How to Finance a Vacation With a Home Equity Loan

You own your own home and it's appreciated in value since you bought it. You may be getting offers from your mortgage lender--or even other third-party lenders with whom you have no affiliation--to tap that equity to pay for things like home improvements, new cars, vacations or to consolidate credit card debt. Should you take them up on their home equity offer?

Instructions

Difficulty: Moderate

1. Understand that home values fluctuate--sometimes wildly--depending on the real estate market. A home that today may be worth $250,000 could be worth $200,000 a year from now. Inflation, natural or man-made disasters and other market forces beyond the control and understanding of most consumers can negatively affect your home equity.
2. Realize that if your home value drops due to circumstances beyond your control, you may end up with an "upside down" loan-to-value if you take out a home equity loan to pay for a vacation or consolidate credit card debt. A borrower who is "upside down" owes more on their loans than the property is worth.
3. Know that when it comes time to sell your home, if its value has decreased and your loan-to-value ratio is upside down, you may very well end up paying the bank money out of your pocket to cover the difference between what you net on the sale of your home and what you owe on your mortgage and home equity loans.
4. Determine your affinity for risk. If you don't mind running the risk of running an upside down loan-to-value ratio, contact your lender and submit a home equity loan application. However, if you prefer the peace of mind that responsible personal finance management will give you over the transitory gratification a vacation will provide, then pay cash for your vacation.
5. Plan ahead. If you really don't mind putting your home on the line to pay for a vacation, make your home equity application far enough in advance that you receive the funds in time for your vacation. Home equity loan applications are similar to mortgages in that they require an appraisal to determine the actual amount of equity you have in your home. It could take anywhere from four to six weeks from the time of application to the closing.

Tips & Warnings

• Consider your home equity a nest egg. There are far better things for which to save your home equity. What if you become unemployed? What if you have a medical emergency that your insurance doesn't cover? Have you saved up for your children's college expenses? These are the types of things for which you should save your home equity nest egg, not a vacation that will come and go in the blink of an eye.
• Try budgeting for a vacation and saving up the cash. Imagine how much better you'll feel once you return home knowing that the trip is all paid for. If you can't afford your dream vacation this year, take a less expensive vacation as you save up for the big one the next year.
• Most personal finance experts advise strongly against tapping your home equity for non-essential purposes. A vacation, no matter how much you think you need one, is a non-essential purpose.