Down Payment vs paying off car

[smurfn_z28]

Okay, here is the skinny. I just got married, and the only debt my wife and I have is 6000-7000 that is still owe on her car.

We both have high 700 to low 800 credit scores. My question is this: We have almost 50,000 in the bank now. Should we pay off the car or put that money into a down payment on a house? (We hope to buy a place within the year in the area of 200,000 or so)

So what is better to get the best terms on a mortgage? Not having ANY debt whatsoever, or a slightly larger down payment. The interest rate on the car is 5.9%

All advice and suggestions are welcome!

[ActYourWage]

Originally Posted by smurfn_z28

Okay, here is the skinny. I just got married, and the only debt my wife and I have is 6000-7000 that is still owe on her car.

We both have high 700 to low 800 credit scores. My question is this: We have almost 50,000 in the bank now. Should we pay off the car or put that money into a down payment on a house? (We hope to buy a place within the year in the area of 200,000 or so)

So what is better to get the best terms on a mortgage? Not having ANY debt whatsoever, or a slightly larger down payment. The interest rate on the car is 5.9%

All advice and suggestions are welcome!

I would pay the car off by the end of the day. That will leave you with around $43,000. Use the money you are paying on the car payment and pay toward the house down payment. Save hard for the next year and you are in great shape.

[jIM_Ohio]

What is the car payment? Generally speaking, I think the advice to pay off the car with cash, then apply the car payment towards the house fund is a sound move.

[smurfn_z28]

The car payment is only a little over 200 per month, but we have been paying 500 per month for a while now to pay it down quicker.

Everyone thinks that we should just pay it off now? I would agree, but I am looking somewhat short term here. We want to buy before the end of the year.

What would a mortgage lender rather see for a hypothetical 30yr fixed mortage for 200k? A 34,000 down payment, and ZERO debt, or 40,000 down, but 6,000 left on an auto loan?

To me, dumping that payment seems to be good Idea, but credit scores and banks don't always make sense in what they find important or responsible. (look at the mess this country in now) I just hope that I can get a mortgage rate lower than the 5.9% on the car if I pay it off.

[noppenbd]

I am guessing if you are not in jumbo loan territory (it sounds like you aren't) that once you get past 20% down you probably won't see much of an improvement in loan terms. So after factoring in closing costs, if you can end up with 20% you are probably going to get a great deal. In that case, pay off the car. It will feel great as well!

If you will not be able to get back up to 20% down after closing costs (for instance if you bought this year instead of next) you may be better off holding onto the car loan.

[jIM_Ohio]

Originally Posted by smurfn_z28

The car payment is only a little over 200 per month, but we have been paying 500 per month for a while now to pay it down quicker.

Everyone thinks that we should just pay it off now? I would agree, but I am looking somewhat short term here. We want to buy before the end of the year.

What would a mortgage lender rather see for a hypothetical 30yr fixed mortage for 200k? A 34,000 down payment, and ZERO debt, or 40,000 down, but 6,000 left on an auto loan?

To me, dumping that payment seems to be good Idea, but credit scores and banks don't always make sense in what they find important or responsible. (look at the mess this country in now) I just hope that I can get a mortgage rate lower than the 5.9% on the car if I pay it off.

The mortgage rate vs car interest rate is not really the point of interest.

You will need to look at debt to income ratio and house payment to income ratios. To find out what makes the most sense, you might think about applying for the mortgage now. Even if you do not have a specific house in mind, get approved for a given purchase amount, they will run your credit and you will then know where you stand now.

Ask the loan officer if paying off the car would help. It would certainly help the ratios, and it should also improve the credit score too.

$500/month over 12 months would add $6000 to the house fund after a 7k withdraw depleted it. I think this makes sense. You might even consider waiting 24 months, adding 12k and making a bigger down payment or having a larger emergency fund for the house.

One more point

So after factoring in closing costs, if you can end up with 20% you are probably going to get a great deal.

I disagree with a twist- the larger down payment might be the difference on whether you can afford a 15 yr or 30 year mortgage. The 15 year will have a lower interest rate, so I do think the down payment size matters.

[Terin]

Use the money to pay off the car, then use what is left over as a downpayment on a house. You only save like 20dollars per month for every thousand dollars you put down anyways. This way you stay with just a single credit debt instead of multiple.

[smurfn_z28]

I think we will just pay the damn thing off. In all likelihood, we should be able to save up close to that amount in the next few months and be back to where we started, especially if we have almost no bills.

Our lease is up at the end of august, and we were going to move in with my folks for a few months while I look for a job (I am finishing up grad school).

Saving 1500-2000 per month over the next 3-4 months after August is defiantly possible.

Thanks everybody, I think I made up my mind!

[ActYourWage]

Originally Posted by smurfn_z28

I think we will just pay the damn thing off. In all likelihood, we should be able to save up close to that amount in the next few months and be back to where we started, especially if we have almost no bills.

Our lease is up at the end of august, and we were going to move in with my folks for a few months while I look for a job (I am finishing up grad school).

Saving 1500-2000 per month over the next 3-4 months after August is defiantly possible.

Thanks everybody, I think I made up my mind!

Nice move! Then you can save hard on the house. You will be amazed how saving becomes enjoyable. For real!

[maat55]

Originally Posted by smurfn_z28

I think we will just pay the damn thing off. In all likelihood, we should be able to save up close to that amount in the next few months and be back to where we started, especially if we have almost no bills.

Our lease is up at the end of august, and we were going to move in with my folks for a few months while I look for a job (I am finishing up grad school).

Saving 1500-2000 per month over the next 3-4 months after August is defiantly possible.

Thanks everybody, I think I made up my mind!

If you had to wait a couple more months, no biggy. I would suggest that you have an EF in place as well.

[Like2Plan]

Originally Posted by smurfn_z28

Okay, here is the skinny. I just got married, and the only debt my wife and I have is 6000-7000 that is still owe on her car.

We both have high 700 to low 800 credit scores. My question is this: We have almost 50,000 in the bank now. Should we pay off the car or put that money into a down payment on a house? (We hope to buy a place within the year in the area of 200,000 or so)

So what is better to get the best terms on a mortgage? Not having ANY debt whatsoever, or a slightly larger down payment. The interest rate on the car is 5.9%

All advice and suggestions are welcome!

smurfn_z28,
I like the idea of paying off the car, but I would wait to pay it off until after buying the house. I don't think the car loan is going to negatively impact you getting a mortgage as you both have excellant FICO scores.
What I have read about mortgages is the landscape of qualifying for a loan has changed--especially with Fanny Mae and Freddy Mac having problems.
You want to make sure you have at least 20% available as a down payment. This will also save you some money as you won't have to pay PMI. Whatever you don't need to qualify for the loan you want, you can keep in reserve to pay off the car after you close.

Have you shopped for a good mortgage broker? It would be a good idea to contact one and get some advice. You could also see about pre-qualifying for a loan.

[glock35ipsc]

Originally Posted by maat55

If you had to wait a couple more months, no biggy. I would suggest that you have an EF in place as well.

Haha, as I was reading the replies, this was going to be mine too!

I would pay off the car today, then sack as much as possible into an emergency fund (3-6 months worth of expenses), then put away as much as possible for a down payment. Go for the 15 year loan if at all possible. The great thing about 15 year loan is, they always pay off in 15 years!

Just some quick numbers:

$200,000 home - $40,000 down (20%) = $160,000 loan:

(Interest rates I got from Bankrate.com)

15y loan @ 5.95%, principal & interest payments are $1345.85. Total interest paid for 15 years: $82,254.

30y loan @ 6.41%, principal & interest payments are $1001.86. Total interest paid for 30 years is $200,667.

Out of debt 15 years sooner, and saved $118,413 in interest.

[Cylenchar]

Originally Posted by smurfn_z28

The car payment is only a little over 200 per month, but we have been paying 500 per month for a while now to pay it down quicker.

Everyone thinks that we should just pay it off now? I would agree, but I am looking somewhat short term here. We want to buy before the end of the year.

What would a mortgage lender rather see for a hypothetical 30yr fixed mortage for 200k? A 34,000 down payment, and ZERO debt, or 40,000 down, but 6,000 left on an auto loan?

To me, dumping that payment seems to be good Idea, but credit scores and banks don't always make sense in what they find important or responsible. (look at the mess this country in now) I just hope that I can get a mortgage rate lower than the 5.9% on the car if I pay it off.

I work in the mortgage industry, so here is my take: As long as you have at least 10 % down plus money for closing costs, pay off the car loan, the lower ratios will help you. Plus the payments will be slightly higher due to the loan amount being higher(about $50, so you end up saving about $150 a month by paying the car off. What you can then do is save that difference for either a down payment fund, or a home repair fund. And once you purchase the home, you could apply that $150 difference to extra monthly payments.

[GrimJack]

My take is you want to have a minimum of 20% down so that you don't have to pay PMI which is just flushing money down the drain. PMI is not for you, it is for who ever holds the paper and PMI can add a couple hundred dollars a month to your payments (I don't have the actual numbers handy er.. and haven't actually bought a house yet).