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 loans.