Large Down Payment or Pay of Cars?

[luckybob]

I am in a position to purchase a house in the next 8-12 months. I am looking at a house no more than $200k (probably less, but this is my high end). I have the option of putting 20% down to avoid PMI and lower my mortgage payment, or out 15% down and pay off both my car loans.

Right now I am saving about $2.5k a month to go towards a down payment that would be just over $45k. I am paying ~$650 a month for two vehicles, one will be paid off may 2011 and the other nov 2014.

Is it financially better to pay my car loans off, giving me more money to put into the house, or would I be better off putting 20% down on the house and paying the cars off 6 months after the house purchase? Any additional savings will be going into the mortgage. SO if I paid the cars off I would be putting $2.5k + $650 + mortgage payment towards the house each month after buying a home.

Thanks for the help!

[Debt Vigilante]

I would stick with the 20% down for the home. What is the interest rate on your vehicles?

[jIM_Ohio]

I am in a position to purchase a house in the next 8-12 months. I am looking at a house no more than $200k (probably less, but this is my high end). I have the option of putting 20% down to avoid PMI and lower my mortgage payment, or out 15% down and pay off both my car loans.

Right now I am saving about $2.5k a month to go towards a down payment that would be just over $45k. I am paying ~$650 a month for two vehicles, one will be paid off may 2011 and the other nov 2014.

Is it financially better to pay my car loans off, giving me more money to put into the house, or would I be better off putting 20% down on the house and paying the cars off 6 months after the house purchase? Any additional savings will be going into the mortgage. SO if I paid the cars off I would be putting $2.5k + $650 + mortgage payment towards the house each month after buying a home.

Thanks for the help!

You need to put this on a timeline

If you saved what you save and paid off cars with no extra payments you have
Car 1 payoff May 2011
Car 2 payoff Nov 2014
House down payment paid in 2015 (or whatever date is)

then attach costs to all those numbers (principal and interest tracked separately on the cars)

If you paid off cars early it would be
Car 1 payoff XXX/2010
Car 2 payoff YYY/2011
House down payment paid in 2015 (or whatever date is)

then attach costs to all those numbers (principal and interest tracked separately on the cars)


What you are looking for is this- does paying off cars sooner save you enough in interest that you get the house sooner... or the opposite- does keeping car payments allow a 20% down payment to be reached sooner.

I don't know what your goal is, so not sure which is better- only you can decide that. I like suggesting problems like this have a time and cost associated with them.

[jpg7n16]

I would personally keep about 4 mos expenses in an EF, pay off all debt charging over 5%, then save an additional 20% for downpayment on a home.

[EconoMutt]

I would personally keep about 4 mos expenses in an EF, pay off all debt charging over 5%, then save an additional 20% for downpayment on a home.

I would agree.

[luckybob]

No matter what, i am buying a house within 12 months. I am done renting and paying more a month than if I were to just buy a house. So there is no putting off getting the house.

The cars would be nice to pay off, but I don't want them to get in my way of purchasing a house.

Car 1 ~11K 6% ends in nov 2014
Car 2 ~7k 4% ends in may 2011


So with that in mind, I am leaning more towards putting my 20% down on a house next year, and get the cars paid off within the next six months.

This only accounts for my house savings, I have a separate 401(k), short term savings, and "o" **** savings (3 months salary).

the reason I ask this is because my brother thinks it would be financially better to pay off my cars and only put 10-15% down on the house, eating the PMI. I am somewhat on the fence.

[jpg7n16]

So are you asking for advice? or asking a math question?

Advice would be - if you can wait 12 months, you can wait 16.

Math question would be dependent on how much PMI costs, the new appraisal fee after you've paid down the mortgage, plus the interest rate differential between the home and the car - adjusted for any tax benefit you might receive over that same period.

If your home is financed around 5%, and PMI is like 100 a month, it's unlikely that paying off the car would generate substantial enough interest savings to warrant eating PMI and a 2nd appraisal fee over such a short period of time.

[luckybob]

So are you asking for advice? or asking a math question?

Advice would be - if you can wait 12 months, you can wait 16.

Math question would be dependent on how much PMI costs, the new appraisal fee after you've paid down the mortgage, plus the interest rate differential between the home and the car - adjusted for any tax benefit you might receive over that same period.

If your home is financed around 5%, and PMI is like 100 a month, it's unlikely that paying off the car would generate substantial enough interest savings to warrant eating PMI and a 2nd appraisal fee over such a short period of time.

Both...Since I have no other debt other than my car loans, and the interest is not outrageous, I would assume more down on the house would be better. My brother just put the other idea in my head because he just bought a house with only like 4% down in an effort to pay off his cars first. I disagreed with him about the benefit of doing that.

My limit is 12 months because I do not want to sign another lease agreement. I want to have a house before my current lease is up. I am already paying ~$1400 a month that is getting me nowhere.

[jIM_Ohio]

No matter what, i am buying a house within 12 months. I am done renting and paying more a month than if I were to just buy a house. So there is no putting off getting the house.

The cars would be nice to pay off, but I don't want them to get in my way of purchasing a house.

Car 1 ~11K 6% ends in nov 2014
Car 2 ~7k 4% ends in may 2011


So with that in mind, I am leaning more towards putting my 20% down on a house next year, and get the cars paid off within the next six months.

This only accounts for my house savings, I have a separate 401(k), short term savings, and "o" **** savings (3 months salary).

the reason I ask this is because my brother thinks it would be financially better to pay off my cars and only put 10-15% down on the house, eating the PMI. I am somewhat on the fence.

Run the numbers

you have interest paid on car loans
you have interest paid on mortgage, plus the cost of the PMI

without knowing specific numbers, its tough to tell.

How much interest are you paying on car #1? if you pay it off early, how much interest is saved?
How much interest on car #2? If you pay it off early, how much interest is saved?

with the money you saved in interest, what would you do with money

a) apply it to house down payment
a1) apply it to house principal (after you purchases- almost same thing)
b)spend it
c) refinance house (and incur costs) to remove PMI
d) something else?

In this environment, I would not want any plans to buy a house, then have a plan to refinance in 3 years and remove PMI. Appraisal risk and rising interest rates would be the two sticking points.



---
you have established what you **want** to do without running numbers, and this is putting a firm date on part of the timeline- this might (or might not) lead you to a decision which costs you more money (or saves you more money). In general I suggest running numbers before applying a time table to any specific goal (such as buying a house).

For example if you pay extra on car 1 (6% loan) and pay car #2 as planned (payoff in may of 2011), could both cars be paid off in May of 2011 (or close to it?). You then have ~$3200/mo going to down payment fund, and simple math tells me that hits 40k in 12 months

so worst case is you have house in May of 2012. This is not so bad, because depending on house you want, its possible you would not find house in April and move in in May, you might need more lead time.

You would also have ~$3200/mo +rent available for a mortgage payment.
If you move in now, you have rent+$650 available for mortgage payment.

---
Much of this is happening because you don't have a clear goal. Buying a house is a one time deal, if you had a bigger plan, you would know what value that $3200 has to the various goals you set (like retirement, being debt free, installing a pool in house etc...).

[TheStreetCeo]

Paying interest on a depreciating asset is a bad idea. When you buy a home, the cost of living will increase. You'll inevitably notice things you want and need for the house. This will only hinder your prepayment to your cars. See if you can go month to month on your rent for a small increase.

[littleroc02us]

I would pay off the cars before I would buy the home. Can you hold off to save up the 20% after that? Believe me, when buying a house you don't want to have any debt because if an emergency arises or someone loses their job you will struggle to make the payments.