How to Use Home Equity to Buy a Car

You can cash out equity in your home to purchase a car.

There are many advantages to being a homeowner. One of these benefits is the availability of home equity -- an asset that can be liquidated for purchases or investments. If you need to buy a car, you can use the equity in your home instead of taking out a potentially high-interest car loan. However, you cannot simply cash out the home equity in your home; you'll need to take a cash-out loan against your home.

Things You'll Need

• First mortgage paperwork Income documents (W-2s, pay stubs)

Instructions

1. Find the estimated value of your home. Before you enter a loan application process with a mortgage lender, you need to make sure you have the necessary equity to purchase a car. To find the estimate value of your home, use an online valuation site such as Zillow. (See resources.)

2. Calculate your estimated debt-to-income ratio (DIR) with a home equity loan. Lenders want to make sure you can repay your new home equity loan. Research home equity loan rates at local banks (most will advertise their rates) and estimate the value of the loan you'll need (price of the car). Then, using this loan amount and rate, calculate the monthly payment using the calculator in the resources section. Next, to find your DIR, divide the total of all monthly bill payments (including the new equity loan payment) by your total gross income. Most lenders will not finance a new equity loan unless your DIR is below 45 percent.

3. Pull a copy of your credit report. You can access a free copy from Annual Credit Report. You should also pay $5 to get a copy of your FICO score. This is a three-digit number between 300 and 850. Scores above 720 are excellent; scores below 600 are poor.

4. Use your credit score as a guide when looking for home equity loan lenders. Make sure to negotiate a sales price on your car prior to initiating a home equity loan. You need to know to value of the home equity loan prior to making any applications. Use finance companies only if you have problems on your credit, such as late payments, collection accounts, judgments or bankruptcy.

5. Fill out no more than three home equity loan applications. Too many applications could negatively affect your credit. Consider applying for a bit more than what is needed to purchase the car. Think about other obligations (such as credit cards, consumer loans and expenses) that could be paid with a home equity loan.

6. Review all loan offers side by side. Eliminate any that do not cover the full cost of the car. Choose the option that is the lowest cost and will fully cover the cost of the car. Make sure to give the loan officer your income documents and first mortgage paperwork. This will speed up the preapproval process.

7. Use the proceeds from the home equity loan to purchase your car. Your home equity lender may even cut a check directly to the auto company.

References

• Federal Trade Commission: Home Equity Credit Lines
• The Federal Reserve Board: What You Should Know About Home Equity Credit Lines
• MSN Money: Your 3 Worst Debt Consolidation Moves

Resources

• Annual Credit Report