Medical debt has become a significant financial burden for many Americans. According to data from the Kaiser Family Foundation (KFF), an estimated 14 million U.S. adults, or 6% of the population, owe over $1,000 in medical debt. Furthermore, around 3 million Americans have accumulated more than $10,000 in medical debt.
For those struggling under the weight of medical bills, using a home equity line of credit (HELOC) could potentially provide some relief. However, it’s important to carefully consider whether it’s advisable to tap into home equity to cover medical expenses. Let’s take a closer look at the pros and cons of this approach.
How using a HELOC to pay medical bills works
A home equity line of credit (HELOC) operates as a revolving form of credit, similar in function to a credit card. This type of financing gives homeowners flexibility in both borrowing and repaying the funds.
Once a HELOC is established, the homeowner can withdraw sums on an ongoing basis, making monthly repayments. Depending on the lender’s terms, there may be minimum or maximum withdrawal requirements after the account is opened. Lenders typically offer various methods for accessing the HELOC funds, such as online transfers, check writing, or a dedicated credit card linked to the account.
Even individuals with poor credit may be able to obtain a HELOC to cover medical expenses. However, the interest rate and other terms will be more favorable for borrowers with stronger credit profiles and financial standing.
Pros and cons of using a HELOC for medical bills
A home equity line of credit (HELOC) may seem like a tempting solution for wiping out medical debts, but like any financial strategy, there are both advantages and drawbacks to consider.
Pros
- One of the key advantages of a HELOC is the ability to borrow only the funds you need, as opposed to a fixed lump sum. During the draw period, you can withdraw up to your established credit limit to cover medical expenses as they arise. This is in contrast to a home equity loan, which provides a fixed amount of funds.
- Another benefit is that you’ll only pay interest on the specific sums you withdraw, rather than the full loan amount. Many HELOCs also offer the option to make interest-only payments during the draw period, rather than paying back both interest and principal.
- Compared to other financing options like credit cards or personal loans, HELOCs typically offer relatively low interest rates, with the exact APR depending on your creditworthiness and the lender’s terms.
- Additionally, HELOCs often provide longer repayment timelines, sometimes extending 20 or 30 years. As you repay the principal, that credit becomes available to access again, providing ongoing flexibility.
Cons
- While a HELOC may seem like a solution for covering medical expenses, there are some significant drawbacks to consider. The most serious risk is that a HELOC is a secured loan, using your home as collateral. This means you could potentially lose your home to foreclosure if you fail to make the required payments.
- Another concern is that HELOCs typically have variable interest rates, which can fluctuate over time. This introduces uncertainty, as your monthly payments could increase if interest rates rise, straining your budget.
- Additionally, the repayment structure of a HELOC can lead to significant payment spikes. Once the draw period ends, the minimum monthly payments often double or more as they shift to include both principal and interest. There’s also the risk of a large balloon payment at the end of the draw period.
- Homeowners should also be aware that using a HELOC may complicate any future efforts to refinance their mortgage. The HELOC lender may require the line of credit to be paid off before approving a refinance. Similarly, if you sell your home, the HELOC would likely need to be settled immediately, reducing your proceeds from the sale.
- Fundamentally, a HELOC simply transforms unsecured medical debt into secured debt against your home. While this may provide short-term relief, it does not eliminate the overall debt burden, and the increased debt load could potentially hurt your credit score.
What to consider before using your home’s equity to pay for medical bills
Relying on home equity for medical expenses should be approached with caution. Although it provides quick access to cash, it entails several drawbacks and risks. If you’re contemplating using your home’s equity to address medical debt, here are some alternative options worth considering.
Payment plans
Numerous hospitals and medical providers are open to collaborating with patients to set up a payment plan. This arrangement allows you to gradually settle your medical debt over time through smaller, more manageable installments rather than a single lump sum. Typically, you can negotiate the monthly payment amount and the repayment duration with the provider. Ensure to inquire about any applicable interest charges or fees associated with establishing a payment plan.
Assistance programs
Medical aid programs offer valuable support for individuals burdened by medical debt. Entities such as The Healthwell Foundation and Patient Access Network (PAN) Foundation offer grants that facilitate faster debt repayment. Additionally, these organizations can assist in negotiating medical debt or accessing more affordable healthcare options. (Refer to the “Tips for paying off medical bills” section below for further guidance.)
Bill negotiations
Securing a reduction in your medical bills could be as straightforward as reaching out to your doctor’s billing department. Typically, healthcare providers aim to receive payment for their services and may consider reducing your debt if you’re facing financial hardship. If negotiating your medical bills seems daunting, seeking assistance from an advocacy group or non-profit focused on debt relief could be beneficial. Keep in mind that some of these organizations may charge for their services.
Common medical costs
According to a 2023 study by the Urban Institute, a significant portion of Americans’ overdue medical debt is linked to hospital care. The cost of a mere three days in the hospital can average around $30,000, as reported by Healthcare.gov. Here’s a glimpse at common procedures and their associated costs, with many ranging in the tens of thousands of dollars:
| Procedure | Average cost (without insurance) |
|---|---|
| Heart bypass surgery | $123,000 |
| Hip replacement | $40,364 |
| Angioplasty | $28,2000 |
| Gastric bypass | $25,000 |
| Cataract surgery | $3,500 – $7,000 |
| Tonsillectomy | $4,000 – $6,000 |
| Appendectomy | $33,000 – $48,000 |
| Emergency fracture surgery | $15,000 – $35,000 |
Tips for paying off medical bills
Knowing your rights regarding medical bills is crucial. As per the Consumer Finance Protection Bureau, if you’re paying out-of-pocket for care, your provider must furnish you with a good-faith estimate of the service costs. Should your bill exceed this estimate by $400 or more, disputing it might be an option.
Even with insurance coverage, it’s wise to request a cost breakdown beforehand and an itemized list of services afterward.
Remember: The No Surprises Act of 2022 safeguards patients with health insurance, preventing unexpected bills from out-of-network providers or facilities. This applies if you weren’t informed about the out-of-network status beforehand or didn’t authorize the services.
Apart from obtaining a HELOC, consider these strategies to mitigate or avoid medical debt:
- Comparison shop: Even with insurance, you can select your healthcare provider. Opting for an in-network provider under a preferred provider option (PPO) plan can lower costs.
- Review coverage: Assess your health insurance policy to understand covered and non-covered expenses. Watch for balanced billing, where providers attempt to charge the difference between their standard rates and negotiated rates with your insurer.
- Scrutinize medical bills: Many medical bills contain errors, with an estimated 60% having mistakes. Check itemized bills for services not received and hidden charges. Use tools like Find-A-Code to detect incorrect code pairs.
- Arrange payment plans: Many medical offices offer installment plans without interest, aiding in manageable repayment.
- Seek assistance: Depending on income, you may qualify for relief programs like CHIP or pharmaceutical assistance programs. Charities such as PanFoundation, Healthwell Foundation, or CancerCare offer aid for various conditions.
- Utilize health savings accounts (HSAs): If your plan allows, HSAs offer tax-free savings for out-of-pocket medical expenses.
- Claim tax deductions: Unreimbursed medical bills exceeding 7.5% of your adjusted gross income may be deductible if you itemize deductions on your tax return.