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I'm considering getting a new or newer car in the next year and a friend was recommending using a HELOC or HEL to purchase it, saying the interest was deductible (I do itemize every year). In reading IRS guidelines I have about 100k equity in the house (value vs loan) so I could easily put 20k or 30k on there (even moving my wife's car loan which has interest over).
If that's the case, wouldn't this essentially make it 0% financing since the interest is deductible? I am responsible enough and have a good steady job that I could pay off the loan in 3-5 years, but some advice says don't use an appreciating asset to purchase a depreciating one. However I don't feel uncomfortable with it if it saves me money in interest and is more flexible in payments. Also it would essentially be 0% if its deductible, am I right?
Curious as to other's thoughts on this as it seems "too good to be true".
Deductions reduce your tax liability by the amount of the deduction times your marginal tax rate. That would be $280 per $1000 if you were in the 28% bracket. You still get to pay the other $720. Differences between home equity loans and lines of credit have more to do with how they operate over time than with their tax effects.
Good to know - so essentially it may be a good option depending on the interest rate I'd be able to obtain on a traditional loan since the deduction effectively lowers the rate somewhat. From what I've read those 0% loans really aren't 0% because there is still a monthly "finance" fee it is just not compounded interest.
So it sounds like sitting down and doing the math on various options and the total cost of the loan is in order.
HELOCS do not have a fixed interest rate, so be careful. When interest rates go up (and they will), you'll be paying more. Dealers often offer low fixed rates for those with exemplary credit, so that could be a good option.
I just bought a car and weighed the options.
HELOC rate is around 4.5%
Used car rate is about 3%
New car rate is 2%
Assume 33% tax fed + state still would not come out ahead after HELOC interest deduction.
Also with HELOC you're leveraging an appreciating asset to buy a depreciating asset.
I just bought a car and weighed the options.
HELOC rate is around 4.5%
Used car rate is about 3%
New car rate is 2%
Assume 33% tax fed + state still would not come out ahead after HELOC interest deduction. Also with HELOC you're leveraging an appreciating asset to buy a depreciating asset.
I was going to mention that. You're buying a car with the security being your home.....
I just bought a car and weighed the options.
HELOC rate is around 4.5%
Used car rate is about 3%
New car rate is 2%
Assume 33% tax fed + state still would not come out ahead after HELOC interest deduction. Also with HELOC you're leveraging an appreciating asset to buy a depreciating asset.
To put that in saltier terms, you are pawning your house to buy a car. Now, assuming you know, somehow, that you are not going to have any issues making all the payments, OK then...
My personal opinion is that home equity loans should be the loan of last resort, but I recognize that I am way out of the mainstream in that.
I agree. Using home equity to buy a car is an awful idea. Worst case scenario you can't make the payments and they foreclose on the house. Even if that's highly unlikely you never know what the future holds, a serious illness or accident coupled with job loss and the scenario could be real.
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