Around this time of year, it’s hard to ignore that little voice telling you to shower those you care about with love.  Even more confusing is figuring out how that voice seems to find its way from your heart to your wallet every year as you run up your bills trying to purchase items that show precisely how much you care. (Of course, those advertisements flaunting cars and jewelry boxes donning pretty ribbon bows don’t help either.)

In looking for another method of payment, you may think that using a home equity line of credit (HELOC) may be a good alternative route to use to pay for your gifts.  But how appropriate is it to use your HELOC to pay for gifts this holiday season?

A HELOC is typically attached to an interest rate which is linked to the prime lending rate.  The interest rates on HELOCs are usually the prime rate plus a margin that financial institutions determine.  However, if you have excellent credit, sometimes you can qualify to receive the prime rate. Use the Internet to shop for the most competitive offers on HELOCs.

Because of this variable rate, frequently the overall benefits of HELOCs are dependent, in part, on the rate environment.  For example, if you had a HELOC between July 2003 and March 2004, your rate would have stayed relatively steady because the prime rate hovered at 4%.  On the other hand, if you had a HELOC from March 2004 to July 2006, your rate would have more than doubled from 4% to 8.25% (Source: Federal Reserve Board).

This potential interest rate fluctuation is one reason HELOCs should be meant for short term spending.  By keeping your HELOC use short term in nature, you can help avoid paying more than necessary for unexpected prime rate increases.

If you want to use your HELOC to pay for your holidays this season, try using it to pay off your credit cards.  Since HELOCs tend to have lower interest rates than credit cards, by using your HELOC to pay off your credit cards, you should save money by lowering the interest paid overall. Furthermore, the interest paid on HELOCs may be tax-deductible. Always check with your tax preparer for full details.

Remember that you don’t have to spend a lot this season to show your friends and family that you care.  You can spend thousands of dollars on gifts, but the best things in life are free.  Spending time together should be a higher priority than spending dollars.  This season, be sure the gifts you give are wrapped in love.