Should I use a HELOC to pay my medical bills?

Medical expenses can be unexpected. They can also be more extensive than your emergency savings fund. So, what options exist for helping you pay off costs for doctor's visits, surgeries, or medication? In addition to the line of credit that may be offered by your healthcare provider's billing office, you may also be considering a HELOC.

In this blog, we’ll share how this special type of financing works and what benefits it offers for those hoping to pay down medical debt.

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What is medical debt?

First, it’s important to acknowledge that large medical expenses can happen to anyone, even those who have planned, saved, and budgeted for such costs. When those expenses can’t be paid right away, it turns into debt that must be repaid over time.

The U.S. Census Bureau reports the average medical debt as $2,000, but that there was no difference in the share of households in groups above and below the poverty line that had medical debt. (19% of both groups had debt.)

They also reported that having fair or poor health may result in more likely debt; 31% of households with a member in fair or poor health had medical debt, while just 14.4% of those with healthy members did.

Hospital stays doubled the chance of medical debt, as well.

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Can I use my home to help pay for medical bills?

Since your home is considered an asset, it’s possible that you may be able to use the equity in your home to secure a loan. This loan can then be used to pay down more expensive medical debt or other medical expenses over time.

One of the most common home equity services for this purpose is a Home Equity Line of Credit (HELOC.) The amount you can borrow is based on the equity of your home, so if you have more paid off compared to the market value of your home, the more you may be able to access.

How can you determine your equity? First, take the market value of your home and subtract the amount you have left to pay on your mortgage. The difference is your equity. Note that market values change depending on many factors, affecting your equity without you having to do anything at all. (In times of a hot real estate market, your equity can actually rise quickly – even without a change in mortgage payment frequency.

HELOCs range in fees and rates, so it pays to do the math to see how much you would save compared to having the hospital finance your medical bills or putting them on a credit card. Typically, HELOC fees are significantly lower, even after adding interest and closing costs. Some HELOCs also come with rate caps, so you can’t pay more than a set amount in interest, even if inflation occurs down the road.

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Should you use a HELOC to pay for large, unexpected bills?

Getting HELOC is a lot like getting a mortgage. There will be similar paperwork requirements, and you’ll have to go through the process of getting your home appraised to determine the appropriate market value. Once you’ve gone through the effort, however, the payoff is a  tax-free lump sum of cash you can use to get rid of nagging medical bills and focus on getting back to financial and physical health.

Other pros include:

• Lower rates than some other financing options
• Access to more home equity during the retirement years
• Ability to access a large sum, with few restrictions on how to use it
• Generous repayment terms, with no payments in some cases, for many years
• You get to stay in your home
• Can use additional funds for things like home repairs

Cons to using it include:

• Large lines of credit may be much more than needed and encourage additional spending
• Good credit is required, for some, a minimum of 640 FICO is required
• Home equity must be established, or you have paid off enough of your existing loans at the time of borrowing
• Loan process is similar to getting a mortgage, including appraisal and paperwork
• Your home becomes the collateral
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If you've not paid your medical bills for some time and they have gone into collections, your credit may be affected negatively, making you ineligible for a home equity line of credit. That's why, if you are interested in using a HELOC to pay debt, you’re better off looking into the process early, before bills become past due and you are no longer in control of your credit history. It’s a wise personal finance move to be proactive if you can.

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Other ways to reduce medical debt

Even if you are looking at a HELOC to reduce debt, it pays to be diligent and look at every medical bill you receive. Rarely will you see a listing of individual charges, so ask your provider for an itemized list of charges you can review.

Once you receive it, check every line for errors, and don’t hesitate to ask the billing office or your insurer about anything that doesn’t appear correct. Mistakes happen.

You will usually have 30 days or more to inquire about issues, but your provider has its own billing policy, and you may not have much time to do your research before you get a past due notice. Don’t assume you can make payments on an account without asking first; hospitals and clinics generally expect payment in full and will only approve payment plans through their billing or credit office with permission and before the bill gets too old.

If the provider offers an interest-free payment plan, take advantage of this. Some will also accept credit cards, but be aware that this could come at a high interest rate. Check all available options when figuring out how to pay, and anticipate if you will need further care from a provider you owe money to. Some clinics won’t continue to treat patients that owe money, giving you another reason to pay off your medical debts quickly to avoid any interruption in your care.

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How do I avoid falling deeper into medical debt by tapping into my home equity?

Unfortunately, for many people, medical expenses aren’t a one-and-done purchase. If you are dealing with ongoing treatment for a major illness, need multiple procedures to correct an issue, or have expensive prescriptions not covered by insurance, you could receive large medical bills over the course of the next few years – or even decades. This could greatly affect your personal finance outlook.

If you don’t make enough to cover these bills, you may have no choice but to borrow money to pay them off. Using your home equity is one option that can help you stay on top of the bills from hospitals and providers. Since HELOC loan funds are generally offered at a lower rate than some credit cards and hospital-administered credit accounts, you might even save money in the long run. It’s also available to those at any age, unlike a reverse mortgage (which is limited to those 62 and up.)

Fraction Mortgage funds are flexible, and monthly payments are 100% optional, so you can choose to pay in a way that works for you and your unique health situation.* You may choose to:

• Use your funds all at once to pay down large hospital bills and reduce interest and late fees
• Put the HELOC funds in a separate savings account, where you can pull from it as needed to pay bills as they get sent to you
• Pre-pay on a major surgery or series of medical treatments to get a better deal through cash pricing

However you see yourself using HELOC funds, the flexibility ensures you can adjust your plan as needed. You are free to repay the Fraction loan in monthly payments now or wait until your term ends to pay in a lump sum. With the uncertainty of your future health and the expenses that come with it, it’s nice to know that a company like Fraction has you covered.