Stupid Tax Tuesday - Paying Off Loans with Your Home Equity
November 27, 2007
photo by Eric Strauss
In thinking over what prompted me to start this blog, it became clear that learning from mistakes has got to be the biggest way people learn to get better at something. So, with that thought in mind, I’ve decided to dedicate Tuesdays to relay some money mistakes I’ve made and what I’ve learned from them. And more importantly, how not to repeat them. I’ll include my mistakes(oh, I’ve got a bunch), and maybe some mistakes by others that provide valuable lessons for all of us. Of course, I’m open to any of your stories on how you messed up, so please comment!
And I’m going to apply the term “Stupid Tax Tuesday” in honor of the “stupid tax” phrase coined by Dave Ramsey, someone who has given me a bunch of motivation. I hope I’m not infringing on any copyrights by using the term, if so somebody please let me know!
Back in the day when I thought I was a financial genius, I convinced myself to pay off my car loan by using my Home Equity Line of Credit. I reasoned that:
- I would have 1 less payment to make every month (the debt-consolidation tv commercials ringing in my ears - “1 easy payment”)
- The interest I pay every month on the car loan would now become tax-deductible. Yipee! More interest to itemize!
- I’d gain a great feeling of accomplishment by technically having “paid off” my car and would have the deed in my hands.
Technically, I was right on these points. But what I didn’t factor in was my ever-present lack of self control. Since the payment on my HELOC did not increase by the same amount as my old car payment, I didn’t feel the need to pay any more than the minimum on my HELOC.
The result was that it took 1.5 years longer to pay off my car that it would have if I had kept the original loan intact. I never actually figured out if the added interest deduction helped increase my tax deduction, but I doubt it, since I was making more money and jumped up to the next tax bracket.
Another reason this was a dumb move was that I exchanged non-mortgage debt for mortgage debt. It was unknown to me at the time, but this is a cardinal rule of personal finance: Unless you are deep in debt, it’s generally unwise to pay unsecured debt off with secured debt. If only because it puts your home more at risk if something should happen down the road.
Lesson Learned? Keep paying on your existing car loan and do your best to pay it off asap. Don’t roll it into a home equity product unless you have the discipline to pay it off at the same rate you would if you had not rolled it in.
Posted in Mortgage, Stupid Tax Tuesday
