Vehicle Loan vs Home Equity Loan

We have a truck loan at $29,000 at 3.9%, payment about $690/mo. I was thinking about transferring that debt to a fixed rate 8% home equity loan for 10 years after paying it down to $25,000. That would make my payment about $305/mo. Then I could use the freed up $385 to invest in a mutual fund at a higher rate of return, say 10% - 12%. I think this will be good for us as we will be making more money on that $385/mo than we were paying in interest on it with the original loan. The interest on the home equity loan will be tax deductible too, so that reduces the effective interest rate on that loan right? Original loan has 3.5 years left on it. I think I'm in a 28% tax bracket too if that is needed. Can someone confirm or tear down this thought for me?

Reply to
aweix
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You'll do yourself harm by extending the loan term out. If you have

3.5 years left on the vehicle loan, you need to calculate the payment on the home equity line with a 3.5 year repayment. Your current HELOC scheme will cost less evey month, but you'll be paying an additional 6.5 years.
Reply to
kastnna

This is a risky strategy. No mutual fund guarantees 10-12%. You are also lengthening your loan to longer than the probable life of the truck.

A more conservative approach would be to continue your current loan. When it pays off in 3.5 years, start putting the loan payment in a savings account. When your truck dies, you should be able to pay cash for the replacement.

-- Doug

Reply to
Douglas Johnson

Leaving the 25K in the car loan will cost you about $1700. Putting the loan in the HEL will cost $5800, save $1600 in taxes while your investment would earn you $1100 and cost $300 in taxes for the next

3.25 years, for a net cost of $3400. :-(

Putting that $4000 into the car loan will save you about $300 over the life of the loan. Investing it in something that earns 10% will make you $1400 - $390 taxes is about $1000 or a net $600 improvement...

So I'd say don't put the $4000 into the car loan or take out the HEL. Invest the $4000 in your 10% mutual fund and keep making the 690/mo payments. This will only make you an average of less than $200 per year though after taxes... If your time is worth $20/hr and you spent more than 6 minutes thinking about this, you ended up with a loss.

Someone check me on these numbers, I'm new at this.

Reply to
Daniel T.

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