Financing a Vacation with a Home Equity Loan

Financing a vacation with a home equity loan can make your dream vacation possible and leave a little extra money. Anyone looking to take a luxury trip abroad or even a 5-star cruise knows that they can be quite costly. 

What Is a Home Equity Loan?

A home equity loan or line of credit allows a homeowner to borrow money using the equity in her home as collateral. Equity is the difference between how much is owed on the home and what the home is worth. The collateral is your home or property. This is used as security for the lender. If you default on the loan, the lender takes the collateral and sells it to get the balance owed on the loan.

Loan vs. Line of Credit

Although similar and often associated with each other, a home equity loan and a home equity line of credit differ. A loan is a lump sum disbursement of cash that is repaid over time with a fixed payment. A line of credit is similar to a credit card with a revolving balance. If you were approved for $10,000 but spent only $4,000 for a vacation, you would still have $6,000 to spend later on, should you wish. You would be required to repay only the $4,000 you have spent.

How Much Time to Pay Back the Loan

Traditional mortgages are typically repaid over 30 years. There is a fixed rate, and you pay the same amount each month.  Home equity loans are usually repaid over a shorter period (usually, 15 years), with a fixed rate and the same amount each month. Please note that terms and rates can vary from lender to lender and loans can range from five to 30 years in some cases.

How Much Can Be Borrowed

Most lenders allow you to borrow up to 80 percent of the value of your home. The interest on the loan is normally tax deductible, but you should consult with your tax advisor for information specific to your state. As an example, let’s say your home is valued at $100,000. Eighty percent of the value is $80,000. Now you must deduct the balance of your mortgage to come up with the amount you can borrow. If you owe $50,000 to the lender, you can borrow $30,000.

Applying for A Loan

Applying for a home equity loan is not as taxing as applying for a first mortgage, but there is paperwork involved. Fees are also associated with your loan, including closing costs, which can easily total up to 5 percent of the loan. When you apply for the loan, the lender will look at your credit history as well as your ability to repay the loan. Your loan-to-value ratio and income are extremely important. It is recommended that you obtain your credit report from all three credit bureaus beforehand to be certain that no erroneous information is present. Once approved, you can spend your cash on anything you’d like, from financing a vacation to remodeling your home or paying off bills. The choice is yours–spend wisely and enjoy. 

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