We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.
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 …….