Pay off Low Int. Car Loan or Pay Down Home Loan

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NERO
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Pay off Low Int. Car Loan or Pay Down Home Loan

Post by NERO » Mon May 30, 2016 11:59 pm

Hi all, should I pay off my $37k 48 mo. auto loan at 0.9% int. or pay down my $370k(no PMI) 27yr left mortgage at 3.75%? I'm doing fine for retirement accounts and college savings plans.

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Watty
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Re: Pay off Low Int. Car Loan or Pay Down Home Loan

Post by Watty » Tue May 31, 2016 7:10 am

NERO wrote:Hi all, should I pay off my $37k 48 mo. auto loan at 0.9% int. or pay down my $370k(no PMI) 27yr left mortgage at 3.75%? I'm doing fine for retirement accounts and college savings plans.



One option would be to call your lender and ask if they will "recast your mortgage" (Google this) if you pay the mortgage down by 10%. If they will then that will reduce your mortgage payment by 10% but the length of the mortgage would stay the same which could be important if interest rates go up and you want to keep the mortgage for as long as possible. This should only cost a couple of hundred dollars for a processing fee.

You could then use the monthly savings to pay the car off sooner.

Somewhere in your plans you should also start saving up to be able to pay cash for your next car.

SimonJester
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Re: Pay off Low Int. Car Loan or Pay Down Home Loan

Post by SimonJester » Tue May 31, 2016 8:18 am

First assume you have a 6 month emergency fund,
Pay off the Car, then put the auto payment into a saving account for the next vehicle purchase so you can pay cash. Once you have a good amount in the vehicle fund, the start paying down the mortgage.
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

NoVa Lurker
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Re: Pay off Low Int. Car Loan or Pay Down Home Loan

Post by NoVa Lurker » Tue May 31, 2016 8:33 am

SimonJester wrote:First assume you have a 6 month emergency fund,
Pay off the Car, then put the auto payment into a saving account for the next vehicle purchase so you can pay cash. Once you have a good amount in the vehicle fund, the start paying down the mortgage.


This is exactly what my wife and I are currently in the process of doing, so it seems like good advice to me, at first glance. However, if you are confident you'll have no issues making the payments in the future, you may want to consider Watty's suggestion to recast, or even refinance to a 15-year since it seems you could handle the payments without a problem. 3.75% is historically low, but there are options to reduce that even further.

Alternatively, since you seem to have no cash flow issues, you could just pay down the home mortgage now. Even if you can deduct some of the 3.75%, you're still probably paying around (let's say) 3%, vs. 1% for the car loan. On $37k, that's $740/year difference in total interest, between those two payoff options.

I think the options really depend on how confident you are that you'll always have a good cash flow buffer (job security, etc.) The more confident you are, the more it makes sense to pay less total interest, which means pay down the mortgage. If you want to maintain more liquidity, pay down the car loan.

orca91
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Re: Pay off Low Int. Car Loan or Pay Down Home Loan

Post by orca91 » Tue May 31, 2016 9:49 am

I would pay down the car loan first. Simply because I like to take out the smaller balance debts first (snowball method). And, because I just really dislike car payments!

Pay that off and then try to not ever take on a car payment again. Just my take on it.

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jimb_fromATL
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Re: Pay off Low Int. Car Loan or Pay Down Home Loan

Post by jimb_fromATL » Tue May 31, 2016 10:44 am

NERO wrote:Hi all, should I pay off my $37k 48 mo. auto loan at 0.9% int. or pay down my $370k(no PMI) 27yr left mortgage at 3.75%? I'm doing fine for retirement accounts and college savings plans.


There's some satisfaction in paying off a short term loan like a car land and reducing your mandatory payments per month, but if you're not having any cash flow problems, bear in mind that Interest is calculated on the unpaid balance each month. So you'll save the most interest and time in debt by paying as much as you can as soon as you can on the loan with the highest rate.

Since you have a fairly expensive car and home, chances are you're in a pretty high tax bracket. So also bear in mind that you'll typically come out better in the long run by making sure you're contributing the maximum allowed to all available tax-deferred or tax-advantaged retirement plans before you pay any extra on any low-rate and manageable debts. That's because any money that you're paying in taxes that could be deferred and invested for yourself is not paying bills, buying necessities, earning compound interest for the rest of your life, or paying down debt either. And because of the way compound interest works over time, you can earn more in the long run by deferring taxes and investing more in the long run than the after-tax money will save in interest on the shorter term debts even if the rate on the debts were higher than your earnings.

jimb

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dm200
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Re: Pay off Low Int. Car Loan or Pay Down Home Loan

Post by dm200 » Tue May 31, 2016 10:49 am

In general, I would do neither. Rather, invest more for the "long term". That will give you more options and flexibility over time. These are both very low interest rates.

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