Home Equity Loan & Line of Credit (HELOC) - Refinancing
Is it smart to use your home to help pay for car?
Looking for a source of cash to pay for a new car? Use the equity you already have in your home. Home equity loans and mortgage refinancing are often good solutions for people who need money to purchase a car. However, to use this type of loan for a car purchase, you should have good financial discipline and a stable lifestyle — and understand how such loans work.
Two different kinds of home equity loans - which is better?
A home equity loan is a conventional loan in which you borrow against your net financial interest, or equity, in your home. Such loans are for a fixed amount, have a fixed interest rate and a fixed term. The loan is paid down with monthly payments that cover both principal reduction and interest expense. The primary difference between this type of loan and a traditional car loan is that your home is the collateral, not your car. Should you default, your home could be at risk.
In comparison, a home equity line of credit (HELOC) is a variable-rate loan that is set up for a specified maximum draw amount. You can use (draw) any or all of that amount over a specified period of time, usually 5 to 10 years. There is also a specified repayment period, usually 10 to 20 years. Typically, a borrower only pays interest during the draw period, but must pay both principal and interest afterwards. Up front costs are typically fairly low. Interest rates are tied to the prime rate which can vary day to day. In this sense, HELOCs are like adjustable rate mortgages but do not have rate caps, except as may be required by state laws. You cannot predict the rate you'll be paying next month, or the month after.
Your FICO credit score will determine what interest rate you'll pay for your loan. Your rate will be somewhat higher if you already have a first mortgage or if you have a low credit score. You can get your credit score online with a simple signup at a web site such as FreeCreditScore.com.
Car buyers often use home equity loans because they can receive tax deductions that are not available with conventional car loans. This reduces overall purchase cost. There are rules and limits on deducting home mortgage interest, so talk with a tax consultant before you take the step.
With the Internet, it's now very easy to shop for and compare home equity loan rates. Quotes are free and quick, conducted conveniently online.
The other way - refinance your home mortgage
Mortgage refinancing is another way to take money out of your home equity to pay for a car, especially if you can also benefit from lower interest rates. Here's briefly how it works. Let's say your house is valued at $200,000 and you still owe $120,000 on your old mortgage. You have $80,000 in equity. You could refinance your mortgage for, say, $160,000, pay off your old $120,000 loan, and take the remaining $40,000 in cash. Your loan interest is tax-deductible, thereby reducing the cost of the new car you buy with the cash.
Again, finding good refinance rates is easy if done online. You can get quick quotes by simply filling out a form with information about your finances and your needs. You'll know right away if refinancing will work for you.
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