Should you use a home equity loan to buy a boat?

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There are certainly times when a home equity loan (HEL) works well for buying a boat. For example, when:

1. Those specialist lenders’ attractive rates turn out to be unavailable for any but a tiny number of borrowers and boats
2. You have loads of “equity” (the amount by which the market value of your home exceeds your current mortgage balance) in your house or condo
3. A home equity loan offers you the most affordable monthly payment or the lowest total cost of borrowing

How much sense does it make to use a home equity loan for boat purchase? After all, there are plenty of specialist boat lenders who advertise extremely attractive rates. Of course, you may well find that home equity isn’t your best deal.

But you should certainly explore all your options before signing any agreement. This particularly applies to deals pushed on you by boat salespeople. Some “dealerships” make more profit from financing than from the boats they sell so they’re far from neutral advisors.

How do boat loans work?

Specialist boat lenders have often spent years developing products that are attractive to consumers. So it’s no surprise that some are very good.

However, many are constrained by rules that might not suit you. You may find exceptions, but many lenders won’t:

• Lend on boats that are more than 15 years old — that classic that’s stolen your heart may not be financeable with a specialist loan
• Offer loans for less than $25,000
• Lend on one boat if you already have a loan on another
• Get close to the ultra-low teaser rates they advertise — you almost certainly won’t get the advertised rate. Perhaps that ultra-low deal lasts for only a relatively brief introductory period or is available only on very short-term loans

There are a couple of other caveats. You need to check your contract for pre-payment penalties, which are fees the lender can levy if you want to pay down the debt early. And you should be aware your lender will require a boat survey, which is the marine equivalent of a home inspection. There are reports that an increasing proportion of craft are failing these surveys because many owners skimped on maintenance during the great recession.

If any of those put you off, you may need the flexibility of a home equity loan for a boat purchase.

Related: How does a home equity loan work?

Boat loan rates

As of this writing, advertised boat loan rates were as low as 2.99 percent APR. Yeah, right. Either the loan is one virtually nobody wants ($4 million for one month, perhaps) or it’s one virtually nobody will qualify for.

One mainstream lender was advertising 4.5 percent. However, that was for a hybrid loan: your rate was fixed for three years and then (appropriately!) floated for the remaining 17 years of its 20-year term.

As a rule, fixed-rate loans come with higher APRs than adjustable-rate ones. You also tend to pay lower rates if you borrow higher amounts. So a $1.5 million loan over five years could come in as low as 4.89 percent APR that day, which is pretty close to a home equity loan’s rate for a similar borrower.

However, most loans for more modest sums over longer periods were advertised at rates that began with a five or a six, appreciably higher than the headline rates for many home equity loans.

Of course, all advertised rates are only available to people with stellar credit scores and extremely comfortable financial situations. Expect to pay a lot more in interest if your credit’s even slightly tarnished or your household finances will be in the least bit tight once your boat loan payments kick in.

Pre-approval

No matter what form of financing you use to buy a boat, it’s a good idea to get pre-approved for your borrowing. This involves applying for your loan before you set about finding your perfect craft.

The lender will run credit checks and analyze your finances before writing a letter confirming you’re good for a certain sum. One advantage of this is that dealers and private sellers will take you more seriously. Imagine if you, with a pre-approval letter in your pocket, are in competition for a particular boat with someone who lacks such a letter. You’re going to be the favored bidder.

There’s another reason to get pre-approved. And it’s one that applies whether you’re buying a boat, a car, an RV or a home. The sales people you’re dealing with will often have financial incentives to get you to go with a particular lender. And, while you may get a great deal from such a salesperson, you more often won’t. Pre-approval gives you a benchmark against which to compare the dealer’s offer.

If that dealer’s deal is better than the one in your pocket, go for it. If not, you’ll have ammunition to fight back against high-pressure sales tactics.

Related: How long does it take to get pre-approved for a mortgage?

Tax implications of home equity loan for boat purchase

The 2017 federal tax cut didn’t do many favors for boat owners. True, you can still deduct state sales taxes, though you must choose to do so on either your state or federal returns — not both.

And the interest on some loans may still be deductible on those boats that qualify as a second home, which means they must have a:

• Sleeping berth
• Galley
• Properly installed head (lavatory)

However, that 2017 tax cut means you can’t deduct on any second home, including a boat, with a HEL. You can now deduct home equity borrowing only on improvements to your first home: the one on which the loan is secured. Most of us are bewildered by tax codes and, if you’re in our camp, you should consult a professional for the full, definitive story.

Why a home equity loan for boat purchase?

There’s a good chance a home equity lender will offer you a lower rate on a HEL than a boat loan. However, that, of course, is not the end of the story. HELs typically come with higher set-up charges (closing costs), though some lenders offer deals that they say have zero closing costs.

And HELs can last longer than some boat loans, which may push up the amount you pay in interest. Clearly, the longer you borrow a sum for, the more you’re going to pay for the privilege.

You need to check a variety of different loans and establish for each:

• How affordable the monthly payments are going to be within your household budget
• How much you’re going to pay over the lifetime of the loan, including set-up costs. That gives you your total cost of borrowing

Only you can decide which of those you regard as more important. If you have plenty of cash each month, you may prefer to make higher payments over a shorter period, which should reduce your total cost of borrowing. If your heart is set on a boat you can only just afford, you may prioritize lower payments, even if that deal costs you more in the long run.

Other advantages of HELs

A home equity loan is a second mortgage. That means it’s borrowing secured on your home. So you get your cash, free and clear.

The boat itself secures a boat loan. So the lender will likely have rules about the sort of craft it will lend against. With a HEL, you set your own rules.

So you can buy that classic, mahogany Chris Craft speedboat if you want. Few boat lenders would touch it. And you can buy your new boat without first selling your existing one. Boat lenders typically have strict one-boat-loan-at-a-time rules.

Finally, you can spend as little as you want on your new boat. However, the higher set-up costs of a HEL mean you’ll probably borrow with one of these only if an inexpensive boat is one of a list of purchases or expenditures (maybe you need to consolidate your debts) you want to make from the proceeds.

HELOCs and other alternatives to HELs

There are alternatives to using a home equity loan for boat purchases. Home equity lines of credit (HELOCs) are another way to tap into your home’s equity in an affordable way. These are a bit like a hybrid HEL/credit card.

Like a HEL, they come with low rates, provide you with money for any purpose and can last for 20 years or more. Like a credit card, you can borrow what you want (up to your credit limit) and repay and re-borrow whenever you want within that limit. And you pay interest only on your balances.

That flexibility can be valuable for boat owners. They may need funds occasionally for running expenses, upgrades, repairs, routine maintenance and other ownership costs.

HELOCs typically are less expensive to set up than HELs. However, they also have their downsides. They often come with a “draw period” of maybe 15 years during which you can access funds. But a “repayment period” of perhaps five years follows that.

During that time, you can’t borrow more and have to zero your balance. The transition between those two periods can be a real shock to unwary borrowers. HELOCs typically have variable rates while HELs usually have fixed ones.