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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
Using a HELOC to buy a new car
Dear Dr. Don,
I recently took out a $71,000 home equity line
of credit. I used $44,700 to pay off my first mortgage. The home equity
line is 0 percent interest for the first three months and then 0.25
percent below prime after that. I will need to buy a car within the
next year. Would it make sense to put the car on the home equity line
or should I take out a car loan? I have no other debt.
Nancy Nash
Dear Nancy,
The only real downside in purchasing the car with your home equity
line of credit (HELOC) is that the HELOC is a variable-rate loan
and interest rates are likely to head higher over the time it takes
you to pay off the car. The prime rate is currently at 4 percent,
so you'd start out either at your teaser rate of 0 percent or a
quarter percentage point below prime at 3.75 percent.
Bankrate's
Weekly Rate Roundup at this writing reports the average three-year
new-car loan rate increased to 7.4 percent, with a four-year loan
now 7.42 percent, and the five-year loan hitting 7.45 percent. Although
new-car loan rates have shown only minor movement in recent months,
any movement in the coming months will be more pronounced.
If you can use the mortgage interest deduction from
the HELOC on your income taxes, the effective rate is even lower.
Take the interest rate risk and buy the car with the HELOC. I'd
be more cautious about this if you had problems managing debt, but
from what you've told me, you don't. Happy motoring!
-- Posted: June 18, 2004
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