Home equity loan to buy a car?

Should you finance your car using a home equity loan?

The usefulness of borrowing against the value of your home cannot be overstated. While your home equity is not a source of funds per se, it does offer a rare opportunity to borrow sums of money which would ordinarily not be available to you. If you were to approach a lender and ask for a $50,000 unsecured loan, you probably would get a polite refusal. But if you wanted to borrow that money against your home, the lender would probably agree. With millions of Americans now having record amounts of home equity, borrowing against their property is in full swing. People are using home equity loans and lines of credit to fund all sorts of things - debt consolidation, college educations, vacation homes and more.

Some people wonder, however, if a home equity loan would be a good source of funding for an automobile. Should you use the value of your property to fund a car purchase?

Car loans have traditionally higher interest rates than mortgages; they tend to run about two points higher. Savvy homeowners know that there are several reasons why it might make sense to use home equity, rather than an auto loan, to finance a car purchase:

• The interest is cheaper- While home loans are now in the 6.5% range, car loans are leaning more towards 9%. Obviously, less expensive is better.
• Tax deductible interest - While not all consumers qualify, due to the standard deduction, many homeowners will find that the interest on a home equity loan is deductible from their Federal income tax return. This effectively reduces the interest rates, making the car cheaper.

From a financial standpoint, it seems like a no-brainer. From that point of view, it is. But there are some reasons why it might not make sense to use your property to finance your car:

• Home equity lines of credit have variable interest rates, and rates are rising. You wouldn’t want to use a line of credit instead of a fixed-rate auto loan, as you might end up actually paying more by doing it this way.
• You car loan is now backed up by your house. Should something go wrong financially and you find yourself unable to meet your monthly car payments, you are putting your house at risk. You could lose your home to foreclosure over a car payment.
• Unless you are disciplined, you could end up taking longer to pay for the car than would ordinarily make sense. You want to pay off the car in a period of time that does not exceed the amount of time you own it. You don’t want to still be paying for a car three years after you get rid of it.

It may make sense for some people to buy a car using their home equity. if you do, make sure that you know how long you intend to keep the car and be certain to pay it off by the time you are ready to get rid of it. Otherwise, happy driving.