How To Use Home Equity To Lower Your Auto Loan Interest Rate

Getting an auto loan can be a difficult experience for many car buyers. Many times you pay higher interest costs than you anticipated and the monthly payment is higher as well. For those that wish to explore another option, using a home equity loan to lower your interest rate is a possibility.

Using Home Equity

If you have lived in your house for many years, you have most likely accumulated some equity. The equity in your home is the difference between what you owe against the house and the value.

If the balance on your car loan is less than your equity, you could benefit from eliminating your auto loan. The interest rates that you pay for home equity loans will usually be less and the payments will be spread out over a longer term. This means the amount that you spend on your car each month will be much smaller. It can help you free up room each month after the bills are paid and allow you to do more things with your money.

How it Works

Getting a home equity loan to replace your auto loan is very simple. Although there will be a little paperwork involved, it is definitely something that you can do. Start by shopping around for the best deal on a home equity loan. There are a number of resources out there that will show you the rates for current home equity loans. You can shop several different lenders to get the best rate available.

Once you find a lender that offers the right rate and fees, you can apply online, in most cases. The lender will provide you with a preliminary approval within a few days to a few weeks. The lender will then order an appraisal to establish the value of your home. Once you sign final documents, they will give you a checkbook or credit card to use against the line itself.

If you have a car loan, all you will need to do is payoff the loan balance and begin payments on the line of credit.

Good Idea?

Although this method can help bring costs down, the biggest drawback is that lines of credit are typically 30 year loans. Your costs, over the life of the loan, will be significantly higher. If you get a 15-year home equity loan, you will basically just have a 15 year auto loan. You will probably not want your car for that long, so you run the risk of paying for something that you no longer want. Just make sure that this is something you want to do before pursuing it as an option. 

Also, you are using your home to secure an asset. Be sure that you keep up with the payments because lenders can foreclose on your home if you do not make payments.

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