How home equity loans and lines of credit work for car purchases

Home equity is the difference between what your house is worth and what you still owe on the mortgage. You can borrow against that equity to buy a car, and lenders will offer you money at interest rates that are often lower than a traditional auto loan. The reason: your house backs the loan, so the lender's risk is smaller.

There are two main ways to borrow against home equity. A home equity loan gives you a lump sum upfront — you get the full amount at closing, then repay it in fixed monthly payments over a set term, usually 5 to 15 years. A home equity line of credit (HELOC) works more like a credit card: the lender approves you for a maximum amount, you draw what you need when you need it, and you pay interest only on what you've borrowed. HELOCs often have a variable interest rate that changes over time.

Both options let you deduct the interest from your taxes if you itemize deductions — something you cannot do with a car loan. But both also put your house at risk: if you stop making payments, the lender can foreclose.

Key Takeaways

  • Home equity loans and HELOCs typically offer lower interest rates than auto loans because your house secures the debt.
  • A home equity loan gives you one lump sum with fixed payments; a HELOC lets you borrow as needed with a variable rate.
  • You can deduct the interest on your taxes if you itemize, but missing payments puts your home at risk of foreclosure.
  • Lenders usually let you borrow up to 80 to 90 percent of your home's value minus what you owe on the mortgage.
  • Closing costs for home equity loans run 2 to 5 percent of the loan amount, while HELOCs often have lower or no upfront fees.

How much you can borrow against your home

The amount available depends on three things: your home's current market value, your mortgage balance, and the lender's lending limit. Most lenders will let you borrow up to 80 percent of your home's value. If your house is worth $300,000 and you owe $200,000 on the mortgage, you have $100,000 in equity. At an 80 percent loan-to-value limit, you could borrow up to $40,000 (80 percent of $300,000 minus the $200,000 you owe).

Some lenders go higher — up to 90 or even 95 percent of home value — but that leaves you with less cushion if the market drops. A few lenders will lend up to 100 percent, but those loans carry higher rates because the risk is greater.

To find out what you can borrow, you'll need a current home value. You can start with your county assessor's estimate or a recent appraisal, but lenders often order their own appraisal before approving the loan. That appraisal usually costs $300 to $500 and is your responsibility to pay.

Comparing home equity loans to auto loans and other car financing

An auto loan is secured by the car itself, so if you default, the lender repossesses the vehicle — not your house. Auto loan rates vary widely based on your credit score and the age of the car, but they typically range from 4 to 10 percent depending on your creditworthiness. A home equity loan or HELOC might offer a rate 1 to 3 percentage points lower, which saves money over time.

However, the trade-off matters. With an auto loan, you lose the car. With a home equity loan, you lose your home. An auto loan also has a shorter term — usually 3 to 7 years — so you pay it off faster. A home equity loan stretches the debt over 10 to 15 years, which lowers your monthly payment but means you pay more interest overall.

A personal loan is another option: unsecured, faster to close, but with higher interest rates (often 8 to 15 percent). A credit card cash advance is the fastest but the most expensive, with rates often above 20 percent. For most car purchases, an auto loan remains the most straightforward choice unless your home equity rate is significantly lower and you're comfortable with the foreclosure risk.

The costs and timeline for getting a home equity loan or HELOC

Home equity loans come with closing costs similar to a mortgage: appraisal, title search, origination fee, and legal fees. These typically total 2 to 5 percent of the loan amount. On a $30,000 loan, that's $600 to $1,500 out of pocket. Some lenders roll these costs into the loan balance, so you don't pay upfront, but you'll pay interest on them for the life of the loan.

HELOCs often have lower or no upfront costs, though some lenders charge an annual fee once the line is open. The trade-off is that HELOC rates are variable, so your payment can rise if interest rates climb.

The timeline from application to funding usually runs 7 to 14 days for a home equity loan, assuming your credit and home value check out. A HELOC can close faster — sometimes in 5 to 7 days — because there's less paperwork upfront. You'll need recent pay stubs, tax returns, and a current mortgage statement. The lender will order an appraisal and a title search, both of which take time.

Tax deductions and the interest you'll pay

If you itemize deductions on your federal tax return, you can deduct the interest you pay on a home equity loan or HELOC — but only if you use the money to buy, build, or substantially improve your home. The IRS changed the rules in 2017: you can now deduct interest on up to $750,000 in home equity debt (or $375,000 if you're married filing separately), but the money must go toward the home itself.

Using a home equity loan to buy a car is a gray area. The IRS does not explicitly forbid it, but the deduction is not may provide. Some tax professionals argue that because the car is not part of the home, the interest is not deductible. Others say the deduction stands as long as the loan is secured by the home. The safest approach: ask a tax professional before you borrow, and keep records of how you used the money.

The interest you'll pay depends on the loan amount, the rate, and the term. On a $30,000 home equity loan at 6 percent over 10 years, you'll pay roughly $9,900 in interest. On the same loan at 8 percent, you'll pay roughly $13,300. The longer the term, the more interest you pay overall, even if the monthly payment is lower.

Risks of borrowing against your home for a depreciating asset

A car loses value the moment you drive it off the lot — typically 20 percent in the first year and 50 percent over five years. Your home, by contrast, usually appreciates. Borrowing against an appreciating asset to buy a depreciating one is a mismatch that can leave you underwater: owing more on the car loan than the car is worth, while also carrying a larger mortgage.

If you lose your job or face a financial emergency, you still owe the home equity loan. Unlike an auto loan, where the lender can repossess the car and you walk away, a home equity loan puts your house on the line. If you miss payments, foreclosure can follow, and you'll lose your home even though the car is long gone.

Home equity loans also reset your mortgage clock. If you've paid down your mortgage for 10 years and take out a 15-year home equity loan, you're now making payments on your home for 25 years total instead of the original 30. That extends your debt and increases the total interest you pay across both loans.

When a home equity loan makes sense for a car purchase

A home equity loan works best when you have substantial equity, a stable income, and a significant rate advantage over an auto loan. If you have excellent credit and can get a 3 percent auto loan, a home equity loan at 5 percent doesn't make sense. But if auto lenders are quoting you 8 to 10 percent and you can get a home equity loan at 5 to 6 percent, the math shifts.

It also makes sense if you're buying a reliable used car that will last many years, not a new car that depreciates rapidly. The longer you keep the car, the more the interest savings matter. And it makes sense only if you have a financial cushion: an emergency fund separate from your home equity, so a job loss doesn't force you to choose between the car payment and the mortgage.

If you're considering a home equity loan because you can't may have access to for an auto loan, pause. That's a sign your credit or income is weak, and borrowing against your home amplifies the risk. Fix the credit or income problem first, or save for a larger down payment on a cheaper car.

Frequently Asked Questions

Can I use a HELOC to buy a car and pay it off quickly?

Yes. A HELOC's flexibility means you can draw the money, buy the car, and pay off the balance in months if you want. You'll pay interest only on what you've borrowed and only while it's borrowed. The downside: HELOC rates are variable, so your rate could rise after you borrow, and you'll need to manage the line of credit responsibly to avoid overspending.

What happens to my home equity loan if I sell the house?

The loan must be paid off at closing from the sale proceeds. If you owe $30,000 on the home equity loan and your house sells for $400,000 with a $250,000 mortgage, the title company will pay both debts from the sale price before you get the remainder. If the sale price is too low to cover both debts, you'll owe the difference out of pocket.

Is the interest rate on a home equity loan fixed or variable?

Home equity loans typically have fixed rates, meaning your rate and payment stay the same for the life of the loan. HELOCs usually have variable rates tied to the prime rate, so your payment can change. Ask your lender which type they offer before you commit.

Do I need a perfect credit score to get a home equity loan?

No, but a higher score gets you a lower rate. Most lenders want a score of 620 or higher, though some go lower. Your home equity and income matter more than your credit score because the home itself secures the loan. Even with a lower score, you may may have access to, but you'll pay a higher rate.

Can I borrow against my home if I'm still paying off the mortgage?

Yes. As long as you have equity — the difference between what the home is worth and what you owe — you can borrow against it. Most lenders require you to have at least 15 to 20 percent equity remaining after the new loan, so you can't borrow your entire equity cushion.