Shawn S

Everyone always says that you should NEVER use an appreciating asset to pay for a depreciating one, like a car.
But why is this?

Take me for example.
I have a small mortgage and close to 250K in equity in my house right now.
I don’t plan to move or sell for a long time.

If I buy a car, say 40,000 dollars and get a regular 48-month car loan at 6% I can’t deduct that on my taxes.
That’s over 5,000 in interest paid over the 4-years.
But if I get a 40,000 fixed equity loan (at the same rate or lower), I can write off the 5,000 on my taxes over the 4-years I’m paying.
That will put an extra few hundred bucks in my pocket each year.

So what’s so “bad” about doing this?

doopstr

The only problem I see is if you want to sell your your home before the car is paid off. There is a risk of becoming upsidedown in the equity loan. For instance, you pay 40k, now car is only worth 30k but you still owe 35k.

Other than that, why not do it?

anothercls

Since you don't plan on selling for any reason at this point, it would benefit you to do this, at least from what you're saying.

95gt

Nothing bad about it as long as you are planning on paying off the equity line you take out in 4 years. Many lines can be paid back over a longer period of time. So paying of a car loan over 10 years is not a good idea. But if you are planning to pay it all back in 4 years

Of course make sure that your equity % and the car loan % are comparable. Many cars are out with really low financing options so even after the tax incentives are taken into account may still be better to do a conventional car loan

DJDZ

Just don't make the loan longer than 5 years or you can be upside down on your loan to asset value. Otherwise, no problem doing this and you will most likely have additional tax deductions you can take.

Scrib

I may be wrong... But "technically" the taxes aren't deductible since you're not using the money for home improvements...

TLover

I don't believe that's true. As long as you aren't borrow more than your house is worth. Using home equity to buy a car is smart, IMO, as long as you:

1. Aren't borrowing more than your house is worth.
2. Are going to buy a car regardless.
3. Don't bypass a good promotional APR (say like 2.9, 1.9 or zero percent financing) through the dealership.
4. Are going to be living in the house at least as long as your car loan is going to last.

I say it's smart because 1. you're going to buy a car anyway, so either way, you're borrowing money 2. the interest is deductible.

Scrib

bah... you're right. it can be deducted....

Next time I need to before opening my trap.

chef chris

Only time it doesn't make sense is when people drag out the repayment schedule too far or don't have the equity to start with.

You are covered on both accounts...from a banker perspective.

BigPimp

Shawn, it's not a bad idea, however you will be paying higher interest rate on the HELOC than you would on a car loan so the tax savings vs higher interest rate is not worth it.

chef chris

All depends. Last time I checked, the buy rates on newer vehicles was cooling off quite a bit. If he gets below prime on the HELOC(which he should at low LTV) he should be alright.

zamo

Its a good move IMO Shawn. Now, of course, you should always leave enough equity for emergencies or bursting bubbles (real state) for instance.

Interest is deductible if itemizing helps you better rather than making standard deductions.

The shitty thing about a new car, it depreciates a lot in the first 3 years. So considering that scenario and having interests for used cars higher than new cars, a equity "cash-out" for buying a used car will be better; you get a much better price, you will have a flatter depreciation and the you will be shielded with tax deductible interest.

scl23

It's a simple math calculation. Whatever your home equity line rate minus whatever your tax deduction would be (everyone is in different tax bracket) vs. whatever rate you can get on your car from your dealer. I got a rate of 4.49% from the dealer and I'd be getting like 7.25% from the equity line so I figured the rate from the dealer was better.

Shawn S

I have a 100K equity line of credit setup right now, but it’s an adjustable rate. Prime +0%
It’s currently at 5.99 I think.
But I also have the option of “breaking out” any amount of that for a fixed term and fixed rate.

I don’t plan to do this until next year, but I’m just looking at my options right now.

Shift_it

Here is my take and owning 2 homes is the past. Which now I am in my 2nd home.

A 2nd mortgage is basically a 2-loan against your home.

Since you mention YOU do not plan to move then go for it. What alot of home owners are doing is using there home getting a 2nd mortgage and using there house as a ATM machine.

I have yet to do one myself, but I am not sure if I want to live in the same home for the next 5-10years....

It's really your call.

VTEC11

Prime rate might be upto 7-8% this time next year.