Using Home Equity To Buy Car

Q: I just purchased a Jeep and was stuck with a high rate of 8.87 percent for the auto bank loan.
 

I am considering refinancing but was wondering if I should use an auto loan or go the route of a home equity loan.

Currently my wife and I have a home equity loan of $23,000 on a $124,900 home. We took out the home equity loan in order to avoid paying the mortgage insurance.

I have seen low home equity loan rates but was not sure if it would be a good idea to take out a second home equity loan. Should I consider the home equity loan which will be a lot lower of a rate than the auto loan, or do I just stay with the original auto loan?

I really need your advice.

A: If you have great credit, and a credit score above 700, the interest rate on a home equity loan would be around 6.5 percent. That's a lot lower than what you're paying now. So, if you have enough equity, don’t think interest rates will go up much further, and you're committed to making on-time payments, the sensible thing to do would be to borrow against the equity in your home to pay off the Jeep loan.

But do you have enough equity? It sounds as though you used a piggy-back mortgage in order to buy your home (80 percent first loan and a 10, 15 or even 20 percent second mortgage) and avoid paying private mortgage insurance. A $23,000 home equity loan might have been almost all of the down payment on a $124,900 purchase.

If that's the case, and your house hasn't appreciated significantly, I don't think you'll have the equity to tap for your car loan. In which case, you'll need to keep paying off the loan at 8.87 percent.

I think you should make every effort to get your auto loan paid off as quickly as possible, even if it means taking a temporary second job. Once that loan is paid off, you should keep making the same payments each month, but apply them toward your mortgage. You'll be surprised how quickly you can pay off your home equity loan if you're committed to making extra payments.

Paying off your home equity loan will give you a financial cushion in case of an emergency – or if you need to buy another automobile down the road.

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