Paying balance with HELOC?

[fe342185]

I was wondering if paying the remaining balance of my X5 with my Home Equity Line of credit is a good idea. Are there any drawbacks?

[Quicksilver]

I bought mine with a home equity line of credit and wrote off the interest.
But remember a home equity line of credit means you're putting up your
house as collateral and if you don't pay........"BAM".

[cmyX6go]

I wouldn't do it. But that's just me. My house is my house and nothing else should be tied to it.

Is the interest prime + whatever? If so, what's the X going to cost you when the rates go up again?

[PersonaNonGrata]

The rates on HELOCs are pretty darn low. I think mine is at about 3%. What's rate is your auto loan and can you write any of it off? I think that if you know you will pay it off and you are saving money/getting a lower rate and you get the interest write off, why not?

[Wagner]

I would not recommend it if you don't "have" to do it. A million things could happen in your life that require funds which are far more important than the X5. My 2 cents.

[clubba]

Originally Posted by Wagner

I would not recommend it if you don't "have" to do it. A million things could happen in your life that require funds which are far more important than the X5. My 2 cents.

If push comes to shove, you want to be able to walk away from your X5 and keep the house. Also, sure you can get a low rate on your HELOC and pay off your X with it, but then you're going to be financing your X5 over the 30 years of the HELOC.

I just bought my X5 and got 5.34% from my credit union. Even if you are paying 7%, here is what the numbers look like when financing $20k:

Summary

Principal borrowed: $20000.00
Annual Payments: 12 Total Payments: 60 (5.00 years)
Annual interest rate: 7.00% Periodic interest rate: 0.5833%
Regular Payment amount: $396.02 Final Balloon Payment: $0.00
Annual Debt Service Constant: 23.7612%
Minimum amortizing payment for this Principal and Interest rate: $116.68

The following results are estimates which do not account for values being rounded to the nearest cent.
Total Repaid: $23761.20
Total Interest Paid: $3761.20
Interest as percentage of Principal: 18.806%


And you'll own the X5 in 5 years (no more pmts)


Now say you can get 4% on your HELOC - my HELOC (which I used for home improvements) is a 30 year fixed (more like 6% than 4%, but we'll use 4% as the rate):


Summary

Principal borrowed: $20000.00
Annual Payments: 12 Total Payments: 360 (30.00 years)
Annual interest rate: 4.00% Periodic interest rate: 0.3333%
Regular Payment amount: $95.48 Final Balloon Payment: $0.00
Annual Debt Service Constant: 5.7288%
Minimum amortizing payment for this Principal and Interest rate: $66.68

The following results are estimates which do not account for values being rounded to the nearest cent.
Total Repaid: $34372.80
Total Interest Paid: $14372.80
Interest as percentage of Principal: 71.864%




Total repaid via conventional auto loan = $23.7k, or a 18.8% premium to what you owe (assuming $20k owed) - and you own the X5 in 5 years


Total repaid via HELOC = $34.3k, or a 71.8% premium to what you owe (assuming $20k owed).


Long story short - stick with a conventional auto loan for your autos.


True, you will make some of that gap up in being able to write-off your interest (in some cases - I heard you couldn't always do it w/ HELOCs) but the basic principles are the same. In other words, you get the idea...

[vegasX5]

Originally Posted by clubba

If push comes to shove, you want to be able to walk away from your X5 and keep the house. Also, sure you can get a low rate on your HELOC and pay off your X with it, but then you're going to be financing your X5 over the 30 years of the HELOC.

I just bought my X5 and got 5.34% from my credit union. Even if you are paying 7%, here is what the numbers look like when financing $20k:

Summary

Principal borrowed: $20000.00
Annual Payments: 12 Total Payments: 60 (5.00 years)
Annual interest rate: 7.00% Periodic interest rate: 0.5833%
Regular Payment amount: $396.02 Final Balloon Payment: $0.00
Annual Debt Service Constant: 23.7612%
Minimum amortizing payment for this Principal and Interest rate: $116.68

The following results are estimates which do not account for values being rounded to the nearest cent.
Total Repaid: $23761.20
Total Interest Paid: $3761.20
Interest as percentage of Principal: 18.806%


And you'll own the X5 in 5 years (no more pmts)


Now say you can get 4% on your HELOC - my HELOC (which I used for home improvements) is a 30 year fixed (more like 6% than 4%, but we'll use 4% as the rate):


Summary

Principal borrowed: $20000.00
Annual Payments: 12 Total Payments: 360 (30.00 years)
Annual interest rate: 4.00% Periodic interest rate: 0.3333%
Regular Payment amount: $95.48 Final Balloon Payment: $0.00
Annual Debt Service Constant: 5.7288%
Minimum amortizing payment for this Principal and Interest rate: $66.68

The following results are estimates which do not account for values being rounded to the nearest cent.
Total Repaid: $34372.80
Total Interest Paid: $14372.80
Interest as percentage of Principal: 71.864%




Total repaid via conventional auto loan = $23.7k, or a 18.8% premium to what you owe (assuming $20k owed) - and you own the X5 in 5 years


Total repaid via HELOC = $34.3k, or a 71.8% premium to what you owe (assuming $20k owed).


Long story short - stick with a conventional auto loan for your autos.


True, you will make some of that gap up in being able to write-off your interest (in some cases - I heard you couldn't always do it w/ HELOCs) but the basic principles are the same. In other words, you get the idea...

This is only assuming minimum payments on either option. If he paid the $396.02 payment on the HELOC loan, it would amortize much quicker and the "premium" would be less than the conventional auto loan. I highly doubt anyone would pay off their car with a HELOC and plan to only make the minimum payment for 30 years

[clubba]

Originally Posted by vegasX5

This is only assuming minimum payments on either option. If he paid the $396.02 payment on the HELOC loan, it would amortize much quicker and the "premium" would be less than the conventional auto loan. I highly doubt anyone would pay off their car with a HELOC and plan to only make the minimum payment for 30 years

Then you, my friend, must not work in finance. This is precisely the kind of activity that has gotten us into the mess we are in today. People purchase houses and over-leverage them to do stupid frivolous things like take vacations, buy new cars, etc. and use the HELOC to lower their monthly payments. Even if the OP's intentions are to make the same monthly payments (doubtful for most people, thought I can't speak for the OP) people tend to fall off of that payment plan rather quickly when they realize 1) they don't have to pay that much and 2) there is something else they would rather do with the money. The excitement of a new car wears off rather quickly. Your car is not an investment like your house. Do not tie the two together. It is a bad idea.

Again, not saying the OP can't, but if you can't afford to pay for your X5 via a conventional auto loan, maybe you shouldn't be driving an X5.

[vegasX5]

Originally Posted by clubba

Then you, my friend, must not work in finance. This is precisely the kind of activity that has gotten us into the mess we are in today. People purchase houses and over-leverage them to do stupid frivolous things like take vacations, buy new cars, etc. and use the HELOC to lower their monthly payments. Even if the OP's intentions are to make the same monthly payments (doubtful for most people, thought I can't speak for the OP) people tend to fall off of that payment plan rather quickly when they realize 1) they don't have to pay that much and 2) there is something else they would rather do with the money. The excitement of a new car wears off rather quickly. Your car is not an investment like your house. Do not tie the two together. It is a bad idea.

Again, not saying the OP can't, but if you can't afford to pay for your X5 via a conventional auto loan, maybe you shouldn't be driving an X5.

First off, I was referring to OP in my post and perhaps shouldn't have generalized. Clearly millions of people did unscrupulously burn through their reserves tied to their overextended mortgages to finance a lifestyle they could not afford - that I concede.

However, I presume that most people that frequent this board who are fellow X5 owners likely have a more disciplined approach to their finances, and the original poster was looking for opinions. You were presumptious in assuming that he would merely make the minimum payment on the HELOC and that the X5 would be the all that was financed by on the HELOC. You're assumption overstated the amount of the premium in interest over the term substantially, because you're essentially comparing two completely different repayment plans. The length of the term needs to be the same IMO in order to see the clear advantages or risks.

That said, I was not recommending to anyone that they use a HELOC for anything unneccessary and/or emergency. I would personally never do it myself especially when interest rates are so low to begin with on all types of consumer loans! Like Wagner said, you have far more important things that could require funds so you don't want it wrapped up in something as petty as a vehicle. BTW - when people are asking for opinions I suggest not jumping to conclusions about what their intentions are and to what extent their knowledge is surrounding the subject.

[clubba]

I see that you are an accountant and I apologize for the rash generalizing comment.
And points taken, but I respectfully disagree with some of them.
Most people in sound financial condition with any sort of financial acumen would never even consider wrapping their car into a HELOC. That said, there is no way we should be looking at these 2 loans apples-to-apples. Yeah, if the HELOC were a 5 year loan you should look at it a-to-a with a 5 year auto loan... but it's not. It's (generally) a 30 year loan that is tied to your home. If you can continue making your current monthly payments I would recommend you do so. Otherwise, there are some great rates out there for autos right now and you could consider refinancing w/ another auto loan - even extending the term if the payments are getting to be too much for you (i.e. if you have 2.5 years left in your current loan, refinance it w/ a 4 year loan). That way the car will still be paid off in a reasonable amount of time.

According to bankrate.com, 30k HELOCs are at 5.57% right now. That means if you refinanced your 7% 20k loan in the HELOC and paid if off over the same period (5 years) as Vegas recommends for an apples-to-apples comparison you'd save ~$13/month in pmt.

I will reiterate that you should NEVER put up your house as collateral for a car.