As we plan for life after COVID-19, we can resume dreaming of new travel experiences. While everyone deserves a vacation, it can be difficult to save for one.
Ideally, vacation funds should come from excess savings, but many Americans find themselves without a savings account or with little money left over to spend. If a vacation is a long-desired, desperately needed treat for you or your family, be smart about borrowing money and consider all options.
Although most families find it easy to fund a vacation with the swipe of a credit card or by taking out a personal loan, interest rates can be difficult to pay back, and you could end up paying dearly for the financing of your getaway. Saving money to help pay for your vacation is always the best option. You can also check out a home equity loan or home equity line of credit as a low-cost way to pay for your vacation.
Home Equity Loan
A home equity loan allows homeowners to borrow against the equity in their homes. The equity is based on your home’s current market value and the outstanding mortgage on it.
A home equity loan is a relatively inexpensive source of cash compared to other forms of borrowing. The interest rate on a home equity loan is typically only slightly higher than the interest rate on a new mortgage. Many home equity loans have fixed rates so they are easy to fit into your budget. With one, you borrow a lump sum upfront to finance your vacation, then pay it off monthly at the set rate or even at a higher rate to repay the loan sooner. If you also use your loan to improve your home, that amount may be tax-deductible.
However, to be considered for a home equity loan, you’ll need a good credit score, sufficient income and reliable payment history.
Home equity line of credit (HELOC)
A HELOC is another option to help you afford a vacation. Home equity lines of credit are similar to home equity loans, as they are based on the value of your home and the amount of mortgage you have left to pay.
A HELOC allows a homeowner to borrow up to the full amount of the loan. Many HELOCs include variable interest rates, but some lenders may offer fixed rates for a given number of years. You can think of a HELOC as a low-interest credit card, using it only when needed.
With a low interest rate, a HELOC can be a good option for homeowners looking to finance a vacation. You can borrow the amount you need with reasonable monthly payments based on the amount borrowed. Usually, the borrower has up to 10 years to reach the credit limit before payments are set based on the remaining balance. Many borrowers prefer the HELOC because:
- They can use a debit card or checks to access the credit line.
- They can take out only the amount they need and still have funds to cover future costs or emergency situations.
To be considered for a HELOC, lenders will look at your credit score and debt-to-income ratio.
Saving money to pay for your vacation is always the best option. A home equity loan or HELOC, however, will let you pay off the cost at a relatively low interest rate over many months. So, they’re an affordable option if you decide to borrow. Just don’t neglect to consider the risks to your home when you use home equity debt. Consult your First Merchants banker to make sure you’re making a sound decision.
Learn more about starting a savings fund or contact a banker today.
