Should You Use a Home Equity Loan or Line of Credit for Vacation?

You may be tempted to borrow to pay for your next trip if you don’t have a vacation fund. For example, you might use a travel rewards credit card to book flights or hotels or even take out a personal loan to cover vacation expenses.

It’s also possible to use a home equity loan for vacation plans. While that’s an option, going into debt to fund a getaway isn’t something most financial experts recommend. Here’s why.

In this guide:

• Can you use a HELOC or home equity loan for vacation?
• Should you use a HELOC or home equity loan for vacation?
• How to use a HELOC or home equity loan for vacation
• How can I take a vacation without borrowing money?
• Is a credit card better than a home equity loan for a vacation? 

Can you use a HELOC or home equity loan for vacation?

Home equity loans and lines of credit allow homeowners to borrow against the equity they’ve accumulated in their homes, typically at lower interest rates than credit cards or other unsecured loans. Equity is the difference between what you owe on your home and its value. 

A home equity loan can be an attractive funding source for homeowners who want to access large sums of cash at competitive rates. Home equity loans offer flexibility since you can use them to fund any type of expense, including vacation plans. 

But that doesn’t mean you should. Before tapping into your home equity to finance your travel plans, consider the potential drawbacks. 

Should you use a HELOC or home equity loan for vacation?

The reasons experts don’t recommend using a HELOC or home equity loan to fund a vacation include: 

• Drawing on home equity for vacation plans could leave you without access to ready cash later, which might be an issue if you need to cover major home repairs or renovations.
• An extra loan payment each month could add strain on your household budget.
• Defaulting on HELOC or home equity loan payments could put you at risk of losing the home to foreclosure.
• The vacation will be even more expensive due to interest and fees.
• The unnecessary inquiry on your credit report could affect your approval odds for future lending needs.

In the long run, a HELOC or home equity loan could lead to more costs than just the vacation. For instance, if you use up all your equity to take a trip and then need to replace your roof, you may turn to a high-interest credit card to pay for it. You now have two additional debt payments each month, not to mention that added burden of credit card interest. 

Should you decide to move ahead with a home equity loan or HELOC, keep reading to learn more about each option and how to use your equity to fund a vacation. 

How to use a HELOC or home equity loan for vacation

After weighing the pros and cons, you may decide that using a HELOC or home equity loan to pay for a vacation makes sense. You’ll need to choose which one you’ll use to fund your trip. 

If you’re unclear on the difference between a HELOC and a home equity loan, here’s a quick rundown.

Home Equity Line of Credit (HELOC)	Home Equity Loan
A revolving line of credit that you can draw against as needed May have a fixed or variable interest rate Only pay interest on the portion of the credit line you use After an initial draw period (typically 10 years), repayment may last up to 20 years	Allows you to borrow a lump sum of money Typically comes with a fixed interest rate Pay interest on the entire loan amount Repayment terms may last from 5 to 30 years

Once you select which one you’d prefer, you’ll need to take five additional steps to complete the borrowing process: 

1. Calculate your equity.

Equity is the difference between what you owe on the home and what it’s worth. If you owe $280,000 on your home and it’s worth $350,000, the $70,000 difference between those numbers is your equity. 

Equity matters in determining your loan-to-value ratio (LTV). Your LTV measures what you owe on your mortgage compared to your equity. Most lenders look for an LTV of around 80% for HELOCs and home equity loans.

To calculate your LTV, use the following formula: Amount you owe divided by home’s current value. Then multiply the answer by 100. 

So if you owe $280,000 on your home and it’s worth $350,000, your LTV is 80%. An LTV of 80% or less is ideal as it makes the transaction less risky in the lender’s eyes. 

2. Review lender requirements.

You’ll next want to consider the lender’s other requirements for a home equity loan. These include minimum credit score and income guidelines. You may want to shop around and get preapproved to see what kind of HELOC or home equity loan terms you qualify for.

3. Compare lenders.

After getting preapproved, you can dig deeper into lenders’ quotes to find the best HELOC or home equity loan option. You might compare the interest rates, fees, repayment terms, and closing costs to see which option will yield the most savings.

4. Choose a lender, and prepare your application.

Once you’ve chosen a lender, review what’s needed to apply, and start organizing your documents. Documents you may need include recent paystubs, W-2s, last year’s tax returns, and bank statements.

5. Apply for a HELOC or home equity loan.

The final step is applying for a HELOC or home equity loan, which usually means completing an application and uploading the necessary documentation. Once approved, you’ll receive a lump sum of cash for a home equity loan or access to your HELOC credit line. You can then use the money to pay for vacation expenses. 

How can I take a vacation without borrowing money?

Borrowing for a vacation isn’t ideal, whether you’re using a HELOC, a home equity loan, a credit card, or a personal loan. 

Here are our nine tips to plan a debt-free vacation:

1. Review your budget to see how much you can save toward vacation plans each payday. 
2. Create a dedicated vacation savings account to hold your travel funds. (Note: Take advantage of a high-yield savings account to grow your money faster.)
3. Use cashback apps to save money on shopping, and deposit the rewards in your vacation savings account.
4. If you get paid biweekly, consider depositing your extra paycheck during three-pay-period months (two per year) in your vacation savings fund.
5. If you get a tax refund, use it to boost your savings total.
6. Consider using any accumulated credit card rewards to pay for travel costs.
7. Weigh the merits of starting a side hustle to make extra money for a vacation.
8. Pick the right destination can also help to keep your costs down so you don’t need to borrow. Use an app such as SkippedLag to find the most effective route to your destination. Google Flights lets to see where in the world you can go that fits your budget.
9. Travel during the off-season to help you save money and avoid large crowds of tourists. Fly in the middle of the week to also help you snag lower fares. When it comes to traveling, flexibility is key.

Is a credit card better than a home equity loan for a vacation? 

Credit cards can be an attractive way to pay for expenses, including travel. You can pay back what you spend over time and even earn valuable rewards in the form of travel miles or points, which you could then redeem for free flights or hotel stays. Qualifying for a credit card may be easier than getting a home equity loan without putting your house on the line. 

But what about the cost? The average credit card APR was 16.27%, according to Federal Reserve data released in October 2022. HELOC and home equity loan rates, meanwhile, tend to be closer to traditional mortgage rates, which hovered around 7% as of October 2022.

Here’s what it might cost you to use a credit card vs. home equity loan for a vacation, assuming that you:

• Borrow $25,000
• Have excellent credit
• Plan to pay off the balance in five years

Credit card at 16.27%	Home equity loan at 7.80%
Monthly payment: $612 Total interest paid: $11,066	Monthly payment: $504.52 Total interest paid: $5,271.22

A credit card would result in a higher monthly payment and more than double the interest. Meanwhile, a home equity loan could be cheaper—and depending on your equity in the home, you might be eligible to borrow even more. 

However, a credit card doesn’t require you to put your home up as collateral. Whether a credit card is better than a home equity loan for vacation plans can depend on how comfortable you are risking the loss of the home.

If you decide to proceed with a HELOC or home equity loan, comparing borrowing options is key for finding a loan that fits your budget.

Either way, borrowing to go on vacation is not advisable. As would most other financial experts, we recommend creating a savings plan to fund your next vacation, not a debt repayment plan.