Car Debt vs. Home Improvement Brain Teaser

[fe2o3ez]

Hey everybody! I have an internal dilemma that you can help me think through - nice problem to have, but an issue nonetheless. Please read all facts before you decide, as there are lots of factors:

1. Last month, I changed out my vehicles and financed $28k on a new truck. Not the best decision, but I am thinking long-term here, like when my little guy starts driving late this decade. If all holds true with current finances, we will have it paid off in less than a year, about the time i reach 10,000 miles.

2. I just received a bonus at work, and after taxes and paying a couple smaller expenses, we have about 7,000 left to do with what we want.

3. We would like to finish our third story, which would add about 400 sq ft of space to our house. It would initially be a workout/media room, but I would configure it to include a full bath and closet, technically making it another bedroom and full bath to our existing house. Total guesstimate is around $10k.

4. The other home improvement option is to extend our deck to include a wrap around patio with a hot tub and stone fireplace. Guesstimate again, around $10k.

5. Monthly payment on truck (5.9% APR) is about $470 per month, with the first pmt due 4/6.

6. Let's assume we bring in about $2k extra each month to put toward debt and\or projects.

7. I am about $30k short of having 20% equity in my house (finance rate at 5.75%) and am paying PMI at $215 per month.

8. Bought my house a couple years ago at $118.32 per sqft and it was valued at $120 per. Value in the area seems to be holding steady at about the same.


In my position would you:

a. put all extra toward the truck, essentially buying down 1/4 of the loan?
b. complete one of the home improvement projects, paying the minimum on the truck until I can finish paying the remainder of the project, another month or so?
c. pay down some of the money toward the car, and use the rest to start the project?

Also, if you say I should start a project, which one do you expect will bring me the better bank for my buck?

(THIS KINDA REMINDS ME OF A STORY PROBLEM OUT OF FINANCE 101, BUT THIS IS REAL LIFE! )

[jIM_Ohio]

Option d)

pay on mortgage, remove PMI and increase cash flow by $215 per month

[disneysteve]

I agree with Jim. Get rid of the PMI. Once you free up that money, use it to accelerate the payment on the car and get out of debt. I wouldn't be doing any home improvements until the car loan was repaid.

[graceful]

Lol. Sounds like that show Sweat Equity.

Even though you provided a lot of information, I don't think there is enough of it to make a real suggestion.

For example, do you have any other debt or enough of an EF?

A few months ago, I would say definitely save more, pay down debt more, before paying for a home improvement project.

I would still say this but can see how tempting it is to put off paying off the car immediately versus paying off slower in order to have the immediate gratification of improving your home and therefore enjoying the improvements earlier. Assuming of course that you job and income is steady and you would have the car paid off and the home improvement costs paid off in XX months.

It would also depend on other factors such as how many bedrooms and bathrooms do you currently have? Going from a 2 bedroom, 1 bath house to a 3 bedroom, 2 bath house will increase the value of your home more than from a 3b/2ba to a 4b/3ba, I think. Do you NEED the extra room? Immediately?

How much of the work or labor are you putting in yourself? Are your cost "guesstimates" realistic?

Conservatively, since you said you would be able to pay off the car in less than a year, I would think the best thing would be to do that as scheduled, do as jIM advises and use the bonus to pay down the mortgage to try to get out of PMI, and THEN think out starting the project next Spring...

[LittleMsMom]

3. We would like to finish our third story, which would add about 400 sq ft of space to our house. It would initially be a workout/media room, but I would configure it to include a full bath and closet, technically making it another bedroom and full bath to our existing house. Total guesstimate is around $10k.

7. I am about $30k short of having 20% equity in my house (finance rate at 5.75%) and am paying PMI at $215 per month.

In regards to #3 Do you NEED this space? Is it going to be over improving for your area? How much value would this add to your home? If you spend the 10K will the house value go up enough to drop the PMI?

In my position would you:

a. put all extra toward the truck, essentially buying down 1/4 of the loan?
b. complete one of the home improvement projects, paying the minimum on the truck until I can finish paying the remainder of the project, another month or so?
c. pay down some of the money toward the car, and use the rest to start the project?

A. No what would this give you but a shorter loan; If you desided not to do any housework it would be a possible option with Item D.....What is the interest rate on your Car loan?
B. Headed this route with the extra bedroom option IF it is going to be a profit (if it will over improve for your area no). In our area the added deck you describe would only increase the house value by like 1K, the bedroom depending on the situation could vary increasing the house value by 5K to 30K depending on the situation.
C. No See item A, your project is 10K and you have 7K.
D. Option D is leave house as is...and paydown Mortgage so that you drop the PMI as soon as possible. What is your car loan interest?

[graceful]

Actually, since your car and mortgage rates are very similar, I agree that you should hold off on repaying the car loan and put all your extra payments toward the mortgage until you get out of the PMI and then concentrate on the car loan.

[fe2o3ez]

Thanks to all for your opinions and options.

Here's some additional info, for those that have requested it:

A. The interest rate on the truck is 5.99%, no early payment penalty.
B. The media\workout\bedroom is not NEEDED, but I would use it to help increase the house value, and reduce the amount of time before I have 20% equity, without requiring a huge investment.
C. I would perform a portion of the labor myself - drywall, painting, flooring, etc. The guesstimates have used many of these assumptions.
D. I have run the numbers before in regard to paying the cars off and snowballing into the mtg, or vice versa -- since I hate the PMI. Truth is, it doesn't make a huge difference. In this case, I would incur about $6200 in interest and PMI if I pay the mtg first, then the car. About $6000 if I reverse that order. With no changes to the house, in both scenarios, both the PMI and car payment would be gone in about 2 years.
E. Fortunately, we have no other real debt. No credit cards that carry a balance, student loans are gone, etc. EF isn't huge, but it is comfortable enough.
F. The change would make our 4BR/3.5BA a 5BR/4.5 BA, not completely out of the realm of our area, and it would be consistent with our large yard, etc.