Should you use your home equity to pay holiday expenses?

The holidays bring happy times — but also financial burdens. And more than ever this past season. While inflation is easing, prices for just about everything are still considerably higher than they were pre-pandemic. In fact, Bankrate’s 2024 Holiday Shopping Survey found that 28 percent of holiday shoppers say they are stressed about the cost of their holiday shopping, and that it will strain their budget. More than a quarter of respondents (27 percent) plan to take on a form of debt for their holiday spending.

So, how should you contend with the potential upcoming mountain of festive-season expenses — especially with retail credit card annual percentage rates (APRs) at record highs and other credit card rates still relatively high themselves? 

One solution might be to leverage your home equity: that is, borrow against your ownership stake. After all, your home has likely gone up in value over the past few years. And the interest rates on home equity loans are much lower than those on credit cards — as those cheery ads that typically start this time of year may remind you. In fact, you might have already received an email from your lender, urging you to “let your home finance your happy holidays!”

But just because you could use home equity to pay holiday expenses doesn’t mean you should. In fact, most financial advisors caution against it. Here are the pros and cons.

Can you use home equity to cover holiday costs?

There are two common ways to tap into your home equity, the part of your house that you own outright (as opposed to the part you financed):

• A home equity line of credit (HELOC) is a variable-rate line of credit that functions much like a credit card: You can draw funds against it for several years, then pay the money back over a prolonged period. 
• A home equity loan (HE Loan) offers a lump sum at a fixed interest rate. You repay it over several years, or even decades.

In both cases, the amount you can borrow is based on the amount of equity you have — which equals roughly your home value, minus the outstanding amount of your mortgage. As with your mortgage, your home backs the debt. As wallet pressures have risen along with home values over the last two years, many homeowners have been tapping their equity to get cash. You can use home equity funds for just about any purpose.

Traditionally, homeowners have used home equity financing for residence-related expenses: repairing, renovating or expanding the property in some way. Most still do: In Bankrate’s 2024 Home Equity Insights Survey, home improvements were overwhelmingly the number one use, cited by over half of current homeowners (55 percent) as a good reason to tap their built-up equity. 

But there are those — younger homeowners in particular — who are more willing to tap home equity for more prosaic reasons or discretionary purchases. Among millennial homeowners, nearly a quarter (23 percent) thought keeping up with regular household bills was a good reason to use equity for cash. Some 14 percent cited taking a vacation and 11 percent, buying big-ticket, non-essential items. From presents to travel to cooking and entertaining, all these expenses become more intense during the festive season.

What’s against using home equity for the holidays?

It is possible to put HELOC or home equity loan funds towards any expense, says Greg McBride, CFA, chief financial analyst at Bankrate. “Yet, it’s unwise to take on this type of debt for holiday costs,” he adds.

Cheaper but not cheap

For one thing, there’s the cost of borrowing. Yes, home equity loans and HELOCs, as secured debt, have much lower interest rates than the average credit card — which “charges a whopping 20.5%,” to quote Bankrate senior industry analyst Ted Rossman — or unsecured personal loan (which are clocking in at 12.31 percent on average). And this autumn, home equity rates have been trending down, to a 7.77–10.47 percent range, reflecting the Federal Reserve’s slashing of rates. 

But don’t confuse cheaper rates with cheap rates. “The average HELOC charges 8.61 percent, a figure that has more than doubled since the middle of 2022,” Rossman observes. “This is no longer low-cost debt.” The really-low-rate days of the pandemic (think: 3 to 5 percent interest) are unlikely to return, even if the current decline continues.

House on the line

Then there’s the fact that home equity loans involve a lot of risk: Your home would be on the line as collateral. If you can’t repay what you borrow, you could lose the place to foreclosure. Even with everything costing more, that risk is not worth taking. We’re all for lavish gifts, ski trips and parties, but these are fleeting pleasures — whereas home equity repayments stretch on for years. And, in the case of HELOCs, can dramatically double on you (especially once you have to start paying back both interest and principal when your draw period ends).

It’s overkill

Home equity money can take a while to come through: Though it’s gotten more streamlined of late, the application process is onerous and requires a lot of paperwork — similar to a mortgage application, in fact (HE Loans are also called second mortgages). Plus, home equity financing tends to be for large sums: White some lenders offer loans as small as $5,000, $15,000 or $25,000 is a more common minimum. That’s a lot of presents. Seriously, it may not be worth the time, effort or expense (like mortgages, you’ll incur upfront closing costs) to tap home equity just for holiday bills, even if they’re bigger this year.

Better reasons to tap home equity

Some wiser reasons to use home equity include:

• Home improvements, especially repairs or renovations that boost your home’s value
• Consolidating credit card or other high-interest debt, particularly if you have a plan to stay out of debt moving forward
• College costs, but generally only if the rates are lower than those on student loans

Of course, if the holiday expense involves one of these uses — such as adding a guest bathroom for the steady stream of out-of-town visitors you host — it might make sense, after all. If your New Year’s resolution is to pay off those outstanding card balances once and for all, that could also be a justifiable use of home equity.

HELOCs and HE Loans for holiday damage or emergencies

One other potential reason to open a HELOC or home equity loan is to address emergencies, especially those due to winter’s extreme weather. “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 urgent issue, equity-based financing could help you pay for emergency repairs, tiding you over until homeowners’ insurance reimburses you or covering the deductible before it kicks in.

Alternatives to tapping home equity to cover holiday expenses

“Accumulating savings throughout the year specifically for holiday spending purposes will help set boundaries around what you spend and keep you out of debt,” suggests McBride. “Taking on a seasonal job or side hustle is another way to set aside funds specifically for holiday expenses.”

Most Americans do indeed use savings. Bankrate’s 2024 Holiday Shopping Survey found that more than half (58 percent) of shoppers plan to use a debit card to buy goodies like gifts and decorations. That’s akin to paying cash, since debit card purchases get deducted directly from a bank account.

If you must borrow, you can turn to credit cards, but do so strategically and carefully. “Credit is a financial tool that can work for consumers if managed well,” explains Christina Roman, consumer education and advocacy manager for Experian. Almost half (46 percent) of Experian’s holiday survey respondents said that they plan to use a major credit card to pay for holiday gifts. 

“Consumers should consider whether they receive any other benefits through their credit cards, like store discounts or cash back rewards, that might make gift buying more affordable,” Roman recommends. You may also want to seek out credit cards with an introductory 0% interest rate — especially if you can repay what you borrow before that rate expires. 

Before deciding how to proceed, carefully evaluate each alternative and consider factors such as interest rates, repayment terms and your current obligations. “Don’t trap yourself in a cycle of debt — especially high-cost debt — to pay for holiday expenses, ” advises McBride. “If you have to borrow money to cover holiday spending, you’re spending too much.”

Additional holiday spending tips

• Learn from 2023. “Look at what you spent last year and see what lessons can be pulled from that, such as where you overspent, how much you pulled from savings or how much credit card debt came from it,” McBride says. 
• Set expectations. “It is important for consumers to set spending boundaries, especially when 89 percent of respondents to Experian’s annual holiday shopping survey told us that they are tempted to spend more than they should during the holiday season,” Roman says. To avoid overspending, she recommends talking to loved ones now. “Consumers can have a discussion with their friends and family about gift expectations, including setting a limit on costs or number of gifts,” she advises. Rossman suggests asking questions like, “Can we only buy for the kids this year? Can we pick one adult’s name at random and only buy for them rather than the whole extended group?”
• Seek out and combine discounts. “Stack discounts so that when you are buying items, you’re paying a lot less than full price,” Rossman recommends. “For instance, combine a store promotion with a rewards credit card that you pay off before interest hits and also use an online shopping portal such as Rakuten [which gives cash back on purchases] for a third way to save on that same purchase.” McBride also recommends using loyalty programs when you can. Many retailers offer earn-a-gift-card events this time of year (but don’t buy too much just to get a big gift card).
• Schedule events strategically. “Consumers may need to pick and choose which events and experiences are the most important to them and stay disciplined to only attend those,” Roman says.
• Use your talents. “Make things if you’re crafty or a good baker,” Rossman suggests. 

As for next year’s holiday budget: “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 the next holiday season, not still paying for this one.”

Bottom line on home equity for holiday expenses

It can be tempting to tap home equity for the festive season. After all, it’s your money, and it’s cheaper than other financing methods. If you need help to cover those bigger-than-ever costs, why not make use of it?

But try to resist. It’s not a solution to overspending, and it’s not a good idea to drain your home’s value for holiday presents, trips or entertainment. In general, HELOCs and home equity loans are best used for renovations, debt consolidation or other costs that pay you back or improve your net worth in some way. Remember that this kind of borrowing puts your home up as collateral, dilutes its asset value and raises your debt load — which weakens your financial profile overall.

“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 costs to borrow,” McBride advises. “Consumption goods and experiences do not fall into this category.”

So, unless you’re treating yourself to a spanking new kitchen or a reshingled roof for Santa’s sleigh — take home equity loans off your holiday to-do list.