The most common method of car financing is through auto loans. However, you can finance your next car through a mortgage. But is financing a vehicle purchase through a mortgage the right idea?
The most common method of car financing is through auto loans. However, you can finance your next car through a mortgage. But is financing a vehicle purchase through a mortgage the right idea? This approach may require you to weigh the pros and cons of using a mortgage to finance your next car. Below we provide you with a comprehensive overview of these pros and cons.
What does a mortgage involve?
A mortgage involves borrowing money where one uses the value of their home as collateral. These loans have a low-interest rate and long repayment periods compared to auto loans.
You can use the mortgage money to purchase anything you desire, including a vehicle. The long repayment periods and interest rates may appear like a good deal. However, the fact that you will use your house as collateral for the loan makes it a risky car financing option.
The perceived pros of financing your car through a mortgage
There are limited benefits to using your mortgage to finance your car purchase. Here are a few pros of financing your vehicle through a mortgage.
1. Faster access to car purchasing cash
Mortgages provide an excellent way for borrowers to borrow money using their homes as security. Lending institutions consider these secured loans as less risky because of the collateral. After all, they can repossess your home if you default. Therefore, the chances of loan approval are very high.
This means mortgages will offer faster access to cash for car purchases. Furthermore, you will not need extensive credit checks because of the security.
2. Long repayment terms
Generally, lenders structure mortgages so you can repay the total amount over an extended period. Many auto loans have a repayment period of 24 to 60 months. On the other hand, a mortgage can last up to 30 or more years. If you borrow a specific amount for a car purchase, the long repayment period and low monthly payment can be a significant benefit.
The cons of financing your car through a mortgage
When using a mortgage to finance your car purchase, you will face more disadvantages than advantages. Below is a list of the cons of financing your car through a mortgage.
1. Higher costs
As stated above, mortgages often have lower interest rates and long repayment periods than auto loans. However, this low-interest rate does not mean the total amount you pay will be less. In fact, the opposite is true. Over time, the impacts of compounded interest rates will make the size of your debt bigger. That means you will pay more with a mortgage than with an auto loan.
2. Reduced equity
Using your mortgage to finance your car purchase will severely impact your overall equity. For instance, if you need some equity to settle an emergency, you will lose the chance to use your mortgage. Also, if you take a first and a second mortgage, you risk reducing your bottom line, especially if you wish to sell your house in the future.
3. Extended loan repayment period
Securing car financing via your mortgage can lead to an extended repayment period. If you opt to stick to the agreed loan payment terms, you will not be able to settle your home loan as soon as you had expected.
4. Risk of foreclosure
Mortgages require you to use your beloved house as collateral. Therefore, if you fail to pay the loan, you risk losing your home, which is a more vital asset. With a car loan, you will only risk losing your vehicle.
5. Availability of extra fees
Your mortgage lender may set some fees for refinancing, which may be very high. Also, some mortgages come with upfront closing costs. If you cannot afford the extra fees and the upfront closing costs, putting your money into a car down payment for an auto loan may be a better option.
6. Lack of financial gain
Generally, vehicles depreciate over time. Therefore, a more-than-a-decade mortgage repayment plan can mean you are paying for a car with little or no value. For instance, if your car becomes unusable, you will end up financing a new car while repaying your mortgage. This new car financing and repaying the mortgage at the same time can place your finances in a tight spot.
Should you use your mortgage to finance your car?
Using your mortgage to finance a car has many disadvantages, making it a bad vehicle financing idea. This is because homes appreciate in value while vehicles lose it rather quickly. Some experts establish that new cars lose about 20% of their value within the first year of purchase. Therefore, you will end up losing more when using mortgages to finance your next car.
Mortgages also have a more extended repayment period. That means you may be paying off your loan for a longer period than the useability of your car. This mortgage is more expensive than an auto loan in the long run.
When is using a mortgage for vehicle financing ideal?
Using a mortgage to finance your next car is not an ideal option. However, for some individuals, it may be the only viable option for them to buy their dream car. This viable option is more applicable to individuals with bad or no credit.
This is because auto loans for individuals with bad credit often have very high-interest rates compared to the low-interest rates of a mortgage. Furthermore, using your home as security makes your loan less risky.
What are the top things to consider before using a mortgage to finance your car?
If you decide to use your mortgage to finance your next car, despite the many drawbacks, here are some things to consider:
- The number of times you need to upgrade a vehicle: If you purchase a new vehicle every four years, you must determine whether your mortgage can afford that pressure.
- The availability of financial buffers to help with mortgage payments: During the entire mortgage repayment period, you may experience family situation change or employment changes. Therefore, consider whether you have an income certainty or financial buffer to boost you through hard times.
- Consider how many other loans or financial commitments you have: This consideration can help you plan your finances better.
Bottom Line
Using your mortgage to finance your car is possible, but it is not a good idea because of its many drawbacks. A mortgage has a long repayment period with low-interest rates. This long repayment period may appear as a benefit, but it is actually a disadvantage, as it facilitates more expensive loans.
