Honest Mortgage Answers

Should I pay off my car?

I know you are probably as sick of these radio and TV commercials advertising mortgage companies as I am. I really wish they would just go away.

Some lenders are suggesting that you should pay off your debt using equity in your home. I agree with this to some extent. It is perfectly fine to pay off your credit cards using your equity. However, they also suggest that you pay off installment debt such as car loans.

My opinion is that this is the wrong way to become debt free and it is unethical for them to push this as an option.

Let me explain why.

Most car loans are not longer than 5 years. Yes they have high payments, but you will have it paid off within 60 months. If you include the car loan with your mortgage, you actually turn a 5 year loan into a 30 year mortgage.

Let’s do the math. Say you currently have a $750 house payment and a $250 car payment. You decide to refinance your home and now you have a mortgage payment of $800 and your car is paid off. So you are saving $200 a month. Sounds good doesn't it?

WRONG!!!!!

You saved $200 a month for 60 months, a total of $12,000. But you are now paying an extra $50 for 30 years, an extra $6,000. So instead of paying your car off in a few years, you will now have this payment until 2036. That’s assuming you are on pace to pay it off in 5 years. What if you only have 3 years left? Using that same math you save a total $7,200 over the next 36 months. However, because you are paying $50 for 30 years, you wind up paying an extra $10,800.

Not only did your mortgage payment go up, but what is going to happen when it is time to get a new car? Most likely you are going to need to get another car loan. Not only did your mortgage payment go up $50, but you are now going to have to pay an extra few hundred for a new car loan. As a result you have lost equity in your home and you are even further in debt.

Why is this different then revolving debt such as Credit Cards?

After you make your credit card payment you might notice that your balance has hardly changed. If you continue to make the minimum payment it will take years to pay it off, much longer then most installment loans. Also, most people they are paying anywhere from 15% to 25% interest on their credit cards. I much rather have my clients pay a tax deductible low interest rate then that high interest rate.

I have to be honest and admit that I have refinanced and paid off quite a few installment loans through out my career. My job is to give my clients the pro’s and con’s of each scenario. Not to make the decision for them. After providing all the information, if they still want to pay off an installment loan, of course I will help the client with a great mortgage.

My suggestion:

Do what ever you can do to pay off your credit cards first. If there is equity in your home making 0% interest, then look into opening a tax deductible line of credit and put your equity to work and pay off the debt.

Another possibility is to refinance your first mortgage to a lower payment and with the money you save, put towards paying off your installment loans.

If you have any questions or if you want me to review your current situation please feel free to contact me with the information I provided below.

Thank you,

Jason Lash
Branch Manager
Family Home Lending
866-366-5724
http://www.VirtualLoanPro.com
http://www.HomeCredible.com
http://www.HonestMortgageAnswers.com

Posted by Jason Lash at 10:02 AM