[diesel007]

Originally Posted by Kenny C

With a home equity the monthly payment can be significantly lower than an a traditional auto loan. Remenber with a line of equity they use your house to secure the loan. With a auto loan what are they securing the loan with. With a auto loan you pay principal and interest every payment. With a line of equity you can only pay interest. Also a traditional car loan is say 5 years at most. A equity line is mininum 10 years. If you have a bad month the mininum will be much less. If youu have a good month you can pay alot more. But the real question is can you afford the car.

Security does not change where the feds set prime rate. The reality is that the majority of auto loans are lower in interest then a HELOC.

[BK]

Not to pile on, but using a home equity loan or line of credit to finance a car is almost always a bad idea because the finance rate you can get from a bank or the manufacturer is bound to be much much better, even accounting for the tax write-off. Yes, diesel007 already said that multiple times above, but in case someone missed it. kuthair, I don't see how you could possibly have done the math and found it a better deal, but I suppose anything's possible.

To the OP, though, yes you can have two loans to finance a car, just as people have first and second mortgages on their homes. It's generally a bad idea because the rate you'll get on the second loan will be terrible. Depending on your situation, have you considered leasing? You might be able to get a better money factor on the lease than you would on the loans. Either that, or consider a CPO Bimmer with low miles -- a much more sound financial decision than buying new, especially if you're struggling to get the money to finance the new car.

[Kenny C]

Security may not change but the minimum monthly payment definitly will and it sounds like he probably can't afford the car with a traditional loan. He should probably save a couple of bucks for a downpayment before purchasing.

[Kenny C]

The amount a car manufacter charges in interest in much higher than my line of credit. All this assumes you have excellent credit.

[diesel007]

Originally Posted by Kenny C

The amount a car manufacter charges in interest in much higher than my line of credit.

Really?

[kuthair]

Wow, I wish I never posted.

Fact is, everything I'm doing is completely reversible. I can always:
1. pay off the loc
2. get a car loan
3. sell the car

Also, I can use the cash in hand to:
1. invest in my house by making improvements thereby putting more equity in my house
2. invest in stocks
3. invest in local business

The last thing that is going to happen is me losing my house. I'm not stupid; I know what I'm doing. Everybody's situation is slightly different. I found this to be the best for me. I can afford a traditional car loan, I chose not to. In my experience, I've found my instincts to be dead on in most cases, so I'm following my gut.

Thank you to Kenny C and diesel007 for seeing a different point of view.

[Kenny C]

mine is approx prime minus 1point. However I was offered 0.9 for 1 year if I took $25000 at closing which I could immeadiately redeposit

[nyc3r]

get the 5000 from interest free credit card

[abc]

interest free cc? you mean like free balance transfer?

[Traceaz]

with regards to HELOC vs traditional auto loan, I would think it depends on your tax bracket mostly, no?

For example, if I'm able to get a HELOC at 7.49%, and I'm able to get an auto loan at 6.79%, I would think that if you're in say the 28% bracket and the interest in tax deductible on the HELOC, then your traditional auto loan would need to be 28% lower than the HELOC to made it advantageous. Right? So, 7.49% HELOC, minus 28% tax bracket for the interest being deductible, would mean the interest would have to be 2.10 lower to take the auto loan, or 5.39%. I would imagine its hard to get an auto loan for a NEW car at 5.39% (or, at least a BMW. Domestic brands with all their 0% financing offers are different).

I guess the only flaw I see is of your payment, not ALL of the payment is interest, so I guess you can't say that 5.39% is the rate you would need to beat. I would assume it would need to be a little higher.

[Pedal2Floor]

Article from Bankrate.com

http://www.bankrate.com/brm/news/drdon/20050420a1.asp

Using home equity to buy a car
Ask Dr. Don by Don Taylor, Ph.D., CFA • Bankrate.com

Dear Dr. Don,
My husband and I are looking to buy a new vehicle. As we consider our different options for auto financing, we wonder if we could tap into our home's equity to buy the new vehicle. We own a home in South Florida and have seen our home's value rapidly increase over the past few years. Is it possible to use a home equity product to buy a car? If so, is this a wise move, or are we better off leaving our home's equity alone?
-- Dani Driver


Dear Dani,
A home equity loan is a fixed-rate, fixed-term, self-amortizing second mortgage. You won't have to worry about the interest rate increasing over the loan term, and the monthly payments contain both a principal and interest component, forcing you to pay down the loan balance over time. You have some choice over the loan term, but if you're using the proceeds to buy a car, you would want the loan term to be shorter than the expected useful life of the automobile.

A home equity line of credit, often called a HELOC, is also a second mortgage, but it has a variable interest rate pegged to a short-term interest rate and the interest rate on the loan will fluctuate with changes in that short-term interest rate. These loans are typically priced based on the prime rate of interest, which you can track using Bankrate's Rate Watch. If you have good credit the variable rate on the HELOC should be within a quarter percentage point of the prime rate. The variable rate loan may have a minimum interest rate (floor) and a maximum rate (ceiling) over the term of the loan.

In the early years of a HELOC, the monthly payment typically just covers the interest expense. After a set time period, say 10 years, the loan payment may change to be self-amortizing over the remaining loan term. If not structured this way, the borrower could wind up with a large balloon payment at the end of the loan term.

Since a HELOC is a line of credit, the borrower can repay the line and turn around and draw against the line again. This could work well if you and your spouse own two cars and alternate replacement vehicles over time. A HELOC can also act to supplement an emergency fund when working through a short-term financial crisis.

The interest expense on mortgage debt may be deductible on your income tax return. If so, it reduces your effective cost of debt. The IRS Web site has more information on the tax deductibility of mortgage interest expense. The interest expense on an auto loan isn't tax-deductible.

With auto loans, low interest dealer financing often comes at the expense of reduced negotiating power over the price of the car. Bankrate has a calculator that helps you decide between accepting a rebate and taking the low interest financing on the car.

The closing costs on a second mortgage are significantly less than a first mortgage, which makes a cash-out refinancing of a first mortgage an unlikely approach to auto financing unless the refinancing can be justified on a stand-alone basis for the existing first mortgage and there's enough equity to allow the homeowner to get enough cash out to buy the car while avoiding private mortgage insurance. Still, closing costs on a second mortgage are a consideration when trying to decide whether it's the right approach to financing the vehicle.

Taking 10 years to pay off a car that you'll only own for six doesn't make much sense. Making interest-only payments on a HELOC as your car depreciates in value doesn't make much sense. Watching short-term interest rates climb higher on your HELOC when you could have locked in a fixed-rate home equity loan doesn't make much sense.

If you need to finance a vehicle, you should choose the option that minimizes your effective interest expense. The tax deductibility benefits of a second mortgage to finance a car could be completely offset by the closing costs on that loan. I've put together an example in the following table:

Home equity loan Home equity loan + additional principal payment auto
Loan amount $20,000 $20,000 $20,000
Interest rate: 7.04% 7.04% 7.78%
Payment term (months): 120 59 60
Payment: $232.63 $232.63 $403.43
Additional principal pmt: $ - $170.80 $ -
Total payment: $232.63 $403.43 $403.43
Total interest expense: $7,915.54 $3,702.71 $4,205.52
Closing costs (est.): $800.00 $800.00 $ -
Estimated value of tax deduction: $(1,979) $(926) $ -
Estimated total financing costs: $6,736.65 $3,577.03 $4,205.52
Source of interest rates is Bankrate.com national averages


The middle scenario reflects the monthly payment on a 10-year home equity loan plus the difference between that payment and the conventional auto loan payment as an additional principal payment each month. One way or another, you need to consider the cash flow differential between a 10-year mortgage loan and a five-year auto loan.

The easiest way to make them more readily comparable is to equate the monthly payment by making additional principal payments and seeing how that shortens up the loan term. In this case, it shortens the loan term on the home equity loan to 59 months, or within a month of the auto loan. The closing cost was just a guesstimate, but the estimated value of the tax deduction was 25 percent of the total interest expense of the mortgage loan, reducing the effective interest expense.

What's the bottom line from all of this? Construct your own table by using Bankrate's auto loan calculator with amortization schedule, your estimated loan amount and your marginal federal income tax rate replacing the 25 percent in my example.

What I hope you get from this lengthy discussion is the idea that to end up spending less money in total financing costs, you need the financial discipline to make additional principal payments along with the monthly home equity loan payment. With that approach, you may be able to save some money when financing your next car. Using the home equity loan exclusively to reduce your monthly car payments has you paying thousands of dollars more in interest expense.

[kevkaz]

Originally Posted by Kenny C

It also depends on your tax bracket.

For a $35k loan over 5 years, you'll pay the following in interest for the first year (use any web amortization calculator or excel compute this)

@7.75 % (going equity rate around here) = $2,503.67
@6.00 % (best you're going to get on a 335i thru BMW) = $1,931.67

However, the $2,503.67 is tax-deductable if on a HELOC.

This means you would likely avoid paying Uncle Sam (HELOCS are not always deductable):
25% bracket (AGI btwn 30-74k) = $626
28% bracket (AGI btwn 74-150k) = $701
33% bracket (AGI btwn 150-336k) = $826
35% bracket - you make too much to care

If you're in the 28% or higher brackets, the HELOC is a better deal. Many HELOCs have a variable interest rate (some are fixed), so if rates were to shoot up, all bets are off. Also, you need to figure in annual and closing fees, if any.

I am not an accountant, but I believe this is correct. Anyhow, there is no clear right-or-wrong answer to this question, you need to consider the details of your situation.

-kevkaz

[gos]

Originally Posted by kuthair

I used my home line of credit to put a huge down payment on my car. Now I have a $200 car payment, but the best part is: the interest from my home line is completely tax deductible.

Pay attention to interest rates.

If you're saving 25% on taxes, but paying 8% instead of 5%, you're losing money.

Prime is a bit over 8% now, most HELOCs are prime+0 or something similar. My auto loan is 4.5% through my credit union.

[abc]

bottom line appears to be that you gotta get the numbers of your situation and map them out via a spreadsheet. too bad i shut down my brain a few yrs ago and i'm resistant to turning it back.

[BK]

Yeah, if you look around, you can get an auto loan a lot better than the 7.78% in Pedal2Floor's example, or 6% in kevkaz's example. That's why using your home equity doesn't save you money, the rates are so high that the tax write-off doesn't make up the difference. I recently bought two cars (my Bimmer and an Oddysey), and the loan rates are 3.9% and 2.9%, respectively. At those rates, it made more sense to get a loan than pay cash.

I realize not everyone's getting those rates, but I think most everyone must be beating 7.78% or 6% if they look around.

[tommithy]

You folks are pretty lucky if you can find interest rates easily under 6%. BMWFS current interest rate for "Exceptional" credit as they put it is 7.78%. Capital one auto finance is 6.35% on 48 month loan. I'd like to know where you can get a 3.9% loan.

[BK]

3.9% was from my bank. I use a bank and a credit union. The CU was offering 3.75% at the time I bought, but I went with my bank instead b/c I like them better.

Maybe rates aren't as good now? This was like 6 months ago.

FWIW, when I bought, BMW Finance had some ridiculously sucky rate. Look at a bank or CU instead.

Also - I should add, the 2.9% rate was a promotional rate from Honda Finance, closeout of the 2006 models.

[Zirenz2006]

I'm not even jumping in on this thread. I have a headache just after reading it!