Home Equity Loan - Good Choice for Luxury Purchases?
Home equity loans or lines of credit have increased
dramatically in popularity in recent years. One of the reasons is
that interest rates are at or near historic lows; borrowing money
has rarely been more affordable. Another reason is that Americans
are enjoying record amounts of equity as home values have
skyrocketed in recent years. Given that the loans are affordable
and the equity is available, many homeowners are wondering if a
home equity loan would be a good way to finance expensive
lifestyle items. Would borrowing against your home be a good way
to purchase that Dodge Viper you've always wanted? How about that
around the world cruise you have always dreamed about? Is taking
out a home equity loan for luxury purchases a good idea?
As with any financial transaction, there are good points and
bad points to borrowing against your home to buy luxury items.
The good points are numerous. Unlike a credit card or standard
auto loan, a home equity loan offers deductible interest on your
tax return, provided that the loan does not exceed $100,000. If
you pay taxes in the 28% tax bracket, you are effectively getting
a 28-cent rebate on every dollar you pay in interest. That is
certainly appealing. The fees associated with a home equity loan
have come down in recent years, and the application process is
much simpler than in the past.
The good points make it seem like a good idea, but the bad
points are considerable. Most home equity loans have terms that
extend quite some time, typically ranging from 5-15 years in
duration. Do you really want to pay for a car for fifteen years?
It is quite likely that you'll still be paying for that luxury
car long after it has gone to the junkyard. The same applies to
that around the world cruise, which will be long forgotten by the
time it has actually been paid for. It may make sense to fund a
luxury car with a home equity loan if the term of the loan is
only five years and you actually plan to keep the car for that
long. Otherwise, funding the purchase with a more traditional
loan would be a better choice.
Of course, if you have already made the purchases and you are
maintaining a balance on a high-interest credit card, it might be
wise to consolidate your debt with an equity loan. Trading a 20%
loan for a 6% loan is certainly a smart move. The best advice for
anyone considering funding a luxury purchase through a home loan
would be to consult with a tax advisor.
©Copyright 2005 by Retro Marketing.
Charles Essmeier is the owner of Retro Marketing, a firm
devoted to informational Websites, including End-Your-Debt.com, a
Website devoted to debt consolidation and credit
counseling information and HomeEquityHelp.net, a site
devoted to information on mortgages and home equity
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