Home equity loan to buy AC, good idea?

[FL030]

Looking to take about 60K out of my home to buy a bug smasher. Is this a really bad idea? I am not referring to aircraft ownership per say, as i am already there and doing that, but am speaking to the financing of it Should i pay cash and just use my equity line of credit for an emergency fund, or would this be simply good use of hard won equity?

Looking for input from any personal finance gurus out there that also can relate to a flying adiction!

 

[Timebuilder]

First, if you knew anything about my personal finances, you'd know that I am NOT a guru.

That said, I'd put the cash in an index tracking, no load mutal fund, with the index tracked being the S&P 500 or the Wilshire.

The loan, with a god rate (hopefully) can have deductible interest, which imediately makes it a better idea than any other type of loan, except an interest free loan from Dad.

You can put the plane on leaseback at a respectable school, and have those folks who share your love of flying help you pay for it.

That should save you enough to start an annual inspection and new engine savings account.

Good luck.

 

[aero99]

uhh...no, unless you want to live out of your plane.


Equity loans sound great and I am sure many people have done such even on this board for various reasons. A plane wouldn't be a good reason in my opinion.

Lets say you come upon hard times. What are you gonna pay first, the home loan or the plane loan? If you can only pay the home loan and not the plane, they can still take your house to pay for that plane that you missed a few payments on.

I have had many friends do equity loans for home improvement, education, etc.....I just wouldn't want the chance of something happening out of my control that ends up making me lose my house.

If you have decent credit why not just apply for a seperate loan for the plane? If you are already an owner as you state, it shouldn't be a problem.

Good luck.

 

[Timebuilder]

Cash from the index fund can handle an emergency payment or two so what you are proposing as a danger does not happen.

 

[aero99]

"That said, I'd put the cash in an index tracking, no load mutal fund, with the index tracked being the S&P 500 or the Wilshire. "


Timebuilder you have bigger ba....uh, thumbs than I do.

I didn't know you could even do that. And remeber you are repaying that loan, its not just "free" money. Usually the institution granting the loan wants to know what you are doing with the money and I can't see investing it in this day and age being a good choice. But, I am by no means a "guru" either.

 

[tarp]

Do the math.

The HELOC will be a prime plus somthing in your contract. These days I'd guess about 7.5 to 8.5% but you have to remember that most HELOC rates will move with the prime rate.

Uncle Sam will give you between 28% and 33% of that back depending on your tax bracket. Therefore, you are going to "rent" the money for about 5.5 to 6% per annum.

Can you take your "cash" money, go out and find a dependable investment that will return greater than lets say 7 to 8%? In this economy, I'd say you are going to hard pressed to find such a deal.

The problem for most buyers of aircraft is that they have to finance the purchase then use the cash reserves to pay for all the amenities and upgrades on the side.

Let's say you buy that $60,000 plane. 5% sales tax to your freindly state government is $3000 more. $800 for the pre-buy inspection. Hangar or tie down fees between $450 and $3900 per year. Insurance about $1200 a year. First annuals with discrepancies will run about $1500 to $2800 for simple aircraft. You gotta buy fuel, oil and any toys that move your spirit (read avionics upgrades, intercoms, stormscopes, etc.)

So, do you still have cash for all that? If not, your decision is made - use your HELOC. If yes, you are all set and are a very comfortable human being or you need to buy more airplane!!! [The buy more airplane comment is a joke ]

 

[Timebuilder]

I am making my suggestion on the supposition that he already has the plane, and wants only to change financing plans. That suggests to me that he already knows what happens to money and airplanes.

The leaseback should help him to approach a break-even point.

 

[azpilot]

If you do apply for a loan look at Deep Green Bank. deepgreenbank.com. They have a rate of 4.3%. It is always .5% below prime as well. So that is pretty **CENSORED****CENSORED****CENSORED****CENSORED** good. My plane loan is at 8.5%. I agree with one of the posters about is it worth losing your house over a plane? You also need to make sure that if you were forced to sell your house you could pay your 1st and 2nd off after commisions. Many of these loans will let you go way overboard. I have used mine to finance some of my training costs which is must better than Visa.

Good Luck

 

[JetPilot500]

If your financial situation is so tight that your only source of financing your aircraft would be your home equity, don't even think about it.

If you are in a good financial situation, then a HELOC is a great way to get a good rate, roughly around 5% right now and deductable.

Don't buy an airplane thinking it will be cheaper than renting...it's not. Don't think that if you will lease it back, then you can fly for free...you won't! Planes are not cheap no matter how you look at it. You can do all the calculating you want, but when the annual comes do and you find out you have problems, then what?

Good Luck,
JetPilot500

 

[gsrcrsx68]

If you would like to know about many mistakes with finances, just let me know.

2 of the biggest are
1. taking home equity loans and
2. investing in the stock market and

the biggest mistake is a combination of the above 2.

plane does not equal investment and therefore only buy with your luxury(disposable) money.

 

[FL030]

Thanks all for the respones.

I think that i have been an excellent money manager so far and really did not want to make a major blunder. For instance i bought this house in 1994 at a 6 and 7/8 rate on a 15 yr mortgage (huge built in interest savings), i max out the 401K (over 800/mo deducted off the gross pay). I have about 60k in cold hard savings in the co credit union and yes i admit this money is really going to waste, ( @ 4.25 dividend rate) but i sleep better at night because of it. I too drive old cars (14 and 13 yrs old) even though obviously i could afford a very nice automobile) The house is currently valued at about 300K and i owe maybe 110k on it, so i'm way on the upside there. Already i own a plane outright, (i'm an experienced a and p and parts costs have been very reasonable so far) just looking to upgrade and live a little more comfy and faster in the skies) Sorta like a once in a lifetime purchase to have for the duration.... I'm thinking at this point, maybe a combination of cash and a more tradional loan to get the plane and just leave the house out of it, although the additional interst costs will be substantial. (and not deductable obvisously) Also buying in CA is a big 8% sales tax ouch! Also i came to realize that having a house is hugely important (duh!) and perhaps something i had been taking for granted lately, where else am i going to work on my cars thx for the wake call on that score.

 

[gsrcrsx68]

Uhhmmm...i would just like to say I have no business offering you advice. You appear to be rock solid. 4.25% isn't money wasted. I have lost at least 4.25% per month for a few years now.

Plus I think your A & P changes everything. Please disregard my entire post as the ravings of a lunatic.

Old cars? Got an '83 ford bronco myself. That **CENSORED****CENSORED****CENSORED****CENSORED** 351W is a gas sucker.

 

[Timebuilder]

The Windsor motor? Just look at what you would pay to feed gas to a Cleveland...

 

[surfnole]

In your situation, I would go for the equity loan.

Two advantages

1) It will keep you liquid. Worse case scenario, you can always use the bank accout to pay off the loan.

2) The tax effect of the home equity loan would make your effective interest rate probably close to 3%.

 

[azpilot]

Don't buy an airplane thinking it will be cheaper than renting...it's not. Don't think that if you will lease it back, then you can fly for free...you won't! Planes are not cheap no matter how you look at it. You can do all the calculating you want, but when the annual comes do and you find out you have problems, then what?

While owning may not be cheaper than renting it has many benefits:

1) You know who flew the plane last and what condition it was in. (So many rental planes get banged around and the renters never report this. Also, many renters don't clean up the plane etc.)

2) Most rental planes never get washed so it is difficult to tell if anything on the dirty belly is old or new.
(I just had an experience working on my commercial rating where there was a pool of oil under the plane and the previous pilot didn't say anything. It turned out to just be clean oil that was spilled but it took a while to figure that out.)

3) You can't take most rental planes for a multi-day trip without paying for non-flying time. If you are looking to build hours by owning your own aircraft you can fly around the country to visit friends and family. If you want to spend a day or two during the trip and not fly it's not a problem.

4) What if you fly some place and want to stay a few hours longer? In many cases you can't because someone has the airplane right after you.

5) If you own you can get the plane any time you want. This is great for those spur of the moment trips.

6) You get familiar with the configuration of your airplane which makes it much easier to fly IFR vs. switching from one 172 to the next, for example.

Owning my airplane has not cost me that much more per hour than renting. I know I have logged more time in the past 2 years because of having my own aircraft.

I too would not lease back my airplane. I have heard of horror stories doing this. I take pride in keeping my plane well maintained and clean. Most leasebacks get used and abused. Yes there are some schools who keep well maintained clean aircraft but at many of those schools you will pay around $100 an hour for a new 172. Yikes. Then owning is cheaping than renting.

So the bottom line is that a lot of the benefits are not tangible from a cost standpoint but they are very tangible when it comes to enjoying the flying experience.

Good luck,
AZPilot