If you are in the market for a new car, then I have some great news for you: prices are being slashed and financing deals are among the best we’ve seen in some time. In fact, you may be able to save thousands on your new car while getting low interest rate financing.
Though most shoppers will pay for their new car purchase by taking out a loan or paying cash, there is a segment of the car buying populace who have figured out a way to buy a new car by using the equity found in their home to pay for it. Instead of dishing out cash or taking out an auto loan, these consumers negotiate the best price for their car and finance the deal for themselves.
Certainly, anytime you borrow money against the value of your home, you are responsible to pay those funds back, just like any other loan. But, in this case, you can deduct the interest from your fixed rate equity loan on your income taxes. Try doing that with your auto loan — you cannot!
Yes, there are certain things you need to keep in mind to make this type of loan smart for you. Otherwise, you risk making the same foolish mistakes that some homeowners have made with credit over the past few years, putting themselves in financial jeopardy.
Among the things to keep in mind are:
Borrow what you need, nothing more. If you have your eyes on a car that will cost you $25,000, then borrow that amount and not a penny more. Avoid the temptation to add in other costs, otherwise your loan will be bigger than what you want it to be.
Keep it short. Certainly you can borrow for ten or fifteen years, but not too many people keep their cars that long. Besides, do you really want to pay interest on a vehicle for that long? Instead, consider a five year loan the length of loan many new car buyers select.
Choose a fixed rate. Avoid any type of loan that can fluctuate. In these challenging times, you don’t want government policy or financial conditions to determine what you have to pay each month. Pay the same amount in month sixty as you’ll pay in the first month and every month in between.
Calculate LTV. What is the value of your home today? LTV is the loan to value of your home, the higher the percentage the better loan rate you’ll be offered. Even if you are allowed to borrow more than what you need for a new car, only do so if you’ll use those monies to fund other projects.
No Restrictions. When choosing a home equity loan, make sure that there are no restrictive clauses for how you can use your money. In addition, you don’t want pre-payment penalties. Why should you be punished for paying off your loan early? You shouldn’t be!
One of the best reasons for allowing your home to finance your new car purchase is that you can claim a tax deduction as per federal and state tax guidelines. Most taxing authorities don’t care what you use your home equity loan money for, that is your business. Consult your financial adviser or tax accountant if you have questions about how this works.
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