Do I need to reduce monthly debt payments? Auto + House

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
frisbee
Posts: 122
Joined: Tue Jan 06, 2015 9:02 am

Do I need to reduce monthly debt payments? Auto + House

Post by frisbee » Fri May 25, 2018 7:30 am

I have a question about the impact of short term debt on the ability to get good mortgage rates. This is NOT a "can I afford it" question but more about how debt load is perceived by the bank.

DW & I are well off, no debt, approximately $3500/month free cash (above all expenses and maxed out tax advantaged savings), plus plenty of savings.

In the next 12 months (starting tomorrow), we'll be buying 2 new Honda Accords to replace the 170k mile models we currently drive. Additionally, we currently have a low cost apartment rental, but it's likely we'll need to relocate and buy a house.

My question pertains specifically to structuring the financing for the cars - Honda is offering a 36 month auto loan @ 1.9% with no down payment for about $750/month. So 2 cars = $1500/month. A mortgage in our area will be ~$1800/mo, so our monthly debt payments would balloon from $0 to $3300/month for 3 years until the cars are paid off. At a practical level, we can easily handle the payments (<20% of our gross income), but I'm concerned that a mortgage lender may not agree.

The alternative is to put about $7000 down on each car to drive the total monthly car payment to $1000/mo. Mathematically, it's better to save this down payment for the mortgage (because the car loan is 1.9% vs. a mortgage of 4%), but I don't know how the car payments will be perceived by the mortgage lender.

Am I over thinking this, or should I try to reduce the monthly car payment amounts.

Thanks in advance-Frisbee

il0kin
Posts: 71
Joined: Mon Feb 26, 2018 8:19 pm

Re: Do I need to reduce monthly debt payments? Auto + House

Post by il0kin » Fri May 25, 2018 7:37 am

I can’t say for sure but we had two car payments when we got a mortgage in 2015 and got competitive rates. You’ll get a mortgage just fine, if anything it will be a question of .1% better rate or something along those lines. Could you stagger the loans and try and run one Accord further so you only have one loan outstanding?

Edit: could you take a 60 month loan instead to reduce your monthly cash outflow on paper? Just pay it like it’s a 36 month.

SRenaeP
Posts: 714
Joined: Tue Jan 19, 2010 9:05 pm

Re: Do I need to reduce monthly debt payments? Auto + House

Post by SRenaeP » Fri May 25, 2018 7:49 am

$3500/mo free cash = $42k in a year. Buy one Honda for cash within the next 12 month. 170k miles isn't typically end of life for a Honda so drive that one until you have cash to pay for its replacement. Use the 'plenty of savings' for your down payment and quickly replenish with the $3500/mo free cash. KISS.

frisbee
Posts: 122
Joined: Tue Jan 06, 2015 9:02 am

Re: Do I need to reduce monthly debt payments? Auto + House

Post by frisbee » Fri May 25, 2018 7:52 am

I'm an engineer, so I take joy in optimizing and micromanaging (I think Bogleheads can relate!).

For the Honda car loans, the promotional 1.9% rate only applies to 36 mo loans - It climbs to 2.9% for 37-60 month loans, which will add ~$1000 to the purchase price of the car. It's easier to put a large down payment if (and only if) having lower monthly debt payments is recommended.

frisbee
Posts: 122
Joined: Tue Jan 06, 2015 9:02 am

Re: Do I need to reduce monthly debt payments? Auto + House

Post by frisbee » Fri May 25, 2018 8:10 am

SRenaeP wrote:
Fri May 25, 2018 7:49 am
$3500/mo free cash = $42k in a year. Buy one Honda for cash within the next 12 month. 170k miles isn't typically end of life for a Honda so drive that one until you have cash to pay for its replacement.
We've deferred car replacement longer than we should have (I'm a car guy; I've personally changed alternator, water pump, brakes in the past 12 months) - stuff keeps failing (suspension & emissions/exhaust on both cars needs to be replaced; Pennsylvania is Pothole hell and the road salt corroded some electronics on one car the dealer had to fix). We've earned a little luxury in our life.

chevca
Posts: 1546
Joined: Wed Jul 26, 2017 11:22 am

Re: Do I need to reduce monthly debt payments? Auto + House

Post by chevca » Fri May 25, 2018 8:15 am

At less than 20% of your gross income, I don't think the mortgage folks will be concerned at all about that. I believe they find up to 40% or so acceptable. You will be well under anything they would turn you down for.

Looking at your post again, are you saying the car payments alone would be less than 20% or the car payments and future mortgage payment would be less than 20% of your gross income?

mortfree
Posts: 958
Joined: Mon Sep 12, 2016 7:06 pm

Re: Do I need to reduce monthly debt payments? Auto + House

Post by mortfree » Fri May 25, 2018 8:25 am

other alternative, put $14,000 down (appx) on one car and finance that car for 60 months...

just curious, is your $1800 future mortgage payment just P&I or does it include taxes and insurance?

but in reality I think you are overthinking this based on the numbers presented and you can financially engineer these auto loans however you want.

Maybe even a few paychecks before you apply for the mortgage, drop the retirement contributions to get the match, if any, (temporarily) so you have a higher net take home... not sure if lenders look at net though

Sandi_k
Posts: 693
Joined: Sat May 16, 2015 11:55 am
Location: SF Bay Area

Re: Do I need to reduce monthly debt payments? Auto + House

Post by Sandi_k » Fri May 25, 2018 2:24 pm

The former "platinum" borrower standards were:

- PITI should be a ratio of 28% (or less) of your gross income
- All combined debt payments (including auto loans and PITI) should be 34% (or less).

If you're within that range, you should be fine.

finite_difference
Posts: 916
Joined: Thu Jul 09, 2015 7:00 pm

Re: Do I need to reduce monthly debt payments? Auto + House

Post by finite_difference » Fri May 25, 2018 6:09 pm

frisbee wrote:
Fri May 25, 2018 7:52 am
I'm an engineer, so I take joy in optimizing and micromanaging (I think Bogleheads can relate!).

For the Honda car loans, the promotional 1.9% rate only applies to 36 mo loans - It climbs to 2.9% for 37-60 month loans, which will add ~$1000 to the purchase price of the car. It's easier to put a large down payment if (and only if) having lower monthly debt payments is recommended.
1.9% is kind of a crappy rate. $750x36 is $27k which also seems a bit high for an Accord. You can probably negotiate quite a bit off the price and then also get a loan that’s more like ~1.5% for 60 months.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

User avatar
grabiner
Advisory Board
Posts: 22039
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Do I need to reduce monthly debt payments? Auto + House

Post by grabiner » Fri May 25, 2018 9:23 pm

frisbee wrote:
Fri May 25, 2018 7:30 am
My question pertains specifically to structuring the financing for the cars - Honda is offering a 36 month auto loan @ 1.9% with no down payment for about $750/month. So 2 cars = $1500/month.
If you have the money to pay cash, this isn't a particularly good deal. This loan is a negative portfolio of tax-free bonds maturing in 1-36 months, so it has a duration of just a year and a half. That is about the current yield on such a tax-free bond portfolio (Vanguard Short-Term Tax-Exempt), so keeping the money invested without taking any more risk is only break-even.

There are two indirect considerations. If you have a loan against your car, you will need to take a lower insurance deductible than you might want, which is an extra cost. On the other hand, opening an auto loan more than a year before you get a mortgage may improve your credit score; if you need this improvement to a mediocre score, having the loan could save you in mortgage interest rates.
Wiki David Grabiner

frisbee
Posts: 122
Joined: Tue Jan 06, 2015 9:02 am

Re: Do I need to reduce monthly debt payments? Auto + House

Post by frisbee » Mon May 28, 2018 6:52 pm

Hey all - Thanks for the recommendations - just to close out the story. I ended up financing about $19k @ 1.9% for 36mo = $550/mo. The loan rate/term was Honda Sponsored (so non-negotiable rate and term). DW & I decided that $550/mo was a psychologically comfortable number.

Paid $26500 out the door for an Accord EX in Pennsylvania (base was about $24400, rest was taxes and fees). The price is slightly less than the TrueCar average. I did the purchase by email, quoted 10 local dealers, got one good price and 9 MSRP'ish prices, then the biggest dealer in the area beat the good price nominally (they had our preferred color). None of the other dealers wanted to negotiate. Honestly thought i would get a better deal - Accord sales are down 13% YTD, end of the month, and we counted 150+ cars in our model in the local area (lots of inventory).

I'll need to do this again in the next year, I'll probably email the TrueCar price and say this is a staring point, how much do you want to beat it.

Post Reply