Recently, a number of our customers have asked us about the advantages of using a home equity loan to finance their next car purchase, so we felt the need to expand on why it is unwise to tie your car financing in any manner to your mortgage.
This isn’t a brand-new financial package that banks have just started selling; rather, it’s a way to acquire extra money that dates back to the first mortgage. However, just because something is readily available doesn’t necessarily imply it’s a good thing. Remortgaging using a home equity loan should only be done as a last resort because the loan duration is the main cost factor.
Watch the video below to see Mina, one of our most knowledgeable finance consultants, analyze the benefits and drawbacks of bundling your mortgage and auto loan so you can make an informed choice.
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However, the majority of individuals do not consider buying a new or used automobile to be a financial emergency, so for those who are still unsure, let’s look a bit closer.
But let’s just get the benefits out of the way first before we proceed.
The alleged benefits
You have quick access to money.
No additional credit checks are necessary.
Your monthly loan installments won’t change.
In a nutshell, this is the reason why this choice appeals to so many homeowners who want to replace or update their current vehicle.
It’s a practical and ostensibly cost-effective way to buy a car, but the benefits are just temporary, and when getting a mortgage (or any other financial package, for that matter), you should seriously consider how the long view will affect you.
The negative aspects
Let’s now get to the meat of the matter.
Cost – While the interest rates on home loans are sometimes lower than those on auto loans, this does not equate to lower payments. In actuality, you end up paying more overall interest over time due to the amount of the loan and the impact of compound interest.
Time – Extending the duration of your house loan is frequently the result of obtaining financing through your mortgage. This means that if you make the agreed-upon payments and don’t pay extra, your mortgage won’t be paid off as quickly as you had intended.
This contributes to our following drawback as well.
Budgeting – Okay, so having one loan payment can seem like a fantastic idea, but the truth is, isn’t this just the same as having two payments? Even if you plan to prepay your mortgage to pay off the mortgage’s auto loan portion in a few years.
You’ll likely wind up paying more overall because we are all inclined to stick to our half of the bargain.
Less control – Once your mortgage and car payments are linked, they are there to stay.
At Stratton, we strongly advise a separate financing package for your car loan because it gives you much more control over your finances. Finance your car for a year, and once the last payment is made, you’re done with it and free to either choose another car or save some money for a year or two.
You’re stuck with your automobile – If your mortgage and car finance are linked, you can feel as though you’ve never paid off the car loan and be hesitant to update your vehicle no matter how old it becomes. You can upgrade without your inner accountant informing you the car isn’t paid off yet by taking out a short-term car loan, like three years.
Fees – There can be predetermined costs for equity loans and refinancing from your mortgage provider.
These can be extremely expensive, and who wants to pay extra fees?
Why it’s best to always get a separate vehicle financing package
Now, we might have a slight bias in favor of auto loans, but there is a very solid reason for it.
More flexibility to change/renegotiate funding at the loan’s end.
greater command over your own money.
the ability to update your vehicle in a few years without having to take out a larger mortgage.
You see, the several drawbacks we previously stated are essentially eliminated by a car loan.
So you can firmly explain why it is a bad idea the next time a family member or financial expert (we can’t conceive why they would) suggests connecting your auto loan to your mortgage in any way.
Contact Stratton and let us find the finest financing option to meet your needs rather than phoning your bank to discuss auto financing or home equity loans. Don’t worry; we’ve been doing this for a while and have got your back.