Is Using A Home Equity Loan A Good Way To Pay Off A Car?

My mother is at retirement age, but still works part time b/c she wants to.

Her condo is paid in full and she is a widow.

I guess she had a wild urge one day, so she went out and bought a rather sporty car.

I figure good for her, she worked hard and deserves it.

The issue is that she has an auto loan to go along with the difference owed from her trade. About 16K @ 6% for 60 months.

I suggested that she set up a home equity loan to pay off the car.

My reasoning is the tax write off for the interest paid.

Do all you financial experts consider this a good idea?

No.

Since she has a 6% car loan, it's probably not a good idea to get a HELOC to pay off her car. Since she is only working part-time, at most, she is probably in the 25% tax bracket, and more likely is in the 15% tax bracket.

Most HELOCs are around the prime rate of 8.25%, so her tax adjusted rate on the HELOC would be 8.25%x(1-.25) = 6.1875% for the 25% bracket or 8.25%x(1-.15) = 7.0125% for the 15% bracket, and that's assuming that she is able to use all of her deductible interest.

For 2007, the standard deduction will be $5350. At 8.25%, a $16,000 loan would generate $1320 in deductible interest. So unless your mother has a lot of other deductible items, she would get no benefit from the 'deductibility' of the interest.

She would just be paying a higher rate to finance her car.

If she can get a rate that is secured by her home that is less than the 6%, it might be a reasonable idea, but the tax savings alone probably will not justify it.

She should leave it be. She has a good rate and would be foolish to risk her home for a car. The savings would be negligible after the first year. As a matter of fact, she would have to spend enough in interest to exceed the standard deduction, which is unlikely with a low rate around 6%.

If she did so, chances are she would not even be able to deduct the interest from her income. She has a good rate and is able to make the payments. If anything, perhaps she wants to pay it off sooner.

Well, I don't qualify as a "financial expert" but I would say "no". While I agree with your reasoning regarding the mortgage interest deduction, I can't see putting my residence at risk as collateral on a loan just to pay off a car. She's got a decent interest rate on the car and in 5 years it'll be paid off (assuming she keeps it that long). If things REALLY went sour and she couldn't pay for the car, so what? They repo it and she still has her condo. If she couldn't pay the mortgage do you really want your mom facing foreclosure in her retirement years? Peace of mind can be a very valuable thing.