Should you tap home equity for expenses this holiday season?
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The holiday season is full of cheer, 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 interest rates rising, you might be considering leveraging the equity in your home to cover some costs. Should you?
- 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 store credit card to receive discounts.
- Forty-three percent of adults surveyed by Bankrate plan to travel this holiday season, with 32 percent feeling their expenses will strain their budget.
- Domestic flights over Christmas cost 39 percent more than they did in 2021, according to Hopper, while hotel rooms cost 32 percent more.
- Holiday hosts are set to spend an average of $630 on gatherings, according to an Ally survey.
- One-quarter of adults surveyed by Personal Capital plan to skip Thanksgiving dinner this year to save money, while 45 percent feel “financially stressed” about the day.
Can you use home equity to cover holiday costs?
Inflation has changed how many of us are approaching this holiday season, with a recent survey by Bankrate finding that higher prices are impacting the shopping decisions of 40 percent of respondents. Of those, more than half (59 percent) are planning to buy fewer items. Fifty-two percent are spending more time looking for coupons, discounts and sales.
With these wallet pressures and the run-up in home values of late, many homeowners have been tapping their equity to get cash for various purposes, undeterred by climbing rates on home equity products.
In fact, in the first half of 2022, home equity line of credit (HELOC) lending hit its highest level since 2007, according to CoreLogic — in part because refinance-eligible homeowners locked in likely the best rate they’ll get in 2020 and 2021, when refi rates were at record lows. Refinancing now and taking cash out simply doesn’t add up.
Enter HELOCs and home equity loans. Both allow you to borrow against your home’s equity — instead of refinancing — with the line of credit functioning similar to a credit card with a variable rate, and the loan a fixed-rate, lump-sum second mortgage you repay just like your first.
While you can put HELOC or home equity loan funds toward any expense, it’s unwise to take on this type of debt for holiday costs, 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 it cost to borrow,” says McBride. “Consumption goods and experiences do not fall into this category.”
Importantly, with home equity loans, your home is on the line as collateral. If you can’t repay what you borrow, you could lose your home to foreclosure — a risk not worth taking, even with steeper holiday expenses this year.
Better reasons to tap home equity
To be clear, opening a HELOC or getting a home equity loan to help cover holiday costs isn’t a smart move.
However, if you’re planning to remodel the rooms where you’re hosting guests this year, a HELOC might make sense. Some wiser reasons to use home equity include:
- Home improvements, especially projects that boost your home’s value
- College costs, but generally only if the rates are lower than those on student loans
- Consolidating credit card or other high-interest debt, particularly if you have a plan to stay out of debt moving forward
If you use the HELOC or home equity loan funds for renovations, you might 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
One other potential reason to open a HELOC: in case of emergency, especially now due to cold-weather or seasonal hazards.
“Many of the claims typically made between January and March can involve things like frozen pipes, ice dams, heavy buildup of ice and snow, water and even power outages,” says Kim Hare, head of Property Claims for Farmers Insurance.
If you find yourself facing an unexpected, urgent home repair, a HELOC can help you pay to fix the damage, and at a much lower rate compared to a credit card.
Steer clear of tapping your home’s equity for holiday presents or travel this year. Your equity is likely the most valuable asset you have, so it’s ill-advised to put it on the line 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’re looking to use your equity, remember: This kind of borrowing puts your home up as collateral and raises your debt load. Be cautious any time you’re considering that kind of financial move.
As for your holiday budget: Avoid racking up any debt, if possible.
“Plan ahead as to what you’re likely to spend and begin 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 up for next holiday season, not still paying for this one.”