Should you use home equity to pay holiday expenses?

The holidays bring happy times — but also financial stress. And more than ever this past season. While inflation is easing, prices are still considerably higher than they were pre-pandemic. In fact, a recent survey by Bankrate found that over half — 54 percent — of holiday shoppers expected to feel financially burdened in late 2023, and more than 40 percent were planning on buying fewer items or seeking out more sales, coupons or discounts.

So, how should you contend with the mountain of post-holiday bills — especially with credit card APRs at record highs?  One solution might be to leverage your home equity: borrowing 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 credit cards’.

But just because you could use home equity to pay holiday expenses doesn’t mean you should. Let’s look at the pros and cons.

Can you use home equity to cover holiday costs?

A home equity line of credit (HELOC) or a home equity loan allows you to tap into that additional home equity.  A HELOC is a variable-rate line of credit that functions much like a credit card; a home equity loan offers a lump sum disbursement at a fixed interest rate.

With wallet pressures and the run-up in home values in the last two years, many homeowners have been tapping their equity to get cash for various purposes, undeterred by climbing rates on home equity products. (For the record, Bankrate projects rates to decline throughout 2024).

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.

“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. Consumption goods and experiences do not fall into this category.”

Plus, these 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 your home to foreclosure. Even with steeper holiday expenses, that risk is not worth taking.

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 bathroom to a guest room for visitors during the festive season — it might make sense, after all.

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, the financing could help you pay for emergency repairs, tiding you over until homeowners’ insurance can kick in. And at a much lower rate compared to a credit card.

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.”

If you must borrow,  you can turn to zero-interest credit cards and personal loans with low interest rates for additional capital.

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.”

Bottom line on home equity to cover holiday costs

Steer clear of tapping your home’s equity for holiday presents or travel. “The ultimate goal for homeowners should be increasing equity and owning their home outright,” says Nicole Cope, senior director of wealth advisors at Ally Bank. “As you weigh your options, keep in mind that tapping into equity draws from the homeowner’s ownership stake, puts loan value payoff farther out and raises interest over the lifetime of the loan.”

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. If you’re looking to tap your ownership stake, remember that this kind of borrowing puts your home up as collateral, dilutes the value of your home as an asset and raises your debt load.

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.”