Use a HELOC to Buy a Car

Using a home equity line of credit (HELOC) to buy a car is easy, though it might not be the best idea. You can generally borrow up to 85% of your home’s value and use the money to buy the car outright. Before going through with the purchase, you should consider other options.

Steps

Obtaining a HELOC

1. Estimate your home’s market value. You can’t borrow more than your home is worth. The bank will want an appraisal after you apply for a HELOC, but you can estimate its value by looking at the following places:
   • Your property tax assessed value. Look at your most recent property tax statement.
   • Comparable sales. Check websites such as Zillow and see how much similar homes have sold for in your neighborhood. The sales should be recent (past six months), and the homes should have the same number of bedrooms and bathrooms.
2. Calculate how much you can borrow. The amount will depend on the value of your home, your mortgage, and your credit history. Generally, you can borrow up to 85% of the value, less your mortgage.
   • For example, your home might be worth $200,000 and your mortgage is $100,000. You can borrow 85% of $200,000 ($170,000), minus your mortgage. In total, you can borrow $70,000.
   • You might not have enough equity in your home, in which case you won’t be able to get a HELOC.
3. Check if you qualify. A lender will want to see that the total amount of your mortgage, including insurance, taxes, and HELOC payment, is no more than 28% of your gross monthly income. All of your debt payments should be below 36% of your gross monthly income.
4. Shop around for a HELOC. Shopping for a HELOC is a lot like shopping for your initial mortgage. You should visit several banks and credit unions so you will have a range of offers to choose from. Usually, credit unions offer better deals than banks, so make sure to stop at a couple.
   • You can also contact your mortgage lender, though you are not required to get your HELOC from them.
   • Try to apply for all loans during a 14-day period. Each credit inquiry will hurt your credit score, but all inquiries made in a two-week window only count as a single credit pull.
5. Compare HELOC terms. You want the best deal possible, so don’t immediately sign up with the first bank to make an offer. Instead, compare multiple offers based on the following criteria:
   • The draw period. This is the period when you can take money on the line of credit. During this period, you typically pay only interest. Many draw periods last four to six years.
   • The repayment period. Once the draw period ends, you start paying down the principal on the amount you borrowed. For example, you might have 10 years to pay off the loan.
   • Interest rates. These usually fluctuate with a HELOC. However, some lenders might offer fixed interest rates.
   • Fees. Your fees should be lower than what you paid for your original mortgage.
   • Closing costs. You’ll need to pay for your appraisal, attorney’s fees, and other fees at closing.
6. Submit an application. The application process is simpler than when you got your mortgage. You will probably need to provide the following information with your application:
   • Property information, such as the purchase date and purchase price
   • Your contact information
   • Your personal information (Social Security Number, marital status, date of birth, etc.)
   • Proof of employment and income, such as W-2 forms and recent pay stubs
   • Copies of bank statements
7. Get approved. It typically takes only a couple months for the lender to decide whether to give you a HELOC. Once approved, you’ll be given a credit card or a check book you can use to draw money from the line of credit. Now you can go car shopping!

Buying Your Car

1. Choose the vehicle you want. If you don’t know what you want, search the inventory at different dealerships in your area. They should have their inventory listed on a website. You can also search for used cars on eBay, Craigslist, Autotrader.com, and Cars.com.
2. Research the car. You want to see the car’s vehicle history report, so you can find out if it has been in any accidents. You should also check the car’s fair market value, which you can find at Edmunds.com or Kelley Blue Book.
   • Remember to test drive the vehicle. You don’t need to buy a car if it doesn’t handle well.
3. Check if the dealer accepts a HELOC. Let the dealer know you have financing in the form of a home equity credit line. Some dealerships might not accept this payment, so find out ahead of time.
4. Drive a hard bargain. Because you already have financing, you should be able to get a good deal. Based on your research, settle on an amount you are willing to pay. Open the negotiations by offering an amount that is 10-15% less.
   • Remember to play dealers against each other. You might have found a similar vehicle for a much cheaper price across town, so don’t hide that fact. Make them compete for your business, and walk away if a dealer can’t meet your target price.
   • Always remind the dealer that the amount you are offering includes a decent profit for the dealership. Many dealers like to claim you’re bankrupting them, which is false.
5. Choose rebates. Many dealers give you the option of taking rebates or getting 0% financing. Because you have money in hand to buy the car, you can choose the rebates, which should save you money.
6. Register your car. The registration process varies by location. Contact your Department of Motor Vehicles for details. You’ll need to pay taxes and fees when you register, and you might also need to pass an emissions or smog test. Contact your DMV for a full list of requirements.

Considering Other Options

1. Identify the risks of a HELOC. With a HELOC, your home secures the loan. If you miss even one monthly payment, your HELOC lender might start a foreclosure proceeding.
   • By contrast, your car loan is secured only by the car, which means you’ll only lose the car if you default.
   • Which do you fear the most—losing your home or losing your car?
2. Crunch the numbers. You might save money buying a car with a HELOC, or you might not. You should compare the different amounts that you will spend before going ahead and getting a HELOC.
   • You can use an online calculator to estimate your monthly payments using a traditional car loan. Look at how much you will pay each month but also over the life of the loan.
   • Use an online calculator to find out how long it will take to pay off a HELOC. However, it’s a little hard to estimate payments with a HELOC, since interest rates can increase in the future.
3. Don’t forget the tax benefits. Generally, you can deduct the interest you pay on a home equity line of credit from your taxes (so long as you itemize deductions). You can typically deduct up to $100,000 in interest. Consult with a tax professional for more information.
4. Shop around for a car loan. You might be unhappy with the high interest rates for car loans. Before choosing a HELOC, shop around for different auto loans. Also look at online lenders. Several major banks offer auto loans over the Internet.
   • Your current rates might be high because your credit score isn’t great. This is even more reason not to use a HELOC. If you’ve struggled financially recently, you are at greater risk of defaulting on your HELOC and losing your home. Consider repairing your credit before applying for a car loan.
5. Cosign on a loan. You might want to buy a car for a child. However, it’s probably better to cosign on the loan than to use a HELOC. You won’t put your home at risk if for some reason you can’t make payments as a cosigner. At worst, you’ll only lose the car and hurt your credit score, but you'll still have a roof over your head.
6. Buy a cheaper car. It might be a safer bet to get a smaller or cheaper car with a car loan than to use a HELOC to buy your dream car. Even if you want a luxury car, you might be able to find a used one in good shape that is affordable.
   • Find used luxury cars at Carmax.com or at Autotrader.com.

References

See also

• Deal with the Finance Manager at Car Dealership
• Buy Cars at Auction
• Buy Then Sell a Car Impounded by the Police
• Compare Used Cars
• Find Out How Much a Car Is Worth
• Buy a Fuel Efficient SUV
• Buy a Used Car Online
• Buy an Alternative Fuel Vehicle
• Buy a Luxury Car
• Save up for a Car

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• Make your New Car Tax Deductible using a Home Equity Loan