Why Financing May Be A Better Decision
Are you considering paying cash for your next boat purchase? If so, it might be time to reconsider. We have all been trained to believe that financing large purchases ends up costing more money in the long run than if we just made the purchases upfront. While interest does add up over the life of a loan, it still may cost you less money to finance. Depending on the current interest rates, length of the loan, and investment earnings, you may actually earn more returns on the money sitting in your account than the money that you would lose in interest. So how do you know what decision is best for you?
Financing versus Cash
Every purchase will vary depending on your financing choices and the marketplace, but let’s look at an example of a situation where paying cash would cost more money over the life of the loan. For the sake of this example, we will say that you are taking out a loan of $100,000 over 20 years at a 5% fixed rate, which would require a monthly payment of $659.96 (including principal and interest).
Over an anticipated life of 60 months, the interest would cost you $23,052.17 on this loan. This expense would be avoided if the $100,000 was paid at the time of purchase. If, however, this $100,000 was placed in an investment account earning 10%, this amount would grow to $177,156 over the same 60 month time period. In this situation it is clear that getting a loan would be the wiser investment decision.
Home Mortgage Interest Deduction on Yacht Loans
Another potential benefit of financing your boat is that you may be able to take advantage of the Home Mortgage Interest Deduction. According to IRS Publication 936, “For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes (IRS, 2017).”
As of the 2018 reforms, you may deduct the interest on up to $750,000 of qualified home mortgages (IRS, 2018), but in order to fully deduct Home Mortgage Interest on loans after 1987, you must be either purchasing, building or improving your property.
Home Equity Loans
If you decide to finance your purchase with a Home Equity Loan, you may also deduct the interest, but only on loans up to $100,000. For purchases under $100,000 this may make sense, but for larger purchases it is typically better to go with a traditional boat loan. In either situation it may still be more cost effective to finance your boat than to pay cash.
With interest rates sitting where they are, and the availability of the tax deductions, it is certainly possible for you to save money by financing your boat. Of course every situation is different and it is always best to consult your tax preparer or CPA about your personal tax situation.Â
Resources
Interest on Home Equity Loans Often Still Deductible Under New Law. (2018, February 21). Retrieved October 2, 2018, from https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law
IRS Publication 936. Retrieved October 2,2018, from https://www.irs.gov/pub/irs-pdf/p936.pdf
In what world could I invest my $100,000 at 10% in the same market where a boat loan is at 5%? A more realistic comparison would be an 8% boat loan with a 4% return on your $100 investment.