Earlier this year, Dennis Shirshikov and his wife were surprised to find they had gained $120,000 in equity since closing on their home in 2020.
So they used a cash-out refinance to borrow $84,000 and consolidate several high-interest debts, then used the leftover funds on a family trip.
“We said, ‘You know what, this is a pretty cool opportunity,’” says Shirshikov, who lives in upstate New York. “Can we pay some more debt or put it away? Yes, we could. But those opportunities will continue to exist.”
About 80 million consumers have available equity in their homes and they’re tapping it at record levels, according to TransUnion’s, 2022 Q2 Quarterly Credit Industry Insights Report. HELOC and home equity loan originations increased by 40.6% and 29.2%, respectively, between 2021 and 2022. Cash-out refinances, which are less popular when mortgage rates rise, also let homeowners borrow money against their equity.
Some personal finance experts caution against using home equity to pay for lifestyle expenses like a vacation, but what Shirshikov did “is vastly different from someone just opening a line of credit and saying ‘Let’s blow it all and go to Europe!’” says Tara Alderete, the director of enterprise learning at Money Management International, a nonprofit credit counseling agency.
Shirshikov used the cash-out refinance to better his financial situation, but financial experts say using this type of funding for vacations is frowned upon.
If you’re thinking about doing something similar, here’s what to consider.
Before You Tap Into Your Home Equity
Before pulling the trigger on a cash-out refinance, Shirshikov and his wife considered their needs and their reason for refinancing. They wanted to use their equity to get ahead. The family used this new monthly budget to make sure they were investing for retirement and all other regular monthly expenses were being handled. But the Shirshikovs had several private student loans, credit card balances, and personal loans they wanted paid off and they hadn’t taken a family vacation since before the pandemic hit.
The couple also considered how they’d tap their home equity. A cash-out refinance is a home loan for more than you owe, with the difference provided in cash, while a home equity loan is a fixed-rate installment loan and a home equity line of credit is a revolving line of credit you can borrow from as needed.
With all three options, the amount you can borrow is based on the equity in your home, and interest rates are typically lower compared to credit cards and personal loans. The biggest and riskiest drawback is that your home secures the loan as you pay it off. “So if you aren’t able to make those payments, your home is at risk of foreclosure,” Alderete cautions.
Shirshikov chose the cash-out refinance because his original mortgage was owner-financed, and he wanted to move the loan to a financial institution. He also wanted to take advantage of the low mortgage rates at the time, consolidate debt, and find a way to pay for a vacation.
Personal finance experts caution against using home equity for “wants,” like vacations, instead of “needs,” like a medical emergency. If you’re going to tap home equity, consider doing something that puts you financially ahead. For instance, doing home-maintenance projects could help replenish the equity you take out, or consolidating debt could put room in your budget and help you save on interest.
Shirshikov Believes ‘This Was a Home Run’
Shirshikov now has a mortgage with a longer loan term and a lower interest rate, and his monthly housing costs are reduced by $400. After using $75,000 of the cash-out funds to pay off higher-interest debts, Shirshikov now has $1,500 a month that used to go toward debt payments. This extra discretionary income “allows him to invest, save, and do a whole bunch of other things that will further his financial situation,” Alderete says.
And if he continues making the same monthly payment as he did with the previous loan, he could get the best of both worlds: the lower interest rate and a shorter payoff term, says Jason Krueger, a CFP with Ameriprise Financial.
From the cash-out refi, the Shirshikovs also spent about $6,000 on a 10-day trip to an all-inclusive resort in Cancun, Mexico.
Improving his financial situation and taking a memorable, relatively low-cost trip with the family, Shirshikov believes, was a win-win. “This was a home run. We got lucky across the board.” Financial experts have a different take on this move, though.
What Experts Have to Say About Using Home Equity for Vacations Expenses
Tapping home equity to pay for a vacation is “never typically a good idea because you’re putting your house at risk,” Alderete says. “It’s also often an indicator you’re living beyond your means.”
Additionally, Krueger says, you’re depleting your most important asset: your home. Instead of using home equity to fund lifestyle expenses, Krueger encourages some of his clients to take out a HELOC and use it like “second layer of an emergency fund,” he says. “If life throws them a curveball and they have an unexpected expense, they can use the line of credit to cover a short-term need.”
Tapping that equity for a vacation takes away that opportunity if you need to borrow money later on.
“That being said, if the pandemic taught us anything, it’s that nothing is promised and life can change on a dime,” Krueger says. “So I wouldn’t discourage the use of home equity to fulfill some life dreams or make some precious memories that can be there forever.”
It comes down to each person’s financial situation being different, says Alderete. Our typical professional recommendation is to “do the things you want to do once your priority expenses are taken care of and you put some money aside,” she says. “Make a holistic budget that includes monthly savings and living within your means. But build in room for the things you want to do.”
If you’re planning to take a trip, Krueger and Alderete agree that saving money for it is the best way to go. In lieu of savings, you might use credit cards that come with an introductory 0% interest rate and a rewards program. So if you pay down the cost of the trip during the promotional period, you won’t pay interest and will still earn rewards.
Using a personal loan is another option. But “unlike a rewards card, you’re not getting anything back for it, and you don’t have the opportunity to pay it back interest-free,” Alderete says.
With any financial decision, you’ll make compromises in the process.
“A few things occasionally come up,” Shirshikov says. “We could have done this or that. You always think about the trade-off, but I have no regrets.”