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 youve 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 youll 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.



About the author:

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 site devoted to debt

consolidation and credit counseling, and HomeEquityHelp.com, a

site devoted to information regarding mortgages and home equity

lending .