Interested in Interest
August 4, 2010 6:43 PM Subscribe
Please help me think through a financial decision involving a mortgage refinance and an auto loan.
I'm not a numbers person. Please help me understand this:
My hubby and I are in the midst of refinancing our mortgage. We didn't have any desperate need to get out of our current mortgage, but with rates so very low, we decided to go for it. We're working with a broker who has pulled our credit scores -- all in the high 700s/low 800s. We're almost ready to lock a rate, though we've spent the last two or three days gambling to see if they'll go lower.
Then...my husband totaled his car. (It's a long story.) So we're going to need a new car, and despite the settlement money we'll still need a loan. (It was an older car, not worth enough to entirely replace it.)
We could:
ADD THE AUTO MONEY INTO THE MORTGAGE: Broker says no problem. We'll qualify, we have enough value in our home, our credit is good enough, etc. The upside to this: the auto money will now fold into our mortgage deduction. The downside: we'll be paying for that car for 30 years. Rate would be somewhere around 4.5, 30 year fixed.
GET AN AUTO LOAN: Broker says our scores are high enough that this will not affect our mortgage refinance. Our credit union rate would be somewhere between 2.9 - 3.5. Upside: not paying for the car for 30 years. Downside: payments are not deductible.
One other element -- if we go with a Civic, Honda's current financing is at 0.9%.
A couple of other details: The auto insurance settlement will probably be around $9000. We will probably buy a car that costs between $18,000 - 22,000. We will definitely buy a new, not used, car.
So...your advice, please? Is there something we're not thinking of here?
I'm not a numbers person. Please help me understand this:
My hubby and I are in the midst of refinancing our mortgage. We didn't have any desperate need to get out of our current mortgage, but with rates so very low, we decided to go for it. We're working with a broker who has pulled our credit scores -- all in the high 700s/low 800s. We're almost ready to lock a rate, though we've spent the last two or three days gambling to see if they'll go lower.
Then...my husband totaled his car. (It's a long story.) So we're going to need a new car, and despite the settlement money we'll still need a loan. (It was an older car, not worth enough to entirely replace it.)
We could:
ADD THE AUTO MONEY INTO THE MORTGAGE: Broker says no problem. We'll qualify, we have enough value in our home, our credit is good enough, etc. The upside to this: the auto money will now fold into our mortgage deduction. The downside: we'll be paying for that car for 30 years. Rate would be somewhere around 4.5, 30 year fixed.
GET AN AUTO LOAN: Broker says our scores are high enough that this will not affect our mortgage refinance. Our credit union rate would be somewhere between 2.9 - 3.5. Upside: not paying for the car for 30 years. Downside: payments are not deductible.
One other element -- if we go with a Civic, Honda's current financing is at 0.9%.
A couple of other details: The auto insurance settlement will probably be around $9000. We will probably buy a car that costs between $18,000 - 22,000. We will definitely buy a new, not used, car.
So...your advice, please? Is there something we're not thinking of here?
Response by poster: This is in Los Angeles. We've lived in our home for about 15 years and have no plans to move. I would put it near 100% that we'd be in this home 10 years from now.
We are waiting on our appraisal, but we believe our house will appraise for about twice as much as our current mortgage number. (Yes, a steep drop from top-of-market days, but since we bought so long ago we're pretty well insulated.)
posted by BlahLaLa at 7:06 PM on August 4, 2010
We are waiting on our appraisal, but we believe our house will appraise for about twice as much as our current mortgage number. (Yes, a steep drop from top-of-market days, but since we bought so long ago we're pretty well insulated.)
posted by BlahLaLa at 7:06 PM on August 4, 2010
If you have equity in the house, did you think about a getting a line of credit?
In the distant past we did a refi + line of credit at the same time. It really was just signing one more set of papers. I'm not sure about the process now - it might be harder, but with a good appraisal I think most things are still possible.
You could then use the line of credit for the car - still take advantage of the interest deduction and then pay it off over a shorter time frame...
Side advantage, you will have a line of credit for future use.
Side disadvantage, you will not get as favorable a rate as either the 30 yr fixed or incentive auto financing.
posted by NoDef at 7:30 PM on August 4, 2010
In the distant past we did a refi + line of credit at the same time. It really was just signing one more set of papers. I'm not sure about the process now - it might be harder, but with a good appraisal I think most things are still possible.
You could then use the line of credit for the car - still take advantage of the interest deduction and then pay it off over a shorter time frame...
Side advantage, you will have a line of credit for future use.
Side disadvantage, you will not get as favorable a rate as either the 30 yr fixed or incentive auto financing.
posted by NoDef at 7:30 PM on August 4, 2010
Best answer: I'd think you're better off taking the car loan. Two reasons:
1) if you roll it into your housing loan, you'll end up paying about eight times as much interest over the life of the loan;
2) the mortgage interest tax deduction will only reduce the interest amount by one-fifth to one-third, depending on your tax bracket.
You'd still end up paying less interest if you took the car loan, if my math isn't completely haywire.
posted by The Shiny Thing at 8:05 PM on August 4, 2010 [1 favorite]
1) if you roll it into your housing loan, you'll end up paying about eight times as much interest over the life of the loan;
2) the mortgage interest tax deduction will only reduce the interest amount by one-fifth to one-third, depending on your tax bracket.
You'd still end up paying less interest if you took the car loan, if my math isn't completely haywire.
posted by The Shiny Thing at 8:05 PM on August 4, 2010 [1 favorite]
Best answer: If you have a little financial discipline, I'd suggest taking out a single loan.
We needed to refinance and purchase a car at the same time, and we took out extra on the home refinance to purchase the car. We did this because we got a lower interest rate and it was less stressful to purchase the car having the financing in hand. It worked out really well in the long run.
Our refinance was a home equity loan for 10 years, but I didn't want to pay for a car for 10 years. So I used an online calculator to figure out what the payment would be for the car for a 4-year term. Then, I calculated what portion of our home equity payment was for the car. I subtracted this from the 4-year payment amount to figure out how much extra I should be paying. I set up an automatic transfer for this amount into savings, and every few months, I used the amount I collected to pay off the principle. After 4 years, when the car was "paid off", I kept putting the extra money aside and into the mortgage principle. We ended up paying off the loan whole loan in 7 years, not 10.
For example, suppose you borrow $100,000, and $20,000 is for the car, and $80,000 is for the mortgage refi. If your total payment is $1000, then $200 is what you're paying on the car. If your payment is $1000 a month, you're only paying $200 for the car. If a 4 year loan at the same interest would be $450 a month, you'd set aside $250 and use this to pay extra on the principle. Keep doing this until the whole loan is paid off and you'll pay yours off early too.
posted by zinfandel at 8:55 PM on August 4, 2010
We needed to refinance and purchase a car at the same time, and we took out extra on the home refinance to purchase the car. We did this because we got a lower interest rate and it was less stressful to purchase the car having the financing in hand. It worked out really well in the long run.
Our refinance was a home equity loan for 10 years, but I didn't want to pay for a car for 10 years. So I used an online calculator to figure out what the payment would be for the car for a 4-year term. Then, I calculated what portion of our home equity payment was for the car. I subtracted this from the 4-year payment amount to figure out how much extra I should be paying. I set up an automatic transfer for this amount into savings, and every few months, I used the amount I collected to pay off the principle. After 4 years, when the car was "paid off", I kept putting the extra money aside and into the mortgage principle. We ended up paying off the loan whole loan in 7 years, not 10.
For example, suppose you borrow $100,000, and $20,000 is for the car, and $80,000 is for the mortgage refi. If your total payment is $1000, then $200 is what you're paying on the car. If your payment is $1000 a month, you're only paying $200 for the car. If a 4 year loan at the same interest would be $450 a month, you'd set aside $250 and use this to pay extra on the principle. Keep doing this until the whole loan is paid off and you'll pay yours off early too.
posted by zinfandel at 8:55 PM on August 4, 2010
Zinfandel's got the right idea. Be careful and read the fine print of your mortgage contract; prepayment penalties can show up in mortgages and can be substantial. On the other hand, they're usually triggered on something like 20 percent or more of the principle in one year. If you have a big loan, the whole car may fall under that, you might be okay even with one in place.
Cheap dealer financing is offered for two reasons: to get you in the door, and to keep you away from used cars. It's definitely attractive if you know you're not in the market for a car 1 or 2 years old (where the bulk of the depreciation is). Of course, you're not expected to qualify for that rate, and the financing guy will try to talk you out of it. And the payment plan will be as short as possible to exclude as many people who didn't read the fine print until it's too late.
posted by pwnguin at 9:57 PM on August 4, 2010
Cheap dealer financing is offered for two reasons: to get you in the door, and to keep you away from used cars. It's definitely attractive if you know you're not in the market for a car 1 or 2 years old (where the bulk of the depreciation is). Of course, you're not expected to qualify for that rate, and the financing guy will try to talk you out of it. And the payment plan will be as short as possible to exclude as many people who didn't read the fine print until it's too late.
posted by pwnguin at 9:57 PM on August 4, 2010
Cost of money should be considered. Do the math. What is your total cost for the car going to be with the auto loan? Then compare that against what the total cost of the mortgage (over the whole term) with and without the car added to it. I'm inclined to think it'll be cheaper to go with the auto loan separately.
In general, never, EVER go by a monthly payment figure alone. Way too many people make that mistake and financial institutes reap the rewards for it.
posted by wkearney99 at 10:31 AM on August 5, 2010
In general, never, EVER go by a monthly payment figure alone. Way too many people make that mistake and financial institutes reap the rewards for it.
posted by wkearney99 at 10:31 AM on August 5, 2010
Response by poster: Thanks, everybody. We ended up keeping the loans separate. The 0.9% interest rate Honda was offering was just too good to pass up. When we signed the papers, the "full disclosure" document showed that we'll only be paying a few hundred dollar of interest over the life of the loan.
posted by BlahLaLa at 1:09 PM on September 4, 2010
posted by BlahLaLa at 1:09 PM on September 4, 2010
This thread is closed to new comments.
One general concern would be, how would adding an additional 10 or 15K to your mortgage affect the amount of equity you would expect to end up with if you ended up having to move in the next five years or so? It could be that you've lived in your current home 15 years, plan to stay another 20, and have the kind of jobs that allow you to be fairly certain you'll be able to do that.
All I can say is this --- house prices have been stagnant or declining in vast swaths of the country for the past three years; given the current economic conditions, we might not see them get back to where they were in the mid-2000s for years. At least, I wouldn't want to count on it. If you end up having to sell your home and move during that time, $15 grand might be the difference in having extra cash to pay for repairs/moving/closing costs and having to take out a bigger mortgage, when the rates may not be so favorable.
It could well be, of course, that your in a location where housing values have held up and you've already got substantial equity in your home. If that's the case, maybe this isn't such a concern.
posted by Diablevert at 7:02 PM on August 4, 2010