As a homeowner, home equity is a valuable asset you can use in various ways, but some ways are better than others. One option you may be considering: buying a car. After all, new cars are expensive, and you can borrow against your equity for a fairly low cost. While using home equity to buy a car is possible, there are reasons to be careful. Show
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Is It a Good Idea To Use Home Equity To Buy a Car?In general, using a home equity loan to purchase a car is a risky move you should avoid, according to Leslie Tayne, founder and head attorney at Tayne Law Group, a debt solutions law firm. If you default on the loan, the bank could foreclose on your home. “Plus, since your vehicle will depreciate fast, you’ll quickly owe more on it than it’s worth,” Tayne said in an email to The Balance. “With a long-term home equity loan, you may even end up paying on the debt long after the car is gone.” Even a brand-new, luxury vehicle suffers from depreciation, or loss of value due to use and wear. The rate of depreciation can depend on the car’s make, model, and year. In 2021, car-shopping app CoPilot found that some sedans can depreciate by as much as 71% in the first five years alone. Ways To Tap Home Equity To Finance Your CarIt’s possible to finance a car using home equity, but generally not recommended. If you’re careful about making payments on time, it could potentially be a low-cost financing option. There are a few ways you can tap into your home’s equity to buy a car (or cover other expenses): Home Equity LoanAlso known as a second mortgage, a home equity loan allows you to borrow against your home’s equity and receive a lump sum payment. The loan is paid back in regular installments at a fixed interest rate. Home Equity Line of CreditA home equity line of credit (HELOC) also lets you borrow against your home’s equity for a revolving line of credit you can borrow against as needed (up to the limit). The HELOC functions much like a credit card, with an interest rate that can go up or down over time. You might have to use the line of credit within a defined period, known as the draw period. Once the draw period ends, you’ll either renew the credit line line or start repaying the balance. Cash-Out RefinanceTypically, you need to have at least 20% equity in your home to qualify for a cash-out refinance, although this may vary by lender. Cash-out refinancing involves taking out a new mortgage loan for a larger amount to repay, then replace the original mortgage. You pocket the equity, which can be used for whatever you want such as buying a car. The terms and interest can change and may increase or decrease your monthly interest payment. Pros and Cons of Using Home Equity for a Car PurchasePros
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How To Get a Better Auto LoanAs you can see, using home equity to buy a car is possible, but maybe not the best move. You’re probably better off applying for a standard auto loan to save money and prevent losing your home if you fall behind on payments. To qualify or secure good terms for an auto loan, Tayne suggested steps to improve your chances:
The Bottom LineIf you’re diligent about payments and confident that your income won’t change, using home equity to buy a car is possible but probably not the most cost-effective option, especially if you’re paying the debt over decades. It’s a risky move to put your home up as collateral for a depreciating asset like a car. Instead, consider doing some prep work ahead of time to secure a low-cost auto loan. With good credit and sharp negotiating skills, you can get a good deal on a car without putting your home or the wealth you’ve built up at risk. Frequently Asked Questions (FAQs)What credit score do you need to finance a car?There are a few different scoring models that lenders may look at when you apply for an auto loan. However, FICO scores are the most common. While there’s no specific credit score threshold for financing a car, the higher your score, the better your odds of being approved and receiving a low interest rate. A “very good” FICO score is considered to be between 740-799 and “exceptional” is 800-850, according to credit bureau Experian. How much can you borrow on a home equity loan?The exact amount you will be approved to borrow depends on a few factors, including your income, credit history and the value of your home. That said, most lenders prefer you to borrow no more than 80% of the equity in your home, according to the Federal Trade Commission. What can you do with a home equity loan?Technically, you can use the funds from a home equity loan to pay for anything you want. However, due to the risks and cost, it’s best to use a home equity loan for long-term expenses that will ultimately generate a return on the investment, such as home renovations. Can u use a HELOC to buy a car?Using a HELOC to purchase a car is a common practice, and you may get a better interest rate on your loan. However, before you make a decision, consider the risks of using your home as collateral and the drawbacks of choosing a longer loan.
What credit score is needed for an equity line of credit?Different lenders will have different requirements for what credit score is needed for a HELOC. But in general, a credit score of 700 or higher is preferred.
Does it make sense to pay off car with HELOC?It's not a good idea to use a HELOC to fund a vacation, buy a car, pay off credit card debt, pay for college, or invest in real estate. If you fail to make payments on a HELOC, you could lose your house to foreclosure.
Can I use a home equity loan to buy anything?You can use a home equity loan for just about anything — it doesn't have to be home-related. However, home equity loans are most commonly used for large expenses like home improvements because they offer lower interest rates than credit cards and personal loans, large loan amounts, and long loan terms.
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