Can You Use Home Equity to Buy a Car?

While you can use home equity to buy a car, that doesn’t necessarily mean you should. In fact, most financial professionals recommend against it. However, using your home equity in specific scenarios might be the most practical decision.

Even though home equity options may allow you to finance your auto purchase at potentially lower rates and payments, you must consider some serious downsides—including the risk of foreclosure if you fall behind on your loan, as well as the total interest you’ll pay over time.

How to Tap Home Equity

Tapping home equity is typically accomplished through one of three uniquely different types of loans:

• Home Equity Loan: Fixed-rate second mortgage providing a lump-sum cash payment
• HELOC: Variable-rate second mortgage with a revolving line of credit
• Cash-Out Refinance: Fixed or variable-rate first mortgage providing a lump-sum cash payment

	Home Equity Loans	HELOCs	Cash-Out Refinances
Loan Type	Second mortgage	Second mortgage	First mortgage
Interest Rate	Generally higher than average first-mortgage rates	Generally higher than average first-mortgage rates	Often closer to average first-mortgage rates
Rate Type	Fixed-rate	Adjustable-rate	Fixed or adjustable-rate
Repayment Term	5 to 20+ years	15 to 30 years	Typically 30 years
Payout	Lump sum	Revolving line of credit	Lump sum

Home Equity Loans

Home equity loans are a type of second mortgage that exists alongside your existing primary loan. With a home equity loan, you receive an upfront lump sum of cash to use for any purpose you choose, including buying a car.

Home equity loans typically have repayment terms of 5 to 20 years, though some lenders may offer longer terms. They generally carry a fixed interest rate with stable monthly payments that remain consistent for the life of the loan.

Depending on your financial profile and lender, home equity loans will commonly let you access up to 90% of your home’s current appraised value.

• Loan Type: Second mortgage
• Rate Type: Fixed
• Payout: Lump sum
• Best Use: Borrowers who want predictable payments and have a below-market rate on their existing mortgage

Advantages

• Access to a large percentage of your home equity
• Stable and predictable monthly payments
• Allows borrowers to retain existing mortgages with favorable rates

Disadvantages

• Higher interest rates than first-position primary mortgages
• Responsible for making payments on two separate home loans
• Potentially higher credit and financial requirements than a first-position loan

HELOCs

A home equity line of credit (HELOC) is another type of second mortgage that sits alongside your current loan. Rather than an upfront sum, HELOCs provide ongoing access to a revolving line of credit during their initial draw phase.

During this draw period, which commonly lasts between 5 and 10 years, you’re only responsible for making monthly interest payments on your running balance. Paying down your principal, however, allows you to reaccess the line of credit.

When your HELOC enters the repayment period, you can no longer draw from your line of credit and begin making monthly payments toward both interest and your principal balance. Most repayment periods last between 10 and 20 years.

Unlike home equity loans, HELOCs generally have variable interest rates that can rise or fall with changes in the broader financial markets. HELOCs often let you tap up to 90% of your home’s appraised value.

• Loan Type: Second mortgage
• Rate Type: Variable
• Payout: Revolving line of credit
• Best Use: Borrowers who may want to tap into their home equity multiple times within the near-to-mid future

Advantages

• Your line of credit can be used as many times as needed during the draw period
• Interest-only payments during the draw period equate to lower monthly costs
• Only pay interest on the funds used, not your entire line of credit

Disadvantages

• Variable interest rates can cause monthly payments to rise if overall rates increase
• Payments can jump once you reach the repayment period, especially in a rising rate environment
• Higher credit and financial requirements than a primary loan

Cash-Out Refinances

A cash-out refinance is a type of first-position loan that replaces your existing primary mortgage. With a cash-out refinance, you borrow more than you owe on your current loan, with the difference—minus closing costs—returned to you as a lump-sum cash payment.

Most cash-out refinances have a 30-year term, though shorter repayment schedules are available. Cash-out refinances can have both fixed and adjustable rates, although fixed-rate loans are far more common.

You can typically access up to 80% of your home’s appraised value with a cash-out refinance.

• Loan Type: First mortgage
• Rate Type: Fixed or variable
• Payout: Lump sum
• Best Use: Borrowers who can refinance at a lower rate than their current rate

Advantages

• Interest rates tend to be lower than second mortgage options
• Only responsible for a single monthly mortgage payment
• Qualifying can be easier than second-position loans

Disadvantages

• May provide access to less equity than a home equity loan or HELOC
• Since you will replace your existing loan, you are responsible for paying closing costs on your entire mortgage balance
• Resetting the clock on your whole mortgage can result in higher lifetime interest costs

Why Some Borrowers Use Home Equity to Buy a Car

While using home equity to buy a car isn’t typically recommended, there are some practical reasons borrowers may consider this route over traditional auto financing:

• Lower Interest Rates: Since your home secures your mortgage, you’ll likely qualify for a lower interest rate than on an auto loan, which, according to recent data from Cox Automotive, averages 9.41% on new vehicles and 14.19% when buying used.
• Longer Repayment Terms: Using home equity allows you to finance your auto purchase over an extended period—up to 30 years—which would significantly reduce your monthly costs. Traditional auto loans tend to span 3 to 7 years, with 72-month (6-year) loans being the most common.
• Larger Loan Amount: Depending on your financial profile and built-up equity, you may be able to access more funds by borrowing against your home—potentially allowing you to purchase a more expensive vehicle than you might otherwise qualify for.
• Flexible Use of Funds: Home equity proceeds can be used however you choose. In addition to buying a car, you could also consolidate debt, make home improvements, or cover other major expenses—all with a single draw.

The Risks of Using Home Equity for a Car Purchase

Despite the potential benefits, using home equity to buy a car isn’t the right call for most borrowers. Here are the key risks to weigh carefully:

• Risk of Foreclosure: Funding your auto purchase with home equity puts your home at risk if you can’t make your payments. With a standard auto loan, you primarily risk losing the vehicle—not your house.
• Long-Term Debt on a Short-Term Asset: Home equity loans commonly extend for 15, 20, or even 30 years—far longer than the useful life of most vehicles. The average age of a car on the road in the US is 12.8 years, meaning you could still be paying off a car long after it’s been scrapped.
• Closing Costs: Most auto loans have little to no origination fees, but tapping home equity typically comes with closing costs ranging from 2% to 5% of the total amount financed.
• Higher Overall Interest Costs: Despite the lower rate, the extended repayment term means you’ll likely pay far more in total interest. For example, a $40,000 vehicle financed over six years at 10% results in $13,354 in lifetime interest. That same amount financed over 20 years at 8% balloons to $40,298 in interest.

Home Equity vs. Auto Loan: Which Is Better?

Here’s a side-by-side look at the key structural differences between a traditional auto loan and using home equity to fund your vehicle purchase.

	Home Equity	Auto Loan
Interest Rate	Often lower on average	Often higher on average
Rate Type	Fixed or variable	Typically fixed
Secured By	Your home	Your vehicle
Repayment Terms	5 to 30 years	3 to 7 years
Overall Interest Costs	Can be higher over longer terms	Can be lower due to shorter terms
Closing Costs	2% to 5%	Lender-specific but often minimal

Cost Comparisons

Here’s a cost comparison of different methods for financing a vehicle purchase.

For these calculations, we’ll assume the HELOC maintains a constant interest rate and has a five-year draw period, during which you make monthly interest-only payments. For the cash-out refinance, we’ll calculate based only on the amount used to buy the car, since the overall cost varies depending on your existing mortgage balance.

	Auto Loan	Home Equity Loan	HELOC	Cash-Out Refinance
Loan Amount	$30,000	$30,000	$30,000	$30,000
Interest Rate	10%	7%	8%	6%
Term	5 years	15 years	15 years	30 years
Monthly Payment	$637	$270	Draw phase: $200 / Repayment phase: $364	$180
Total Interest	$8,245	$18,537	$25,678	$34,751
Total Cost	$38,245	$48,537	$55,678	$64,751

As this comparison illustrates, even though home equity options offer lower rates and monthly payments, you’ll wind up paying significantly more in total interest over the life of the loan due to the extended repayment term.

Tapping Home Equity to Buy a Car: Know the Risks

Using home equity to buy a car can make sense in certain situations, but it isn’t the best option for most borrowers. Because vehicles depreciate quickly and tapping home equity puts your property at risk, it’s worth carefully comparing all your options before making a decision.

Explore Your Home Equity Options with Refi.com

Whether a cash-out refinance, home equity loan, or HELOC makes the most sense for your situation, Refi.com can help you explore your options and find the right fit. Start your home equity application with Refi.com today and see what you qualify for in minutes.