Should you pay for a vacation with a HELOC?

You work hard, and lately you find yourself dreaming of a vacation. You may even have begun researching flights or dream hotels online, or used budgeting tools to help plan your finances. So how do you take that break without breaking the bank? To help make a dream a reality, let’s start with budgeting for your upcoming travel. Simply, how much money do you need? Is this an around-the-world trip, or something more low key such as a road trip to another state? As you may already know, there are many different ways to pay for a vacation. One option that doesn’t make a lot of splashy headlines is using a HELOC (home equity line of credit) to finance your trip. If you have questions, we’ve got answers so let’s dive into some common questions surrounding using a HELOC to finance a vacation

Q. To begin, what exactly is a HELOC?

A. A HELOC is simply using your home as collateral in exchange for a loan. The equity you’ve built up since buying your home is entered into a simple calculation: how much your home is worth minus any mortgage(s) you might have. Usually, one is allowed to borrow roughly 80% of that equity. As you repay your balance, the amount of available credit is replenished, similar to a credit card. And, once you open a HELOC, it works like a credit card. You can use what you need when you need it. You don’t have to use the funds right away and you only pay it back when you do. Unlike credit cards, the line amount is typically much higher, and many lenders have interest-only payment options during the borrowing or draw period, typically 10 years. You use the funds only when you need to, and you can continue to use the funds as you repay them. You only pay interest on the money you use. Check with your lender to see if they charge closing costs as some might as a HELOC is much like a second mortgage. As for the interest rates, most HELOCs charge a variable rate, which can adjust up or down.

Q. Can you use a HELOC for a vacation? And should you?

A. Your friends might use a cash back credit card or a card that offers rewards for dollars spent on travel. However, if your preferred credit card rewards program comes with a less than ideal interest rate (such as around 18%-24%) transferring that balance to a lower rate HELOC could save you money month-to-month. And those rewards? They might not be all that rewarding. According to a recent report by the Consumer Financial Protection Bureau,¹ “Consumers with revolving debts on average pay far more in interest and fees than they get back in rewards.” In the same year as the report (2022) credit card companies charged consumers $150 billion in interest and fees. But it’s possible to make your credit card and HELOC work in sync. If you plan to book your travel using a credit card in order to reap the card’s rewards, transferring that balance to a HELOC could result in a lower monthly interest payment (only if the HELOC offers you a better APR than that of your credit card.)

Let’s look at the pros and cons of both avenues of paying for a vacation to ensure you’re not spending beyond your means:

Q. What are some tips to save further on a vacay?

A. There are even more out-of-the-box ways to save when planning your dream vacation. If you get paid biweekly, look out for three-pay-period months to go on your vacation. These happen twice per year, and you can slide the extra funds toward your trip savings. Similarly, if you get a tax refund, after paying major bills the rest can go in your “vacay” piggy bank. There’s a term called “shoulder season,” which means avoiding peak times of travel. A road trip or even an RV might be cheaper than flying, though be sure to calculate gas and RV hookup prices. For large families (or just for those who love to cook!) it can often be advantageous to rent a house equipped with a kitchen rather than pay for a pricey hotel room and eat out every meal.

Where can you go from here?

You absolutely deserve your dream vacation, but you don’t want debt creep while trying to enjoy your cold drink with your toes in the sand. A HELOC could be an out-of-the-box way of paying for your next trip, given its attractive low interest rate. HELOCs could offer lower interest rates than what you'll find with most credit cards and personal loans, though you’ll also be adding another payment to your monthly bills. Only you know the best way to finance your trip to save money on travel. And remember, there’s always that “staycation” if things are unaffordable.

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If you are taking on a renovation project, consolidating high-interest debt or you just want a worry-free getaway, a Citizens HELOC can help you right now. And our home equity specialists are here to help guide you.

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“CFPB Report Finds Credit Card Companies Charged Consumers Record-High $130 Billion in Interest and Fees in 2022,” October 25, 2023.