An Odd Way To Buy A New Car

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RSteve

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One of my friends decided to buy a new car using equity in his house. It didn't make sense to me, but maybe it does. He owns his home, without a mortgage. It's a nice house in the suburbs, probably would sell for $450,000. He's been there for about 30 years. He traded in, I'd guess, about a five year old Lexus with low miles. He's like me, a widower. in his late 70s and doesn't drive much. I'm puzzled why he decided to buy a new car, but he said he wanted one more new car. He's sufficiently well fixed that he could have paid cash for the new car.
Given his age, I'm surprised the bank gave him a 30-year mortgage. His rationale was he wanted a new car, the bank gave him a < 3% loan, his monthly mortgage payment will be less than $100 and within three years his house will likely appreciate the amount of the loan. Does this make sense?
 

RSteve

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Depends on what kind of car he bought.
Another Lexus.

Friday morning: I just got off the phone with him to make lunch plans.
"Isn't it a pain in the ass to remember to make a mortgage payment?"
"I have it set up to automatically transfer from my money market account. It's like it doesn't even exist. When I quit driving, I'll sell the house, move into a close-in apartment and pay off the loan."

It still makes no sense to me.
 
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ftrplt

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Maybe for tax purposes! He can write off the (minimal) interest on the mortgage/HELOC. No can do on an auto loan. Plus he keeps his capital invested. Just a guess on my part! FTRPLT
 

Ranger107

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I can see his rational. As ftrplt said it makes sense to keep his capital in the bank and have a minimal mortgage payment. Banks don't care about your age when making a loan, especially an equity loan, as they know if he passes away the house will likely be sold and they get their loan paid off. When I bought my used Ram 1500 I got a five year loan at less than 2%. Didn't make sense to take 30K out of my capital that was yielding 6%.
 

Niblick

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Maybe for tax purposes! He can write off the (minimal) interest on the mortgage/HELOC. No can do on an auto loan. Plus he keeps his capital invested. Just a guess on my part! FTRPLT
I was thinking he was wanting to use it for tax purposes whether or not if its worth it. You could run some numbers through turbo tax both ways or talk to an accountant to find out.
 

RSteve

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Here's the laugher. I saw the new Lexus today. It's quite the vehicle. My friend, the buyer, says there's so much electronics that he doesn't quite understand, the last time he thought he'd used his turn signal, instead tripped the windshield washer. He said he figures he'll get the hang of the new car, but wishes he hadn't made the switch from his 5-year-old Lexus.
 

Tbradsim

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Sorry, I don’t agree, not smart to mortgage your home for a car, especially if he had the money to buy one. Just my old Cajun Math, keep the home free!
 

RSteve

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Sorry, I don’t agree, not smart to mortgage your home for a car, especially if he had the money to buy one. Just my old Cajun Math, keep the home free!
As the car buyer said, with current real estate appreciation in double digits, it's basically a free car. I've always been very cautious with my home; not wanting any risk and it's been a financial mistake. One of my friends insists on constantly pulling the equity out of his house, and investing it at a rate higher than the mortgage interest. Years ago, he inherited his parents' home. He moved into the home and immediately took out the largest mortgage he could get on the house. He invested in mutual funds that were paying 12 to 16% annually. Within a decade he was quite a wealthy man. At 16% annual interest, money doubles at 4.5 years.
 

Ranger107

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As the car buyer said, with current real estate appreciation in double digits, it's basically a free car. I've always been very cautious with my home; not wanting any risk and it's been a financial mistake. One of my friends insists on constantly pulling the equity out of his house, and investing it at a rate higher than the mortgage interest. Years ago, he inherited his parents' home. He moved into the home and immediately took out the largest mortgage he could get on the house. He invested in mutual funds that were paying 12 to 16% annually. Within a decade he was quite a wealthy man. At 16% annual interest, money doubles at 4.5 years.
Years ago that was true but in todays market one is lucky to see 6/7% interest unless you are willing to take some pretty big risks.
 
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