Should you use the equity in your home for your vacation expenses?


The holiday season is full of joy, but also costs. The average consumer is spending $1,430 on holiday-related gifts, entertainment and travel this year, according to PwC. With inflation weighing on budgets and rising interest rates, you might consider leveraging the equity in your home to cover some costs. Should you?

2022 Holiday Spending Statistics

  • Thirty-five percent of holiday shoppers surveyed by PwC plan to spend more this year than they did in 2021.
  • Forty-three percent of Americans surveyed by Bluedot are more likely to open a credit card in-store for discounts.
  • Forty-three percent of adults surveyed by Bankrate plan to travel this holiday season, with 32 percent believing spending will strain their budget.
  • Domestic flights over Christmas cost 39% more than in 2021, according to Hopper, while hotel rooms cost 32% more.
  • Vacation hosts are expected to spend an average of $630 on gatherings, according to an Ally survey.
  • A quarter of adults surveyed by Personal Capital plan to skip Thanksgiving dinner this year to save money, while 45% feel “financially stressed” about the day.

Can you use the equity in your home to cover vacation expenses?

Inflation has changed how many of us are approaching this festive season, with a recent Bankrate survey revealing higher prices impacting the buying decisions of 40% of respondents. Of these, more than half (59%) plan to buy fewer items. Fifty-two percent spend more time searching for coupons, discounts and sales.

With these pressures on portfolios and soaring home values ​​of late, many homeowners have dipped into their equity to raise money for a variety of purposes, undeterred by rising rates on home equity products.

In fact, in the first half of 2022, home equity line of credit (HELOC) loans hit their highest level since 2007, according to CoreLogic — in part because homeowners eligible to refinance likely got the best rate they could. will get in 2020 and 2021, when refi rates were at record highs. Refinancing now and cashing out simply don’t add up.

Enter HELOCs and home equity loans. Both allow you to borrow against the equity in your home – instead of refinancing – with the line of credit functioning as a variable-rate credit card, and the loan a fixed-rate, lump-sum second mortgage that you pay off as your first.

While you can apply HELOC funds or home equity loans to any expense, it’s not a good idea to take on that kind of debt for vacation expenses, says Greg McBride, CFA, chief financial analyst at Bankrate.

“The best uses of home equity involve something that enhances the value or livability of your home, or has the prospect of earning a higher rate of return than the cost of borrowing,” says McBride. . “Consumer goods and experiences do not fall into this category.”

Importantly, with home equity loans, your home is at stake as collateral. If you can’t repay what you borrow, you could lose your home to foreclosure — a risk not worth taking, even with higher holiday spending this year.

Better reasons to leverage your home equity

To be clear, opening a HELOC or getting a home equity loan to cover vacation expenses is not a smart move.

However, if you’re planning to remodel the rooms where you’re hosting guests this year, a HELOC might make sense. Here are some wiser reasons to use the equity in your home:

If you use the HELOC or home equity loan funds for renovations, you may be able to deduct the interest at tax time. You’ll need to itemize deductions to take advantage of this break, and the deduction limits apply to all of your mortgages and loans.

HELOCs for holiday damage or emergencies

Another potential reason to open a HELOC: in an emergency, especially now due to cold weather or seasonal vagaries.

“Many of the claims typically made between January and March can involve things like frozen pipes, ice dams, heavy ice and snow buildup, water and even power outages,” says Kim Hare, manager. property claims for Farmers Insurance.

If you find yourself facing an urgent and unexpected home repair, a HELOC can help you pay to repair the damage, and at a much lower rate than a credit card.

At the end of the line

Avoid using your home equity for holiday gifts or travel this year. Your capital is probably the most valuable asset you have, so it’s not advisable to stake it for discretionary costs.

In general, HELOCs and home equity loans are best used for renovations, education expenses, or other costs that pay you back in some way. If you are looking to use your capital, remember: This type of loan puts your house as collateral and increases your debt. Be careful whenever considering this kind of financial move.

As for your holiday budget: Avoid going into debt if possible.

“Plan in advance what you’re likely to spend and start setting money aside — or creating room in the budget — for those expenses,” says McBride. “But that’s the limit — don’t go into debt by spending money you don’t have. You want to spend the New Year saving for the next holiday season, without paying for this one.

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