Make your New Car Tax Deductible using a Home Equity Loan

Because of their low interest rates, home equity loans are an attractive source of funding when you want to buy a car. Even better, the interest you pay on a home equity loan will be tax deductible. Nevertheless, you should think carefully before using a home equity loan to buy a car, since you can lose your home if you stop making payments.

Steps

Researching Your Car

1. Choose your car. Most dealers have websites, which makes browsing their inventory easy. Identify cars you are interested in and check their availability along with the dealer's asking price.
   • Assess your needs based on the number of passengers and the type of weather you will be driving through. For example, if you'll drive through snowy weather, you might want a car with four-wheel or all-wheel drive.
2. Find the car's invoice price. This is the amount that appears on the invoice when the manufacturer ships the car to the dealer. It's a convenient starting point when negotiating to buy a new car. You can find the invoice price at Edmunds.com.
3. Research the car's market value. This is the amount that a car should sell for on the market. You can think of this as a “fair” price. You can find this amount online at websites such as Edmunds or Kelley Blue Book. You might also use the new car pricing tool from U.S. News.
   • If you will be trading in your used car, look up the market value as well. A used car's value will depend on its condition. Few cars are in excellent condition, so be realistic.
4. Identify how much you want to pay. To negotiate effectively, you need to come up with your “walk-away” point. This is the maximum you will pay. If the dealer can't meet this amount, you walk out the door.
   • You might choose the car's true market value as your walkaway point. If you're feeling confident, you can try to get the car for $500-1,000 less. It'll be difficult, but it is possible.

Obtaining a Home Equity Loan

1. Estimate your home's value. Ask a real estate agent to run a comparative market analysis or look at your tax bill to find the assessed value. There are also websites you can use, such as Zillow, to get a rough estimate.
   • Your lender will probably require an appraisal and will use the appraised value when calculating how much to lend.
2. Calculate how much you can borrow. Most lenders will loan 75-80% of your home's value. For example, if your home is worth $300,000, then you can borrow $225,000-$240,000.
   • Some lenders will allow you to borrow 100% or more of the home's value. However, you probably shouldn't borrow that much, since home values are unlikely to rise fast enough to make the loan worthwhile.
3. Deduct the amount owed on a mortgage. For example, your home might be worth $300,000 and the bank is willing to lend 80%, which is $240,000. If your mortgage is $150,000, then you can borrow $90,000.
   • You also need to deduct the value of any liens on the home, such as tax liens.
4. Decide how much to borrow. You might be tempted to use your home as a piggy bank and take out as much equity as you can. However, you run a risk of losing your home in this situation. If you miss a payment, the lender can seize your home and sell it.
5. Shop around for home equity loans. You aren't required to get a home equity loan from the same lender that gave you the mortgage. Instead, apply at different banks and credit unions. Lenders will request financial information, such as proof of income and the amount of debts you carry.
   • Apply for loans within a 14-day window. Each time a lender checks your credit, your score will fall. However, all credit pulls within a two-week period will count as only one pull.
6. Compare loans. Lenders should provide basic details about their home equity loans. Compare offers to find the best deal for you. Consider the following:
   • Interest rates. Home equity loans should have fixed interest rates. The lower the interest rate, the lower your monthly payment.
   • Term. This is the repayment period. Home equity loans usually have 10 to 15-year terms.
   • Penalties for missed payments.
   • Fees.
7. Close on your home equity loan. Choose a loan offer and contact the lender. When it comes time to sign, confirm that the loan details are the same as what was quoted to you when you applied. If they aren't, ask why. Once you close, you should receive a check which you can deposit.

Buying a Car

1. Test drive multiple cars. Go to the showroom and identify the cars you are interested in. You should take them for a test drive. Note how comfortably the car rides and ask about safety features: antilock breaks, air bags, etc.
   • Ideally, you will go on a weekday, when the dealership is less busy. You might be able to score a good deal during the slow times.
   • The dealer might want your Social Security Number before going for a test drive. They want to run a credit check while you are away. You should decline to give your number.
2. Make an offer first. Although some experts recommend not making the first offer, you gain an advantage if you do. You can “anchor” the negotiation by putting the first number on the table. Open by offering the invoice price plus a couple hundred dollars.
   • Be prepared to explain to the salesperson how you calculated your initial offer
3. Negotiate effectively. The dealer will almost certainly reject your initial offer and will make a counteroffer. Don't immediately reject or accept it. Instead, use silence to your advantage. Continue to walk around the car and look at it. The longer you remain quiet, the more pressure on the salesperson to come down to your price.
   • Move up in increments—for example, $500. Mention that you intend to shop around at other dealerships.
   • As you negotiate, focus on the total purchase price. Salespeople like to talk about everything but the total price—monthly payments, financing options, trade-in value, etc.
4. Walk away if necessary. If the dealer won't come anywhere near your target price, you should walk. This is the greatest power you have as a potential buyer, and you shouldn't feel pressure to agree to a price you think is too high.
5. Negotiate a trade-in separately. Dealers often give you a “break” on the purchase price of a new car by offering less on the trade-in. For example, they might agree to sell you a new car for $19,000 instead of $20,000. However, they only offer $5,000 on your trade-in, which is really worth $6,000. You aren't coming out ahead in this scenario.
   • Insist on negotiating the purchase price first and then moving onto the trade-in second. You might need to lie and say you aren't interested in trading in your current car. Once you've locked down the purchase price, you can say, “On second thought, maybe I will trade in my car.”
6. Pay for the car. The proceeds from your home equity loan should be sitting in your bank account. Ask the dealer how to pay for the car. For example, you might wire the money or use a cashier's check.
7. Make timely payments on your home equity loan. By taking out a home equity loan, your home now serves as collateral for your loan. If you miss payments, your lender can foreclose and seize the home. For this reason, you must make timely payments.
   • Automate payments so that you don't miss them. Check with your bank whether you can set up an automated payment system.
8. Deduct the mortgage interest on your taxes. You'll receive the interest you can deduct on Form 1098. Include that amount on Schedule A, line 10.

Related Articles

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References

See also

• Apply for a Used Car Loan
• Redeem Your Repossessed Car
• Transfer a Car Lease
• Get Your Ex Off a Car Loan
• Get a Car Loan While in the Military
• Compare Car Loan Rates
• Buy a Car with Bad Credit
• Find Alternative Finances for Your Auto Loan
• Finance a Car
• Negotiate an Interest Rate on a Lease Buy Out Car Loan

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