6 Deadly Sins of Home Equity
I cringe when homeowners say, "I paid off my car loan with a home equity loan." First, I need to point out: You have not "paid off" the car loan. You've only shifted the debt to your house, thereby increasing the liability on what may be your biggest asset.
If the interest rates on both loans are about the same, the home loan might save you a few hundred dollars when you figure in the tax deduction.
But there's a catch: Most home equity lines of credit carry a variable rate—when some financial benchmark like the prime interest rate moves up, the interest charged on your home equity line also rises. Lately, the prime rate has been increasing.
So why not use a home equity loan with a set interest rate? Because the house loan's term—how long you have to pay it back—is five to 10 years longer than the average five-year auto loan, so you end up paying more interest over the life of the home loan, erasing any savings from the tax deduction.
If you want a good deal on a car, keep your credit rating up so that you can qualify for one of the zero-interest loans being offered by auto dealers, who are desperate to sell cars these days.