Wednesday, April 20, 2005

Using Home Equity For A Car

Homeowners have taken out many billions in home equity loans and used the funds for all kinds of things. This BankRate article tells us just how foolish that is. "Taking 10 years to pay off a car that you'll only own for six doesn't make much sense. Making interest-only payments on a HELOC as your car depreciates in value doesn't make much sense. Watching short-term interest rates climb higher on your HELOC when you could have locked in a fixed-rate home equity loan doesn't make much sense."

We hear this quite a bit, but the logic is flawed, "The interest expense on mortgage debt may be deductible on your income tax return. The interest expense on an auto loan isn't tax-deductible." Not mentioned is the home becomes collateral for the auto.

"You need the financial discipline to make additional principal payments along with the monthly home equity loan payment." How many borrowers have that "discipline"? Part of the housing bubble is just a cash-out bubble.

24 Comments:

At 11:10 AM, Anonymous Anonymous said...

ah, yes... and more sound advice to keep the re-fi cashout madness going...

 
At 11:11 AM, Anonymous Anonymous said...

Whenever I come to Silicon Valley, I am impressed by the number of new luxury cars on the roads. Five years ago. I commented to my friend, who is very tuned in to the local grapevine, and he said, "There sure is a lot of stock option money around here." Today he says, "There sure are lots of cash-out refi's around here."

 
At 11:23 AM, Anonymous Anonymous said...

In our local newspaper, there's an advertisement from a bank pushing home equity loans. I kid you not, they have an illustration of a home turned upside down with cash pouring from the chimney! The text of the ad mentions "a well-earned vacation" as one of the potential uses of their home equity loans.

This is nuts! Borrowing against your house in order to sit on a beach for a couple of weeks? What these ads never mention is that you could lose your house if your don't pay back the loan!

It's all part of the instant-gratification American culture. Why wait until you actually save up the money for something? Just borrow and you can have it today!

 
At 11:54 AM, Anonymous BoyInTheBubble said...

You can live in your car, but you can't drive your house... I stand corrected. Anyone getting a home-equity loan to buy a car pretty much is driving his house.

Anyone getting a HEL for a vacation, OTOH, is flying his house to Hawaii.

 
At 12:12 PM, Anonymous Jim in Venice said...

"Whenever I come to Silicon Valley, I am impressed by the number of new luxury cars on the roads."

I had a coworker in the San Jose office of my firm who cashed out $80,000 (!!!) from his house to buy a Mercedes. Brilliant.

 
At 12:30 PM, Blogger John Law said...

I'm amazed how equity in a home is considered dead money. home equity is almost a dirty word.

 
At 12:38 PM, Anonymous BKlawyer said...

HELOC loan interest is only deductible for loans below $100k. Tipical Also, typical HELOC loan is tied to short term interest rates which are directly tied to Mr. Greenspan's actions. Not much equity is left out there and the ATM-machine-house is pretty much tapped out. Some of the houses I'm seeing you couldn't give away with the debt taken against them.

 
At 12:39 PM, Anonymous Anonymous said...

"I'm amazed how equity in a home is considered dead money. home equity is almost a dirty word."

Agreed. That and "renter".

 
At 1:05 PM, Anonymous Anonymous said...

There may be a good argument for pulling the equity out and investing it, provided you can find a conservative investment that pays more than the cost of carry - which is helped by the tax deduction.

 
At 1:13 PM, Anonymous Anonymous said...

bklawyer,

Thanks as always for your input. Do you have any advice or recommendations on reading for savers who hope to go bargain-shopping after the bubble? I guess reading up on the RTC and the vulture funds would be a start...

 
At 1:21 PM, Anonymous Anonymous said...

I've got some advice: wait as long as possible. While we may see a steep drop in RE initially, the fall out from this is going to take years to reverse, with prices dropping more and more each year.

 
At 1:29 PM, Blogger Dave Johnson said...

I don't use credit cards, and my house is almost paid off. Good?

Maybe not. I'm starting to realize what is going to happen. MY house is going to be worth almost nothing because all the other houses on the block will be for sale in foreclosures. Meanwhile the government will bail out all the idiots.

-I- am the one who is going to look like the naive loser when this is all over. I'm just going to be broke, but not eligible for a bailout.

 
At 1:32 PM, Anonymous Anonymous said...

Fannie limits may hurt US housing:

http://biz.yahoo.com/ap/050420/mortgage_giants.html?.v=7

 
At 1:47 PM, Anonymous Anonymous said...

To the 1:21 Anonymous: that makes sense - the time to buy RE will be when Business Week comes out with a cover story titled "The Death of Real Estate" :)

 
At 1:49 PM, Anonymous Anonymous said...

chuckle That story will be out next week !

 
At 2:02 PM, Anonymous Anonymous said...

Dave:

It's true that there's an opportunity cost with not participating in a bubble, but it's also true that once you're on the inside looking out, you become more and more susceptible to confusing brains with a bull market and thinking the gravy train will go on forever. Whenever I have good paper profits in the stock market (usually due to some pump-and-dump momentum stock), it gets harder and harder to be objective - it's just like getting drunk. It's only through experience that I'm able to get out sooner each time and keep more of that profit. For many of these RE speculators, this is their first time riding such a bubble (or maybe the second, if they were in the game in 1999) and they're playing on a huge scale. It's like teaching a 4-year-old how to drive (and drive drunk, for that matter) with a semi instead of a tricycle.

 
At 2:36 PM, Anonymous Anonymous said...

Ryland expects 2005 to be record year, "increased its outlook for 2005 on record home orders and backlog"

http://www.marketwatch.com/news/yhoo/story.asp?source=blq/yhoo&siteid=yhoo&dist=yhoo&guid=%7B3C04A379%2DC623%2D4CD9%2DB035%2DCDF143CDF9E0%7D

 
At 3:12 PM, Anonymous Anonymous said...

http://www.safehaven.com/article-2935.htm
Still Not Convinced There's a Real Estate Bubble, Read This!

Finally, an article which appeared in the April 10 New York Times, entitled "The Hunt, Becoming a Mogul Slowly," which should have been entitled "A Bankruptcy in the Making," chronicles the real estate deals of a 25 year old New Yorker, who began his investment career at the ripe age of 22, using money borrowed form his proud parents for the down-payment. This young man's advice to those potential investors who might be worried about real estate is "What are you worried about? Take a risk with real estate, its less risky than the stock market." It is! Well he's 25 years old, so I guess he should know

Madhu

 
At 3:47 PM, Anonymous dontcountchickens said...

I bet a lot of homebubblers are congratulating themselves right now as they watch the stock market tank: "See how smart we were by putting all our money into real estate which never goes down. Not like that nasty stock market."

Problem is, they're next. It's all one system. The money flows from one thing to the next. In a liquidity cycle (like 2003), everything can go up. In a tightening cycle and/or liquidity crunch, everything can go down.

 
At 4:02 PM, Anonymous doodahman said...

Interesting quote from that SafeHaven article:

"A third individual boasts about having paid $70,000 for a rental condo last year that is worth $115,000 today. How does she know the condo is worth $115,000? Is it because a greater fool purchased a similar one at that price? How does that affect her if she is not the one who sold? Remember all those "paper profits" in the stock market? What good are they now to those who did not sell?"

Very true. Back when the Nasdaq was bubbling up, lots of folks had big paper profits. But if even a small percentage of them had tried to cash out, those profits would have disappeared quickly. Very few get out with the big money.

The same is true today with real estate. The price of a home is determined by what other similar homes in the area are selling for. Let's say there are 5,000 identical homes in a development. At any given time, 150 are up for sale. Let's sale the most recent sale was $500,000. So every homeowner in the neighborhood believes their home is worth $500,000.

But if 500 of them decided to sell, there is no way that they could realize $500,000 because there wouldn't be enough buyers available.

The price discovery process (whether in homes or stocks) always takes place at the margin. Right now there are lots of buyers (fear/greed/EZ-credit, you name it) and not a lot of sellers.

Once the buying frenzy subsides, sellers will find that they will have to compete for buyers. And prices will come down.

 
At 4:46 PM, Anonymous Anonymous said...

Great info in the table. Why am I thinking that people who use the home equity line don't have the discipline to use the middle column (by making monthly principal Interesting to note how much more you end up paying over 120 months.

 
At 7:44 PM, Anonymous Anonymous said...

Not to mention that HELOC interest is subject to the AMT. If congress doesn't raise the limits and lets the current law take effect, most of the HELOCs WON'T be deductible for a large majority of taxpayers.

I don't think congress will do it, but I'll bet most people being told to buy cars or vacations with a "cash out" loan, have no idea what the AMT even is.

 
At 9:13 PM, Anonymous Anonymous said...

Why doesn't Mr Don tell Dani that if she needs to take out a second mortgage in order to purchase a car, that very likely she just plain can not afford a new car?

Ah, but here in SoCal you are what you drive. You may not have two nickels to rub together, but you have a shiny, $48K SUV.

My neighbors just got a HELOC to buy a new car (luxury SUV). I thought they were smarter than that.

Incidentally, another neighbor here in sunny San Diego, finally sold their house after 4 months on the market and dropping the asking price 10 percent. They had already moved into a bigger house, and were motivated to sell the old one.

 
At 11:27 PM, Anonymous Anonymous said...

"Incidentally, another neighbor here in sunny San Diego, finally sold their house after 4 months on the market and dropping the asking price 10 percent.

Impossible! Housing prices only go up, remember?

 

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