away after taking out the loan.

A home equity loan typically provides more money than a HELOC. Be careful that you don’t take out more debt than you require.

3. Home equity agreement

A home equity agreement (HEA) differs from the prior two options.

The HEA doesn’t work like a loan. There are no payments and no interest. The provider gives you a lump-sum payment in exchange for a portion of your home’s future value.

To end the agreement, you can sell your home or buy out the provider’s share.

Home equity can be a powerful tool to pay off debt. Just be sure to weigh the pros of cons of each approach to accessing your equity to make sure you find the right solution for you.