Pay off car or put more down on mortgage

[barc77]

Hi everyone,

First time poster here looking for some advice. I have started looking for a new house around 180 -210K range. With cash and equity in my current house I have should have 80-90K to work with for a down payment.

Now my dilemma.... My income is not to high, combined (wife and I) about 55K a year. We owe 14K on a car loan at 2.9% with about 4.5 years left. That and a small student loan are our only debt. The property taxes would be around 6,000 a year.

I am trying to decide if I should pay off the car or put more money down on the mortgage. If I am doing the math correctly it will cost more over the term of 30 years to pay off the car now, but an extra couple hundred dollars a month would go a long way in buying a nicer house now.

Any advice is appreciated.

[disneysteve]

Welcome.

I think you need to run the numbers. There are plenty of online calculators - check bankrate.com or money.com. Figure out how much you'd save by paying off the car and how much lower your payments would be with a larger house down payment. Without running the numbers, I'd suspect the house is the better place for your money. The total interest on the car loan at 2.9% is going to be minimal compared to what you'll pay on the house over 30 years.

[watsoninc]

Welcome as well.

My answer isn't purely mathematical. The student loans and car loans have added risk to your financial picture and will continue to eat at your cash flow every month until they are eliminated. My concern is that if you stretch yourselves too thin in purchasing the house, you won't have much financial wiggle room if something comes up. Also, with the additional cash flow generated by getting rid of the debt, you would have more money to invest and to pay off the home. Life is so much simpler without payments, so I would opt to get rid of the other loans first.

[arthurb999]

I'd say car and loan. and buy a house you can reasonably afford.

[disneysteve]

Originally Posted by arthurb999

I'd say car and loan. and buy a house you can reasonably afford.

I think that last part is very important. I was going to say that, but didn't want to jump on that point. If you earn 55K, you should not be looking at houses in the 180-210K range. You should be looking to spend 2.5-3 times income which would put you at a max of 165K. Stretching to afford more house can have a big impact on your overall financial situation.

[jIM_Ohio]

Have you checked what mortgage you would be approved for with the car and SL payment? Then check to see what loans you would be approved without the car and SL payments.

Their will be some ratios calculated (house to income and debt to income) and IMO you are better served paying off the debt so you keep the debt ratio low and be able to buy more house.

[Goldy1]

My dh bought our home for 150K in 1997 as a youngster(he was 24) He was making about 55 to 60 K at the time I think. (this included overtime but he made sure he could afford it on 40 hours)
It was a nice amount and ratio.

[swanson719]

If you go small and put the 80K down on the house, and still have the 14K car payment, and big on the house side - say the 210 - your looking at a 130K house note, and 14K car debt. A 30 yr note on the house puts you into a $900-$1100 monthly payment depending on your rate, taxes, and insurance. Versus a 15yr note, which has a lower rate, for about $200 a month more, and I highly advise because you save so much in interest. So go with $1300 a month on the mortgage, and call it $400 a month for the car w/ insurance. You're looking at roughly $1,700 a month in debt payments, not counting the student loan, which is about 37%+ of your gross monthly. Much too high.

On the other hand, go with paying off the car, and using a $66K down payment on the 180K house. Now your looking at $124K in debt, plus student loan, with no car payment. You'd be looking at about $850 a month on a 30 year fixed @ 5.0% and pay $115K in interest over the life of the loan. Put that into a 15 yr fixed at 4.75% and your looking at $1175 a month on the mortgage, but only $49K in interest. Saves you $625 a month, and around $65K in interest. Definitely would go with paying off the car, and the cheaper house. Get's you out of debt 15 years sooner, and saves you over $600 a month, and keeps your debt at about 27% monthly not counting your student loan. Not a bad place to be.

[puck36]

I would pay off the car first then work on the mortgage.

[barc77]

Thank you all for the advice.

After looking over everything I think I am going to pay off the car, 14K and student loan which is just under 4K, and go around 180K for a house.
I think that will put me in a good place with only debt from the house, and still have some money set aside for emergencys.

[DebbieL]

Originally Posted by disneysteve

I think that last part is very important. I was going to say that, but didn't want to jump on that point. If you earn 55K, you should not be looking at houses in the 180-210K range. You should be looking to spend 2.5-3 times income which would put you at a max of 165K. Stretching to afford more house can have a big impact on your overall financial situation.

He has equity from his current home (plus cash) that will give about a 80-90K down payment. I think that would make a 180-200K house very affordable.

[QueenOphelia]

Originally Posted by DebbieL

He has equity from his current home (plus cash) that will give about a 80-90K down payment. I think that would make a 180-200K house very affordable.

Totally agree with Debbie. The 2-3x salary ratio is valid for someone doing a small down payment. (10-20%)
If you are putting down 40-50 % that equation is not accurate.

[parafly]

I was under the impression that the "3x your salary" guideline was for the mortgage amount not the purchase amount.

[barc77]

After talking to a couple lendors over the past couple months they seem to be mainly concerned with the total monthly payment ( mortgage, tax, insurance) rather than the purchase price of the house.

So the 3x salary would be about right for the mortgage amount, not the purchase price.

[financialnut]

I agree with a lot of what is being said. Though it might make good financial sense to start paying on the home, it may make sense not to spread yourself too thin.

It's nice to have more cash to work with, especially when you're only making a combined 55k per year.

[scoutdjackson]

Psychologically I'd say it'd be best to pay of the car first. It's value depreciates every year while the house appreciates. The longer you take to pay off the car the longer you're paying for something that is worth less. I'm not sure how sound that advice is financially, but it's what came to my mind.

[wnlbutterfly]

When we bought, the lender was thrilled that the cars were paid off and even though they weren't the newest (one being 1989 van), he was able to list them as assets instead of listing a car loan as more debt load. The less outstanding debt the better.