How to Buy a Car Using a Second Mortgage

Instead of financing a car, use a second mortgage to buy it outright.

Second mortgage loans are home loans that are secured with your house. Most second mortgage loans are used for debt consolidation, home improvements or large purchases (like an automobile or a college education). If you have some equity in your home, solid credit scores and ample income, you might consider tapping your home's equity to purchase a car. Before financing a second mortgage, though, make sure you have considered all potential options and taken care to look into the particulars of the repayment.

Things You'll Need

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

Instructions

1. Find the car and negotiate a sales price first. This will help you when you start looking for second mortgage options. You will also need to know if you home has the necessary equity to purchase the new (or used) car.

2. Find the estimate value of your home. You can get a full appraisal done, but this could cost you up to $500. Instead, use an online value estimator, such as Zillow.com. This is a free service and these companies use up-to-date sales in your neighborhood to find estimates.

3. Pull your free credit report from Annual Credit Report. You should also pay for a FICO score ($5). This three-digit number, between 300 and 850, shows lenders how well you manage your finances. Scores above 720 are considered excellent while scores below 600 are deemed poor.

4. Collect car loan offers from your dealership or bank. You will want these to compare them to the second mortgage options you will be offered. You must make sure that a second mortgage is more financially beneficial than an auto loan. To get auto loan offers, you will need to submit applications to either the dealer or the bank with whom the dealer conducts business.

5. Research mortgage lenders based on your FICO score. If you have great credit, apply only to local, small banks and credit unions. These institutions often offer the best, most financially advantageous second mortgages. If you have some credit problems, you should also apply at finance companies.

6. Compare all loan offers side by side. Pay special attention to the type of loans offered (some second mortgages are revolving, like credit cards), the rates offered (some second mortgage rates are variable) and the fees involved with each deal. Make a decision and complete financing based on your financial goals and needs.

Tips & Warnings

• Remember that using a second mortgage to purchase a car will allow you to write off the interest each year on your taxes.

References

• Bankrate: Refi Second Mortgage to Pay off Debt
• Bankrate: Bankruptcy May End Second Mortgage Woes
• Federal Trade Commission: Knee Deep in Debt

Resources

• Annual Credit Report
• ZIllow Value Estimator