Using Your Mortgage As Car Finance

If you’re like a lot of people, loans of any kind probably stress you out. Interest rates, loan terms, APR, are all loan lingo that can sound overwhelming and difficult to sort through. Finding the best loan for you will obviously be your priority, but may not be the priority for the lender.

When it comes time to buy a new car, you’re suddenly going to be forced with not only understanding these terms, but figuring out what a fair loan for you looks like, and what you can afford. Because of the complications of getting a loan, it can be extremely tempting to try and consolidate. With buying a car, one option to consolidate is to use your existing home mortgage to finance your car loan.

Just like almost everything in this world, there are pros and cons to doing this. You’ll want to thoroughly research your options and review this list to determine if this is the right course of action for you.  

PROS:

Interest rates

First, a little background for those of us who need help understanding the basic process.

Using your mortgage as vehicle finance simply means reconfiguring your existing home loan. You’ll need to refinance your home loan at a higher borrowing amount, which essentially gives you the money you need to buy a car.

One of the biggest pros of doing this is saving money from interest rates. Refinancing a mortgage can sometimes mean you can get a lower interest rate than you originally signed up. Interest rates are always fluctuating as the market climbs and falls, so if you refinance at the right time, rates may be lower. Lower interest rates mean that you’ll pay less interest by the end of your loan term, saving you money over the long run.

Some people refinance simply to get a lower interest rate, but others refinance for lower monthly payments or to shorten their loan term and pay it off earlier. This is especially helpful for small business owners who are looking at commercial vehicle finance, and need the extra equity to help their business get started.   

Ease

Another pro of refinancing is that it can be much easier to manage one loan and payment instead of a mortgage and a car loan. Simply tacking on the car loan means that everything is in one place and you have one payment to keep track of. This works really well for those of us who forget payments sometimes.

It also means that if you have questions, or need assistance with anything, you only have one place you need to be in contact with. Your mortgage broker becomes your one stop shop for all your questions and needs.

Change your loan type

If you previously signed up with an adjustable rate mortgage, this means that your mortgage is susceptible to interest rate changes and can potentially mean you end up paying more over time. Sometimes, this type of mortgage means interest rates will go down, but the risk is definitely there that it will go up instead. Refinancing can potentially give you the opportunity to switch to a fixed rate loan, which means you can lock in at a low rate and keep it for the entirety of the loan.

CONS:

Your credit

Your credit score is based on quite a few things, but a couple of main factors are how diversified your credit is, and your payment history. Having a separate car loan automatically means that you have multiple loans and therefore a more diverse credit history. If you pay your monthly payments on time consistently, with both your mortgage and your car loan, your credit score will actually increase because of your solid payment history.

Future lenders may also be more willing to give you a loan, and you will be more likely to get a better interest rate because of your high credit score. If you aren’t sure what your credit score is, use a credit score calculator to give you an idea of what to expect for an interest rate.

Fees

Refinancing a mortgage doesn’t usually happen for free. Your lender may choose to charge a fee, which can be a bit exorbitant. Make sure you find out what kind of fees you can expect by contacting your lender before you start looking at cars. Many lenders might charge a fee for checking your credit score, or a fee for appraising your home. You might also want to consider using a refinancing calculator to get an idea of how much it will cost you.

Limitations

Refinancing a loan isn’t something you get to do whenever you feel like it, or whenever interest rates are especially low. You may only be able to refinance once within a certain time frame, depending on your lender’s terms and conditions. This means that if you are in a place in life where you are in need of an emergency fund shortly after refinancing, or even just need to be able to pay for your child’s schooling or other large debts, you might not be able to. Before you consider refinancing, you should assess your current savings and make sure that you have enough set aside as an emergency fund, just in case.

Appraisal

Most refinancing companies will require your home to go through an appraisal. Depending on how much work you have or haven’t put into your home over the years, the appraisal may not be the same as when you first bought the house. If the appraisal is lower than the original assessment, it’s possible your refinancing request may get denied. This can mean a bit of a hit on your finances, as you’ve most likely already paid some of the fees and done the paperwork to start the refinancing process.

In the end, the decision to use your home mortgage to finance a new car is completely up to you. You will really want to assess if you can not only handle the additional payments, but if it makes financial sense considering the current interest rates and your monthly budget. Remember that refinancing is not a quick fix or a quick money maker, but rather a calculated move that should be carefully considered and taken seriously.

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