Second mortgage advice needed pls

[NetWareHead]

I lease a car now and I just made one of my regular monthly payments. I intend to buy this car when the lease is up, and I have 20 more lease payments left. So from now, another year and 8 months. I looked at my credit union and the interest rates they are offering for second mortgages are practically a steal, i mean extremely attractive. I intend to take out a second mortgage on my house for approximately 10-12K and use those funds to buy the car out at end of the lease.

However, in 20 months, I am not sure I will be able to pull the same interest rates on a second mortgage like I can today. Therefore what I propose, is to to take out the second mortgage sometime soon so I can enjoy the great rates. Put the 10-12K in some kind of interest bearing CD for 20 months or whatever is the best time period offered that will coincide with end of the lease.

When end of lease comes, I liquidate the CD and use that to buy out the car, while I pay down the second mortgage at this great interest rate.

I'd rather borrow money through a second mortgage than go for a auto loan, since auto loans carry several times higher interest rates, plus the interest on a mortgage is tax deductible.

Any flaws in this line of thinking? Thanks...

 

[rcpratt]

What's the rate.

 

[NetWareHead]

What's the rate.

both 3 year loans, same amount. mortgage is 3% and auto loan is 5.5%

 

[IronWing]

CD rates are running 1-1.25% for a 12-18 month period.

Edit: Was typing while you posted. I'll rerun the numbers with your rates.

Okay, using your rate and a CD of 1.25% the 20 months will cost you $468 in interest on a 10K loan, that is 10K for 20 months at 2.75%.

Where does the 5.5% auto loan fit into your question?

 

[NetWareHead]

CD rates are running 1-1.25% for a 12-18 month period.

Edit: Was typing while you posted. I'll rerun the numbers with your rates.

Okay, using your rate and a CD of 1.25% the 20 months will cost you $468 in interest on a 10K loan, that is 10K for 20 months at 2.75%.

Where does the 5.5% auto loan fit into your question?

I have two choices on how to pay for the buyout of my car at end of lease. Either I lock in a 2nd mortgage now at this rate. Or I get an auto loan in 20 months to cover the car then. the 5.5% is the auto loan interest rate now. 3% is the mortgage rate

 

[IronWing]

I have two choices on how to pay for the buyout of my car at end of lease. Either I lock in a 2nd mortgage now at this rate. Or I get an auto loan in 20 months to cover the car then. the 5.5% is the auto loan interest rate now. 3% is the mortgage rate

Got it. The auto loan will cost you $870.52 over 3 years assuming 10k loan and monthly payments.

3 year mortgage on 10K at 3% will cost $371.83 for the first 20 months.
18 month 10K CD at 1.25% will yield $189.17
So the cost of borrowing and sitting on money for 20 months will be approximately $182.66.

Total cost of the mortgage over the 3 years will be $469.24.

Assuming you follow the plan you will save $590.45 (the interest on the auto loan - the interest on the mortgage + the interest on the CD) . This ignores any closing costs on the mortgage.

 

[the DRIZZLE]

It's not worth it to take out a second mortgage for 12k. I don't even think any bank will do a mortgage that small. Closing costs for a second mortgage are around 1k. Even you if you end up at 7 percent on the car loan for 3 years the total interest is 1338 over the life of loan.

 

[NetWareHead]

Assuming you follow the plan you will save $590.45 (the interest on the auto loan - the interest on the mortgage + the interest on the CD) . This ignores any closing costs on the mortgage.

It's not worth it to take out a second mortgage for 12k. I don't even think any bank will do a mortgage that small. Closing costs for a second mortgage are around 1k. Even you if you end up at 7 percent on the car loan for 3 years the total interest is 1338 over the life of loan.

Thanks for the answers but what I didnt see is additional savings by being able to deduct the mortgage interest on a tax return, something which my accountant my have to help me quantify. Basically that equals bigger savings.

Ive done this before for 12K in the past few years also without closing costs. But I never had to wait 20 months....I used the mortgage $$$ immediately.

Thanks for the answers

 

[the DRIZZLE]

Thanks for the answers but what I didnt see is additional savings by being able to deduct the mortgage interest on a tax return, something which my accountant my have to help me quantify. Basically that equals bigger savings.

Ive done this before for 12K in the past few years also without closing costs. But I never had to wait 20 months....I used the mortgage $$$ immediately.

Thanks for the answers

The interest would probably be deductible but you'd have to pay income tax on the interest you get from the CD. Also keep in mind you are securing the loan with your home instead of your car. If you stop paying the bank on a car they'll send the repo guy to pick it up. If you stop paying your mortgage...well you know the rest.

 

[rcpratt]

This just strikes me as too much work for too little gain.

 

[IronWing]

To calculate the value mortgage interest deduction multiple $469.24 by your tax rate. Be sure to see if second mortgages qualify. Keep in mind that this deduction would be spread over three years.

 

[OCGuy]

It's not worth it to take out a second mortgage for 12k. I don't even think any bank will do a mortgage that small. Closing costs for a second mortgage are around 1k. Even you if you end up at 7 percent on the car loan for 3 years the total interest is 1338 over the life of loan.

Wrong. You can walk into a bank such as BofA or Wells and get a small HELOC pretty easily, if you have the credit/equity.

 

[IronWing]

Wrong. You can walk into a bank such as BofA or Wells and get a small HELOC pretty easily, if you have the credit/equity.

Wells HELOCs start at 6.6% per their website. If I punch in $10k on the $120K house with no first mortgage, and excellent credit in my fair state the website says 8.75%.

 

[Sluggo]

Why not just call the lease company and ask what it takes to buy out the lease and own the car today. Go the the CU and borrow that amount and own the car.

 

[thepd7]

Better question: why don't you save the money and buy the car cash in 20 months?

 

[dullard]

In some potential cases, this might save you a bit of money over doing nothing. But, there are many better ways of doing it.

1) Like others have said, this is a risk. You would risk losing your home over a missed payment for your car. Your willingness to take that risk is not a good sign (neither was your choice to lease a car that you want to buy, but that is a story for another thread). The huge risk isn't balanced by a similarly large gain. At most you'll save a couple hundred dollars over doing nothing. So, are you willing to lose your house over a few hours worth of pay?

2) You haven't discussed even better options. For example, Thepd7's suggestion of just outright buying the car with cash. You should be able to do that if you can save almost $500/month. Of course, not everyone can afford to save at that rate. But, if you can't you probably couldn't truely afford that car either when you bought it.

3) The best option of all, is probably to just refinance your home at ~3% and take some of your equity out for the car. No second mortgage needed at all and you get that great rate on all of the mortgage balance instead of just $10k.

We cannot answer your question regarding tax savings since we don't know your tax rate nor do we know your deductions. Remember, only a part of mortgage interest is deductable (the part that is above the standard deduction). As interest rates go lower, and as time passes and your mortgage gets smaller, that tax deductable part gets smaller and smaller.

 

[Codewiz]

Where are you looking at rates. I am pre-approved right this minute for a 3.39% used car rate for 36 months. 3.99% for 60 months.

 

[Bignate603]

Better question: why don't you save the money and buy the car cash in 20 months?

It's hard to believe but there are some people on ATOT that don't have enough extra money coming in each month to save $12k in 20 months. Crazy, I know!

One thing that might be a better deal though is saving as much as possible each month until the car comes off the lease, then only taking out the car loan for the remainder.

 

[soulcougher73]

This just strikes me as too much work for too little gain.

This.

 

[IronWing]

It's hard to believe but there are some people on ATOT that don't have enough extra money coming in each month to save $12k in 20 months. Crazy, I know!

One thing that might be a better deal though is saving as much as possible each month until the car comes off the lease, then only taking out the car loan for the remainder.

Under the mortgage scenario with a 12k loan he'll have to come up with almost $7k extra in those 20 months. While that is less than 12k, it is still quite a bit. If he were to save the money now and then take a 3 year, 5.5% loan on the balance down the road he would pay ~$435 in interest. Subtract a bit from that for interest earned on the savings over the 20 months and he would save ~$450 or so over the car loan alone. Probably the best route overall. It keeps any loan tied to the car, not the house and saves a good chunk over financing the whole 12k.

 

[spidey07]

Wells HELOCs start at 6.6% per their website. If I punch in $10k on the $120K house with no first mortgage, and excellent credit in my fair state the website says 8.75%.

Something is wrong then. Most HELOCs are prime + .5%

OP - just get a 2 year loan on the car if you can't pay cash. You should be able to get 2-3% interest and that way the amount of interest you pay will be very little.

 

[Kntx]

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[AMDZen]

Where are you looking at rates. I am pre-approved right this minute for a 3.39% used car rate for 36 months. 3.99% for 60 months.

What bank?

 

[melly]

Why mortgage your house just for a car? Doesn't make sense to me. Granted, the entire mortgage structure in the U.S. doesn't make sense to me...never borrow against your house. Property appreciates (usually); whereas cars lose half of their value once driven off the lot. What money do you plan on using to pay back this second mortgage, and why can't that money be used to put towards the cost of buying out the car when it's time?

 

[Train]

This just strikes me as too much work for too little gain.

Agreed, I wouldn't mess with the mortgage.

Instead see about buying out the car early, and getting a great rate on that.

USAA refinanced my car loan for 3.99% which is a damn good rate for a car. I'm paying extra on it so 5 year loan will be paid off in only 14 months, overall I paid next to nothing in interest on the car.

Might be worth asking the car dealer for a current payoff quote, then shopping around for a good rate on that.