Friday, June 29, 2007
For What It's Worth: Big Purchase
We're surrounded by water and a lot of us dream of buying a boat, but how do we decide if we can afford that and other luxury items. In For What It's Worth, Seven's Craig Stevens looks at the issues you need to consider.
WSVN -- It's the time of year when you dream of the warm ocean waters.
Irene, boater: "We were a skiing family. We liked to do a lot of water skiing."
But, like a lot of boaters, this family decided bigger was better.
Irene, boater: "We went to the bank to check into boat loans, home equity loans or home equity line of credit to help us pay for the boat."
Seven's financial expert Allie Jablon says when deciding to make a big purchase, it is a good idea to shop around.
Allie Jablon, Seven's Financial Expert: "Look at all the interest rates that you're offered for these separate purchases, and then decide what's the smartest move for you."
For luxury items like boats, you are going to have three options: An unsecured loan from a bank, using your cash or credit cards and home equity based loans.
Allie Jablon, Seven's Financial Expert: "On average, you're going to see about a 14 percent interest rate on your credit cards. When you move to a home equity loan or a home equity lin of credit, you're usually going to see a rate around eight percent right now."
And there are a lot of factors to consider when figuring out which way to pay.
Allie Jablon, Seven's Financial Expert: "The option that you choose is going to be based on how long it's going to take you to pay for that purchase."
Allie says if it's a big ticket item that's going to take a while to pay off, you definitely want to lock in an interest rate like that offered with a home equity loan.
Allie Jablon, Seven's Financial Expert: "You pay a fixed rate and a fixed payment over the course of the loan."
But if it's a project like remodeling, or sending your child to college, where you will need various amounts of money over a long period of time, you want to go for a line of credit.
Allie Jablon, Seven's Financial Expert: "You decide when and how much you're going to want to withdraw from that line of credit."
The good thing about using the equity in your home to make big purchases is it's tax deductible. That's what happened to these folks.
Irene, boater: "The entire amount of interest on the home equity line is tax deductible."
The bad part about it is your home is on the line if you can't pay.
Allie Jablon, Seven's Financial Expert: "If you tap into your equity in the good times, for perhaps for the purchase of a boat, then what money do you have to tap into in the case of an emergency?"
Even though they're now paying a higher amount, they say the boat was a good buy.
Irene, boater: "It was a great purchase. We certainly enjoy it."
Craig Stevens: "And one more note: Allie says before you buy, you need to look at not just the purchase price, but include costs like fuel, insurance and maintenance to make sure you have money for those items in your budget as well.
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