Monday, July 6, 2020

Second Mortgage?
by Scott Bilker
Scott Bilker is the author of the best-selling books, Talk Your Way Out of Credit Card Debt, Credit Card and Debt Management, and How to be more Credit Card and Debt Smart. He's also the founder of DebtSmart.com. More about and DebtSmart can be found in the online media kit.

Scott Bilker

Dear Scott,
We want to purchase a new truck in a few weeks and are undecided on how we wish to finance it. We have plenty of equity in our home. Would it be economical to  take out a second mortgage (approx. $28,000) for this purchase? Also, wouldn't the interest be tax deductible? A few years ago we obtained a second mortgage to pay off some high interest credit cards and was unable to deduct the interest. Of course we would shop around for the best rate and will compare closing costs. My questions are:

1. What are your thoughts on a second mortgage for a truck purchase.
2. What range is considered "good" for interest rates?
3. What can we expect to pay in closing costs for a second mortgage in the amount of $28,000?

Thanks! --Debbie

Answer
Debbie,
Thanks for writing!

The only thing that makes one loan better than another is the cost. A second mortgage is a loan with a fancy name and some tax advantages. To find the comparable rate for a non-tax advantage loan, simply subtract your tax bracket from 1 and multiply by the second mortgage rate.

For example, if you’re in the 15% tax bracket and you take a 9% APR second mortgage, it’s the same as a 7.65% APR credit card, personal, or car loan, (1-0.15)*9=7.65, when reduced by the tax benefit.

So if you can finance the car through the dealer, without them ripping you off somehow, for 2% or whatever their new-car financing deal is, you will be better off. 

>>What are your thoughts on a second mortgage for a truck purchase?

As long as it costs less, then I may do it. The only thing is that you’re putting your house up as collateral for the car.

>>What range is considered “good” for interest rates?

A good rate is the best rate you can get. The national average for mortgages are between 7% and 9%.

>>What can we expect to pay in closing costs for a second mortgage in the amount of $28,000?

I wouldn’t accept any closing costs for that loan. There are so many banks that would be willing to give you a second mortgage with no closing costs. Just keep looking. Also, you may do better financing the car through the dealer, or your current bank, with a new car loan.

The bottom line is to look into all your options. Calculate the cost of each loan and pick the best deal.

You can get my free software to help at:
http://www.debtsmart.com/pages/p_calc_5yr.html

Good luck and keep in touch!

Scott


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