Home Equity Loan - For a Car, Boat or Vacation?

Home equity loans may not be the best choice for luxury purchases

Home equity loans and lines of credit are certainly popular these days. Why not? Competition has lowered the fees associated with taking out loans, the process is faster than ever, and with interest rates at or near all-time lows, it makes sense to consider a home equity loan when making any large purchase. It doesn’t hurt that rising home prices throughout the country have left Americans with staggering amounts of equity in their homes; nearly everyone has useful collateral today. Given the ease and affordability of obtaining a home equity loan, many homeowners are probably wondering if that would be a good way to finance some luxury lifestyle items. Would it make sense to use your home to buy that Porsche you’ve always dreamed of? What about that yacht? The cruise through the Panama Canal? Does it make sense to use your home to finance items such as these?

With any financial undertaking, an examination of good and bad points is in order, and this is rarely more true than when a borrower considers placing his or her home at risk. The advantages of using a home to fund large purchases are numerous. The most significant is the ability to deduct the interest on the loan from your Federal income tax. This automatically amounts to a reduction in interest of 28¢ for every dollars spent in interest for the average taxpayer, which is not insignificant. The fees for obtaining an equity loan have come down in recent years, and the entire application process is faster and simpler than it was just a few years ago. The long payment structure of an equity loan makes such purchase affordable, too. But what about the disadvantages?

The disadvantages in these situations can be considerable. The typical home equity loan has a repayment schedule that averages between five and fifteen years. Do you really want to make payments on a car for fifteen years? Do you plan to keep the car for fifteen years? Even if you do, it will have a lot of miles on it by then. How will you feel about making the same payments on a fifteen year old car as you did when you bought it? Do you really want to be paying off your Alaskan cruise ten years after you take it? These things are well worth considering.

It may make sense to use your equity for an expensive car or boat if you plan to keep it for many years and if you keep the repayment schedule of the loan to a relatively short period of time, say, five years or less. In most other cases, it would make sense to either pay cash or finance your purchase with a more traditional form of payment.

It’s worth noting that if you have already made the purchase with a credit card with a high interest rate,

>consolidating that debt with a home equity loan would be a smart idea. Trading a twenty percent loan for a six percent loan is wise, and the interest becomes deductible. Just make sure that you pay it off, or your long-ago vacation could cost you your home. If in doubt, consult a tax advisor.