They Deduct Interest Payed On Their Mortgage.?
Q: have heard of some people taking a loan out of their home equity line of credit to use for a car, so that they can deduct the interest payed on the car (essentially the line of credit) from their taxes in the same manner they deduct interest payed on their mortgage. I am wondering if that is a good idea or not, or if there are certain circumstances where it's a better idea than others. Any suggestions?
A: There are some issues that may be worth considering: 1. A home equity loan or home equity line of credit is tax deductable only up to a $100,000 lifetime limit if used for purposes other than for home acquisition (if I recall correctly), and then only up to the equity one has in one's residence, so the portion beyond one's equity is not tax deductable for the life of that loan. 2. Depending on your specific tax situation, you might not be able to benefit from being able to take the tax deduction if the total of your itemized deductions don't exceed the standard deduction. 3. Which would you rather have repossessed, the car or the home? If you use your home for collateral (HEL or HELOC), you will have larger payments that you must keep up to keep your house. 4. If you have to relocate for any reason (job, health, to take care of a parent or child, etc.), if you have less than, say, 10% to 15% equity in your place after the HEL or HELOC, you may have to bring money to the table when you close to cover selling costs (sales commissions, etc.). 5. Between the generally lower interest rates (unless you get on to one of those special 0.9% financing deals), tax deductability, and generally stretching the loan over a long period of time, the monthly payments might not seem like much, but over the life of the HEL or HELOC you may be paying much moe for the vehicle this way than you would with a regular car loan (either from the dealer or from your credit union). 6. The lure of "easy payments" and a long-term loan may mean you are still paying for your vehicle years after you replace that vehicle. Repeat the exercise and you may be paying for 2 or even 3 vehicles at the same time. (Of course, this is also true if your car dealer allows you to roll your current car loan into your new car loan.) 7. Often a HEL or HELOC ends up being a stepping stone to getting further into debt. (The sign of this is when one starts moving other loans to the HEL or HELOC and then starts driving up the debts again. For example, one study that I found posted on the FDIC site said that 70% of those who take out a high loan to value second mortgage end up back in credit card debt a year later.) I am not saying a home equity loan or a home equity line of credit is necessissarily bad, but, like many financial decisions, there are both advantages and disadvantages, and both have to be considered before coming up with a decision. For some people, a hoem equity loan or a home equity line of credit is the best fit for their situation, but for some people it turns out to be a bad choice. I think a better way would be to make the car payments _before_ purchasing the car: adding to a savings account each payday and not buying a new car (or in my case, a decent used car) until one has saved up enough money. That way, one doesn't need to purchase comprehensive insurance (unless one wants that level of coverage), and inerest would be paid into your account instead of you paying another party for the privilege of having rented you the money. Many financial institutions have mthods of automating this, such as taking a regular direct deposit (such as payroll direct deposit) and splitting part of it off to feed a savings account automatically, or a "Savings Builder" or "Asset Builder" plan that automatically direct debits your checking account on a regular schedule (e.g., monthly) to build up a money market account or a money market fund. Of course a loan officer or a car salesman would be opposed to you saving up for a purchase because salesmen know that the majority of people who are allowed to "sleep on it" end up "cooling off" (not finding it as important to make that purchase and end up either delaying or not buying at all), and loan officers have financial reinforcement for issuing loans to financially responsible people. And, if the truth be told, I have "cooled off" to several purchases by starting to save up for that purchase and then deciding that it isn't so important after all--and it wasn't. 8)
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