Is it Wise to Buy a Car Using a Home Equity Loan – The most common way that people purchase a car is through a traditional home loan, but some people do choose to finance a car using a home equity loan. What is the better way to go? Is it a good idea to use a home equity loan to buy a car? Here are some things to consider both options.
What Home Equity Money Can Be Used to Purchase
There are very few limits on how you choose to spend the money from a home equity loan. Some people choose to borrow money using the equity in their home to consolidate debt, make improvements to their home, or to be able to pay some unexpected emergency costs. Some lenders have spending restrictions on loaning the money. For example, some lenders will not loan money for the purpose of paying for college tuition.
Using a Home Equity Loan for a Car
Borrowing money for a car using your home equity is fairly simple. You will need to have plenty of equity in the home to be able to take out a home equity loan. This is the amount of money your home is currently worth minus the amount you currently owe through your mortgage. Applying for an equity loan will require a credit check, appraisal, application fee, and other documents to prove your financial standing. Once the loan is approved you can expect to receive the money in about two weeks.
Advantages of Using a Home Equity Loan Instead of a Car Loan
The Flexible Terms
The majority of home loans are set up for a period of three to seven years. A home equity loan gives a longer time to repay the money, usually about 10 to 15 years. Home equity loans can also be paid off early with no penalty, unlike many car loans.
Home equity loans have much lower interest rates than traditional auto loans. This can be a big help in affording a car. If your credit score is fairly high you could qualify for a home equity loan around just 3% interest.
Disadvantages of Purchasing a Car with Home Equity
Longer Payment Term
A longer loan term will lower your payments, but that long loan term can also outlive the useable life of your car. You might end up paying for the car after you move on to a new one.
Lower Home Equity in Your Home
Using home equity to finance a car or anything for that matter, decreases the amount of equity in your home. This could be a negative impact if you need to sell the home before you have paid off the home equity loan. If your home value goes down, you could end up underwater on your home. This means you own more money on your home than you can sell it for.
It is possible to use a home equity loan to buy a car and save on the interest rates from a traditional home loan, but the risks of doing so should always be considered. You are putting your home up as collateral when using a home equity loan. You may also not want to carry the debt of the car for longer than you have to.
For more information on home equity loan options in Mission Viejo and California please contact me any time.
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