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4 Things To Consider When Paying Off A Car Loan With A Home Equity Loan

[Jun 16, 2009.]

 

Aside from credit cards, large medical bills, and home improvements, many homeowners often use their home equity loans to pay off the loans on their vehicles. Like most other uses, using your home equity loan for this purpose will still involve the typical shopping process--shopping multiple lenders, comparing interest rates, and negotiating any closing costs. However, paying off a car loan with your home's equity involves a few other factors worth considering. Below is a short guide with a few helpful tips for homeowners planning to pay off their car loans with their home's equity.

1. Home Equity Loans Give You More Monthly Payment Options
Especially in the case of a home equity line of credit, homeowners can have the option of interest only payments for certain months. With job uncertainties on the rise, these lower monthly payment options can help to ease your overall cash flow. On the flipside, there is no prepayment penalty for paying more than the required monthly amount on most HELOCs. And if your finances allow, a home equity loan still gives you the option to pay off your entire debt years in advance, and save money on interest charges.

2. Home Equity Loans Ease Your Repayment Period
For some individuals, the lengthened terms of a home equity loan can also be quite an advantage. While most car loans are spread over three to seven years, HELOCs and traditional second mortgages are typically amortized between 10 to 15 years. With this extended repayment period, homeowners can enjoy smaller monthly payment requirements. But be careful, this added flexibility can also be quite the dangerous temptation. If you relax too much on your payments, your new home equity loan could easily outlive your car. So although you have more choices with a home equity loan, it's advised to still aggressively payoff the car loan as best as you can.

3. You Can Take Advantage of A Home Equity Loans' Tax Benefits
Homeowners who itemize their tax deductions can enjoy the many tax benefits of a mortgage even after paying off their car loan. Unlike a standalone car loan, a home equity loan allows the borrower to deduct a portion of their interest finance charges. Unfortunately, borrowers who claim a standard deduction will not be able to take advantage. Additionally, before banking on any tax benefits, be sure to consult a qualified tax professional to discuss your individual situation.

4. Remember, Home Equity Loans Carry Harsher Consequences
Especially in this economic climate, homeowners need to cautiously borrow from their home's equity. While negative equity can occur with a car loan, having negative home equity is considerably worse. Additionally, homeowners must also consider the ramifications of late payments and loan defaults. With a car loan, the vehicle itself typically serves as collateral. With a home equity loan, late payments and default can lead to more severe problems such as foreclosure.

For many individuals, home equity loans can be a great leveraging tool to finance larger purchases and expenses. However, as mentioned above, the flexibility and advantages do come at a certain price. To help discuss more possible home equity loan options, find a home equity lender in your area by using our site's directory.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.

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