Should you use home equity to cover holiday spending?

The holidays are near, and many Americans are now looking for ways to finance their celebrations. But credit card rates have climbed to an all-time high of over 23% on average, making traditional holiday spending much more expensive. As a result, some homeowners may wonder if they should tap into their home's value instead.

Currently, the average homeowner has more than $300,000 in home equity. That's a lot of potential spending power. But should you borrow from your home's equity to pay for holiday expenses? While tapping into your home equity with a home equity loan or a home equity line of credit (HELOC) can seem like an easy borrowing solution, homeowners need to think carefully about the risks.

We spoke with mortgage and financial specialists to help you decide if using home equity makes sense for your holiday spending. They shared insights about current rates and what this choice could mean for your future.

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Should you use home equity to cover holiday spending?

"Generally, it's not a great idea to use your home as a piggy bank," warns Dean Rathbun, a mortgage loan officer at United American Mortgage Corporation. He explains that home equity is typically best used for things that add value to your home, such as remodeling projects.

Peter Diamond, founder of the American Institute of Bankability Experts (AIBE), agrees. He points out that using home equity for holiday expenses means paying significant interest on purchases offering no lasting value. With HELOC rates averaging between 8.61 currently and home equity loans averaging 8.41%, holiday debt could cost you more than planned.

Here are the pros and cons to consider before making your choice:

Pros of using home equity to cover holiday spending

While most financial experts will tell you not to use home equity for holiday expenses, there are some advantages to consider.

Here are the main benefits:

• Lower interest rates than credit cards: Your home equity loan rate will likely be much lower than what you'd pay on a credit card.
• More time to repay: Justin Mankita, capital markets manager at Tomo Mortgage, highlights monthly payments can be more manageable because you have a longer time to pay back the loan.
• Quick access to funds: "[It's] like pressing the easy button," says Diamond. You can get what you need instantly for your desired holiday experience.
• Simple monthly payments: Unlike juggling multiple credit card bills, you'll have one monthly payment.

Compare today's best home equity borrowing rates online now.

Cons of using home equity to cover holiday spending

In most cases, the cons of home equity borrowing for the holidays outweigh the pros.

Here are the main drawbacks to consider:

• Foreclosure risk: "You're using your home as collateral, so the risk of foreclosure is real if you can't make payments," cautions Mankita.
• Extra costs upfront: You'll need to pay closing costs to get the loan, which means spending money to borrow money.
• Borrowing minimums: Most lenders require you to borrow at least $10,000 to $15,000, even if you need less.
• Long-term impact on wealth: Diamond reminds us that holiday expenses give no lasting value, but the debt keeps adding up with interest. This can hold you back from investments that build wealth.
• Negative future borrowing power: The payments will increase your debt-to-income ratio, making it harder to qualify for other loans.
• Reduced home equity: You're trading years of built-up home value for short-term purchases that will be forgotten long before the debt is paid off.

Alternatives to consider for holiday expenses

Mankita and Diamond recommend trying these options before putting your home on the line:

• Test your budget first: Try saving the amount you'd pay monthly on a home equity loan. "If it's challenging to save that now, it's likely the loan payments would be tough to manage in the future," stresses Mankita.
• Look for zero-interest deals: Many stores offer special holiday financing with no interest if paid within a set time. This works well if you have a solid payment plan.
• Start a holiday savings fund: Set aside a small amount each month starting now for next year's holidays. This helps avoid debt altogether.
• Consider a 401(k) loan: While not ideal, this option keeps the debt between you and your retirement account. Just remember you'll miss out on investment growth.

The bottom line

Home equity should be your last resort for holiday spending — not your first choice, experts say. Diamond mentions it might make sense for essential purchases that offer lasting value, such as a computer for your child's education. But think carefully before using your house as collateral for holiday spending.

Before making any decisions, talk with a home equity lender or HELOC lender about your situation. They can help you explore all your options, including zero-interest store cards and holiday savings accounts. Together, you can create a plan that won't put your home at risk. After all, the best holiday gift you can give yourself is a secure financial future.