With the holidays just around the corner, many of us are dealing with a fair amount of trepidation over how we’ll afford this otherwise enjoyable time of year. After all, there are usually dozens of presents to buy, plus all the decorations you need. Most of us will have a few holiday parties, too, which means dressing up and bringing a dish or bottle of wine. Travel plans are not uncommon either, and can also add up. For all these reasons and more, a lot of people could use help during the holidays with paying for all of these items. Like others, you may be wondering if home equity can be used to your advantage here.
Using Home Equity to Get Money
Home equity on its own isn’t what will help you in this situation. Rather, it’s using the equity you built up in your home to help secure a loan that will, in turn, allow you to make any of the aforementioned purchases.
This is what many people refer to as a second mortgage. A lender feels secure enough that the amount of equity you have built up in your home makes you a low risk to lend money to because it serves as collateral. These are also commonly referred to as a home equity line of credit or HELOC.
Can I Use It to Deal with Holiday Expenses?
The simple answer is that, yes, you can. Technically, you should be able to use a HELOC for whatever you please, though there may be certain stipulations involved based on your unique contract (this is doubtful though).
That said, simply because you can do something doesn’t mean you should. There’s a reason people generally use these lines of credit on major purchases or emergency expenses. If you use this loan now for gifts and decorations, just be sure you understand that this lifeline won’t be around later on if you find yourself with a pile of medical bills or damage to your home above what the insurance company will cover.
Other Uses for a HELOC
Let’s take a look at some common reasons people take out loans against the equity they’ve built in their home. Chances are that you could either benefit from pursuing one of these options now or you understand it may be necessary to do so in the near future.
- Paying down credit card debt that has an unfavorable interest rate. A HELOC will usually have a much lower interest rate than your credit card. Furthermore, that interest is usually tax deductible, which you definitely can’t say about a credit card’s.
- Consolidate debt across numerous cards you may use. Using a HELOC loan to pay off the debts on some of your cards makes it much easier to manage whatever’s left over and consolidate it on just one card.
- Remodel your home with the help of a HELOC loan. Not only will this help you and your family enjoy it more, but if you are smart about it, this will improve the amount you can expect to sell your home for, too.
- As we mentioned, HELOC loans are great for handling financial hardships that come out of nowhere. If the recession has taught us anything, it should be about how easily the things we used to take for granted—like our job and salary or investments—can be ripped out from under us. When that happens, you’ll be happy you have equity in your home to use as collateral.
To reiterate, you can definitely use your home equity to help deal with holiday expenses, but it’s probably not a very good idea. Instead, look for ways to limit the amount you spend and prepare in advance next year.