Auto Loan vs Mortgage

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
whattodonow
Posts: 51
Joined: Wed Jul 13, 2016 11:58 am

Auto Loan vs Mortgage

Postby whattodonow » Sun Jun 18, 2017 7:25 pm

Wife and I max out 401ks, IRAs, and 529 for the kid.
We have a 6 month EF.
Only debt is one auto loan (29k @ 0.9%) and a mortgage (248k @ 4.625%).

I have PMI on the mortgage, it's a conventional 30 year loan (we're almost 3 years into the loan now).
Original value on house was around $281k, not sure on value now, Zillow doesn't seem very accurate (fairly new neighborhood, added a pool, etc.).
The car payment is around $680/month.

I'm considering the following, need some opinions:
a) pay off car, frees up cash flow, would drop EF to 2 months
b) take the $29k that would pay off car and get my mortgage down to 78% of original loan value to knock PMI out, obviously this also drops EF down to 2 months
c) something else?

Our jobs are relatively stable and I believe we could build EF back up to 6 months before any potential job loss.

MindBogler
Posts: 451
Joined: Wed Apr 17, 2013 12:05 pm

Re: Auto Loan vs Mortgage

Postby MindBogler » Sun Jun 18, 2017 7:30 pm

I would pay down to get rid of PMI asap and look into a refinance. I haven't checked rates recently but I think you can shave .75 off that loan for a 30 yr fixed. Your car loan is at .9%, you can put 29k in an account at Ally and come out ahead. There is no reason to pay that off early while you still have PMI.

Goal33
Posts: 342
Joined: Sun Apr 12, 2015 12:30 pm

Re: Auto Loan vs Mortgage

Postby Goal33 » Sun Jun 18, 2017 7:34 pm

Step 1 is to do a refinance. Get the best rate possible and put what is needed in to get to 80% L2V so you don't have to have PMI.

If you have extra cash after this activity is complete, create a new post on bogleheads reflecting new situation.
A man with one watch always knows what time it is; a man with two watches is never sure.

whattodonow
Posts: 51
Joined: Wed Jul 13, 2016 11:58 am

Re: Auto Loan vs Mortgage

Postby whattodonow » Sun Jun 18, 2017 7:36 pm

MindBogler wrote:I would pay down to get rid of PMI asap and look into a refinance. I haven't checked rates recently but I think you can shave .75 off that loan for a 30 yr fixed. Your car loan is at .9%, you can put 29k in an account at Ally and come out ahead. There is no reason to pay that off early while you still have PMI.


I keep leaning towards that option, but what I'm worried about is having to get an appraisal and the current home value is lower than original value.
If I hit 78% of original value, that means auto drop of PMI right, no matter what the lender says? Or can they still force an appraisal and base 78% on current appraised value?

whattodonow
Posts: 51
Joined: Wed Jul 13, 2016 11:58 am

Re: Auto Loan vs Mortgage

Postby whattodonow » Sun Jun 18, 2017 7:39 pm

Goal33 wrote:Step 1 is to do a refinance. Get the best rate possible and put what is needed in to get to 80% L2V so you don't have to have PMI.

If you have extra cash after this activity is complete, create a new post on bogleheads reflecting new situation.


Goal33, putting 20% down for a refinance would require more $$ out of pocket versus paying $29k to remove PMI.

Goal33
Posts: 342
Joined: Sun Apr 12, 2015 12:30 pm

Re: Auto Loan vs Mortgage

Postby Goal33 » Sun Jun 18, 2017 7:51 pm

whattodonow wrote:
Goal33 wrote:Step 1 is to do a refinance. Get the best rate possible and put what is needed in to get to 80% L2V so you don't have to have PMI.

If you have extra cash after this activity is complete, create a new post on bogleheads reflecting new situation.


Goal33, putting 20% down for a refinance would require more $$ out of pocket versus paying $29k to remove PMI.



80% L2V means 80% loan on the total value of your property. If it appraises for 300, you'd only need to put 8k in to get to 80% L2V
A man with one watch always knows what time it is; a man with two watches is never sure.

Goal33
Posts: 342
Joined: Sun Apr 12, 2015 12:30 pm

Re: Auto Loan vs Mortgage

Postby Goal33 » Sun Jun 18, 2017 7:53 pm

Find a lender that'll front the cost for the appraisal if it doesn't appraise higher than your purchase price. Anyway, it probably will.
A man with one watch always knows what time it is; a man with two watches is never sure.

BanditKing
Posts: 507
Joined: Tue Oct 29, 2013 11:11 pm

Re: Auto Loan vs Mortgage

Postby BanditKing » Sun Jun 18, 2017 8:03 pm

whattodonow wrote:Goal33, putting 20% down for a refinance would require more $$ out of pocket versus paying $29k to remove PMI.


Should still look into it. With appreciation and your additions, might be able to hit <80%. Worst case it's just the cost of appraisal, but you can get a sense of value when you talk to the lender.

JGoneRiding
Posts: 687
Joined: Tue Jul 15, 2014 3:26 pm

Re: Auto Loan vs Mortgage

Postby JGoneRiding » Sun Jun 18, 2017 10:20 pm

I was paying pmi until last week. As I hadn't paid the loan down nor hit the 24 month mark I didn't bother with the first lender. Just refined from 4% to 3.8% but removed pmi. Closing cost about 2400. Totally worth it and they waved aprisal. I would consider that route asap.

No way would I pay off a less than 1% loan with a 4.5% hanging over my head

Why do you think housemight be worth less? Is this reasonable based on area/zillow or just fear? Most places have gone up in last 3 years plus you made improvements. Wr are not fast growing area and 18 months was sufficient to raise value and remove pmi

Yes if the lender thinks the value has dropped they can order apprisal but not likely if they are being reasonable. You would have to call and ask them their procedure. I would do this before any extra payment. I would ask for a recast then at same time. But honestly talk to a broker first I bet you can get a better deal with refi.

ryman554
Posts: 643
Joined: Sun Jan 12, 2014 9:44 pm

Re: Auto Loan vs Mortgage

Postby ryman554 » Mon Jun 19, 2017 9:02 am

JGoneRiding wrote:No way would I pay off a less than 1% loan with a 4.5% hanging over my head


There is one reason: cash flow. Not having to pay the 1% loan means more $$ is available monthly in case of emergency. Paying down a mortgage to remove PMI affects cash flow too, so go to that, but afterwards, there is zero advantage in putting money away on a mortgage unless and until you pay it off completely.

Mathematically, no question paying the 4.5% loan offers the best return. Is it the best risk-adjusted return?

NorCalDad
Posts: 676
Joined: Sun Mar 25, 2012 11:14 pm
Location: Northern California

Re: Auto Loan vs Mortgage

Postby NorCalDad » Mon Jun 19, 2017 9:21 am

I agree with refi+remove PMI. Dropping your interest rate below 4% plus eliminating PMI outweighs paying off a 0.9% auto loan. Sounds like your biggest fear is not having sufficient cash to get to 80% LTV, but you could start shopping for refis and see what the computer appraisals say before you agree to an actual appraisal.

User avatar
dm200
Posts: 12406
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Auto Loan vs Mortgage

Postby dm200 » Mon Jun 19, 2017 10:07 am

BEFORE paying down mortgage to eliminate PMI, make 100% sure that this can be accomplished. I am not up on all the rules, but I am quite sure that some of this has changed in the last few years making it more stringent on eliminating PMI. It would be a shame if you paid a big lump sum - and it did not eliminate the PMI.

whattodonow
Posts: 51
Joined: Wed Jul 13, 2016 11:58 am

Re: Auto Loan vs Mortgage

Postby whattodonow » Mon Jun 19, 2017 11:45 am

Zillow has my house way under valued I believe.
I checked Remax and Chase value estimators and those are near each other and close to the original market value of the house.

I think the stringent rules mainly apply to FHA loans in regards to PMI payoff.
We have a conventional loan with PMI.

I pulled trigger on refinance process this morning, so will see if they require an appraisal and if so, what that turns out to be.

For only $200 more a month I can go from 30 year to 15 year with 1% reduction in interest rate and no PMI. Hopefully things work out.

User avatar
8foot7
Posts: 447
Joined: Mon Jan 05, 2015 7:29 pm

Re: Auto Loan vs Mortgage

Postby 8foot7 » Mon Jun 19, 2017 2:50 pm

get rid of the PMI like right now.

User avatar
Meg77
Posts: 1882
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: Auto Loan vs Mortgage

Postby Meg77 » Mon Jun 19, 2017 3:07 pm

whattodonow wrote:Zillow has my house way under valued I believe.
I checked Remax and Chase value estimators and those are near each other and close to the original market value of the house.

I think the stringent rules mainly apply to FHA loans in regards to PMI payoff.
We have a conventional loan with PMI.

I pulled trigger on refinance process this morning, so will see if they require an appraisal and if so, what that turns out to be.

For only $200 more a month I can go from 30 year to 15 year with 1% reduction in interest rate and no PMI. Hopefully things work out.


A refinance will definitely require a new appraisal, as well as other closing costs like a new title policy. But it's worth it especially if you move to a 15 year, shave a point off the rate, AND get rid of PMI. After that I wouldn't pay extra on the mortgage until you run out of other financial goals, if that ever happens.

We have a car loan at 0.9% too and plenty of cash to pay it off, but we don't plan to. 0.9% is less than inflation, so effectively we are borrowing for free. Lots of better things to do with that money (including putting it toward our 2.75% mortgage, if it came to that).
"An investment in knowledge pays the best interest." - Benjamin Franklin

whattodonow
Posts: 51
Joined: Wed Jul 13, 2016 11:58 am

Re: Auto Loan vs Mortgage

Postby whattodonow » Mon Jun 19, 2017 8:11 pm

Meg77 wrote:
whattodonow wrote:Zillow has my house way under valued I believe.
I checked Remax and Chase value estimators and those are near each other and close to the original market value of the house.

I think the stringent rules mainly apply to FHA loans in regards to PMI payoff.
We have a conventional loan with PMI.

I pulled trigger on refinance process this morning, so will see if they require an appraisal and if so, what that turns out to be.

For only $200 more a month I can go from 30 year to 15 year with 1% reduction in interest rate and no PMI. Hopefully things work out.


A refinance will definitely require a new appraisal, as well as other closing costs like a new title policy. But it's worth it especially if you move to a 15 year, shave a point off the rate, AND get rid of PMI. After that I wouldn't pay extra on the mortgage until you run out of other financial goals, if that ever happens.

We have a car loan at 0.9% too and plenty of cash to pay it off, but we don't plan to. 0.9% is less than inflation, so effectively we are borrowing for free. Lots of better things to do with that money (including putting it toward our 2.75% mortgage, if it came to that).


Meg, I'm actually going with $0 closing costs and still getting a 1.3% reduction in interest rate. We will have to provide delta in cash up front to get the 80% LTV, depending on appraisal.

Tc99
Posts: 44
Joined: Thu Oct 23, 2014 8:18 pm

Re: Auto Loan vs Mortgage

Postby Tc99 » Mon Jun 19, 2017 10:19 pm

MindBogler wrote: Your car loan is at .9%, you can put 29k in an account at Ally and come out ahead. There is no reason to pay that off early while you still have PMI.


You sure about the first quoted sentence? Does Ally pay more than inflation and taxes that beats a rate of 0.9% if your only two choices are to pay off the car or invest it at Ally?

I do agree with you're second sentence on paying down the mortgage to get rid of the PMI instead of the car loan.

avalpert
Posts: 5147
Joined: Sat Mar 22, 2008 4:58 pm

Re: Auto Loan vs Mortgage

Postby avalpert » Mon Jun 19, 2017 10:32 pm

ryman554 wrote:
JGoneRiding wrote:No way would I pay off a less than 1% loan with a 4.5% hanging over my head


There is one reason: cash flow. Not having to pay the 1% loan means more $$ is available monthly in case of emergency.

No, it absolutely does not mean more $$ available in case of emergency - you had $29k available in case of emergency and put it towards the loan. Future cash flow doesn't bring that back quicker than not paying it off in the first place - and for a loan that costs less than the interest of a high-yield savings accounts.

There is no reason to pay off an auto loan at that rate any quicker than they force you to. That is independent of the question of what to do with the mortgage - I would look into refinancing to a lower rate before any other decision.

ryman554
Posts: 643
Joined: Sun Jan 12, 2014 9:44 pm

Re: Auto Loan vs Mortgage

Postby ryman554 » Mon Jun 19, 2017 11:33 pm

avalpert wrote:
ryman554 wrote:
JGoneRiding wrote:No way would I pay off a less than 1% loan with a 4.5% hanging over my head


There is one reason: cash flow. Not having to pay the 1% loan means more $$ is available monthly in case of emergency.

No, it absolutely does not mean more $$ available in case of emergency - you had $29k available in case of emergency and put it towards the loan. Future cash flow doesn't bring that back quicker than not paying it off in the first place - and for a loan that costs less than the interest of a high-yield savings accounts.

There is no reason to pay off an auto loan at that rate any quicker than they force you to. That is independent of the question of what to do with the mortgage - I would look into refinancing to a lower rate before any other decision.


Yes, it absolutely does, because (sorry OP) the kinds of folks who take out a car loan simultaneously with a mortgage with PMI have a deeper budgeting problem that indicates to me that the $29k is not going to be sitting at Ally for long... otherwise there wouldn't be a car loan or PMI in the first place. Rather, it's going to be spent on other things that aren't cars, houses, or real emergencies. In these situations it's a whole lot better to get in the habit of reducing monthly obligations.

We all agree that PMI should be the first to go. Whether or not this is via refinancing or pre-payments is irrelevant. The car should be the second -- no way am I leveraging a car/depreciating asset for an emergency fund. I pay the car off, I don't have to worry about it getting repod when stuff hits the fan. Given the $29k isn't going to make a different in foreclosure, it goes to the car. Would you go take a loan out on a car (or a home) to put money in the bank for emergencies? I wouldn't.

avalpert
Posts: 5147
Joined: Sat Mar 22, 2008 4:58 pm

Re: Auto Loan vs Mortgage

Postby avalpert » Mon Jun 19, 2017 11:38 pm

ryman554 wrote:
avalpert wrote:
ryman554 wrote:
JGoneRiding wrote:No way would I pay off a less than 1% loan with a 4.5% hanging over my head


There is one reason: cash flow. Not having to pay the 1% loan means more $$ is available monthly in case of emergency.

No, it absolutely does not mean more $$ available in case of emergency - you had $29k available in case of emergency and put it towards the loan. Future cash flow doesn't bring that back quicker than not paying it off in the first place - and for a loan that costs less than the interest of a high-yield savings accounts.

There is no reason to pay off an auto loan at that rate any quicker than they force you to. That is independent of the question of what to do with the mortgage - I would look into refinancing to a lower rate before any other decision.


Yes, it absolutely does, because (sorry OP) the kinds of folks who take out a car loan simultaneously with a mortgage with PMI have a deeper budgeting problem that indicates to me that the $29k is not going to be sitting at Ally for long... otherwise there wouldn't be a car loan or PMI in the first place. Rather, it's going to be spent on other things that aren't cars, houses, or real emergencies. In these situations it's a whole lot better to get in the habit of reducing monthly obligations.

We all agree that PMI should be the first to go. Whether or not this is via refinancing or pre-payments is irrelevant. The car should be the second -- no way am I leveraging a car/depreciating asset for an emergency fund. I pay the car off, I don't have to worry about it getting repod when stuff hits the fan. Given the $29k isn't going to make a different in foreclosure, it goes to the car. Would you go take a loan out on a car (or a home) to put money in the bank for emergencies? I wouldn't.

If the rate they offered was less than the interest I can earn in the bank - absolutely I would (and I have - I have taken out car loans when I had many multiples of the cost if I wanted to buy it straight because of the low cost of the debt).

And there are ways to force the mental game of isolating the money so you don't think to spend it without resorting to making the financially suboptimal choice to pay down cheap debt (it matters not at all that the debt is secured by a depreciating asset, if anything that makes it a better deal because the asset you would lose has less value then the debt itself).

User avatar
8foot7
Posts: 447
Joined: Mon Jan 05, 2015 7:29 pm

Re: Auto Loan vs Mortgage

Postby 8foot7 » Tue Jun 20, 2017 8:34 am

ryman554 wrote:Would you go take a loan out on a car (or a home) to put money in the bank for emergencies? I wouldn't.


If I were going to buy a car anyway and had the cash to do so, and if they offered me a rate under one percent to finance the car, then sure, I'd leave the money in the bank and use the note. And actually, if I had a car worth $29k that was paid off and I could refinance it under one percent, I would strongly consider doing so and stashing the cash away.

I'm generally very very much against car payments but loans under one percent for things you'd buy anyway can be a useful tool.

With that said, PMI is bad in every way and that should be priority #1. It is a sign one bought a house one can't afford, and rectifying that by paying down principal and getting a mortgage under control is a crash priority emergency in my book.

ryman554
Posts: 643
Joined: Sun Jan 12, 2014 9:44 pm

Re: Auto Loan vs Mortgage

Postby ryman554 » Tue Jun 20, 2017 8:51 am

avalpert wrote:And there are ways to force the mental game of isolating the money so you don't think to spend it without resorting to making the financially suboptimal choice to pay down cheap debt (it matters not at all that the debt is secured by a depreciating asset, if anything that makes it a better deal because the asset you would lose has less value then the debt itself).


I think this is where we differ. Mathematically you are correct. It's the behavioral aspect which is suspect.

There is a lot of difference between
person A: who has a lot of assets to cover a (car) purchase but decides to finance it to gain <1% arbitrage.
person B: who has a car loan without a lot of assets along with other suboptimal debts (PMI, in this case, credit cards in others)

Person B needs to get on a sound financial footing, while person A is already there. Person B is likely living paycheck to paycheck, meaning every dollar in every month is accounted for, whereas person A is not. The goal for person B is to reduce obligations and increase income to get out of living paycheck to paycheck. Person B does not have the ability to take un-necessary risk.

whattodonow
Posts: 51
Joined: Wed Jul 13, 2016 11:58 am

Re: Auto Loan vs Mortgage

Postby whattodonow » Tue Jun 20, 2017 1:30 pm

ryman554 wrote:
avalpert wrote:And there are ways to force the mental game of isolating the money so you don't think to spend it without resorting to making the financially suboptimal choice to pay down cheap debt (it matters not at all that the debt is secured by a depreciating asset, if anything that makes it a better deal because the asset you would lose has less value then the debt itself).


I think this is where we differ. Mathematically you are correct. It's the behavioral aspect which is suspect.

There is a lot of difference between
person A: who has a lot of assets to cover a (car) purchase but decides to finance it to gain <1% arbitrage.
person B: who has a car loan without a lot of assets along with other suboptimal debts (PMI, in this case, credit cards in others)

Person B needs to get on a sound financial footing, while person A is already there. Person B is likely living paycheck to paycheck, meaning every dollar in every month is accounted for, whereas person A is not. The goal for person B is to reduce obligations and increase income to get out of living paycheck to paycheck. Person B does not have the ability to take un-necessary risk.


I'm a mix of person A and B I guess, in your above example, since I currently have enough asset to pay off car (it's 2017 by the way), but as already stated it's <1%.
I'm also person B because I have a conventional mortgage with a flat fee PMI (mortgage is less than 3 years old), that has cost me around $4300 so far.
No other debts (this includes full ownership of a 2016 vehicle).
I of course now have enough assets to where I can also remove PMI (assuming the value of my house hasn't dropped substantially).

sunny_socal
Posts: 958
Joined: Tue Mar 24, 2015 4:22 pm

Re: Auto Loan vs Mortgage

Postby sunny_socal » Tue Jun 20, 2017 1:42 pm

Kill the PMI, don't pay off the car even if you have the cash.

ryman554
Posts: 643
Joined: Sun Jan 12, 2014 9:44 pm

Re: Auto Loan vs Mortgage

Postby ryman554 » Tue Jun 20, 2017 4:44 pm

whattodonow wrote:I'm a mix of person A and B I guess, in your above example, since I currently have enough asset to pay off car (it's 2017 by the way), but as already stated it's <1%.
I'm also person B because I have a conventional mortgage with a flat fee PMI (mortgage is less than 3 years old), that has cost me around $4300 so far.
No other debts (this includes full ownership of a 2016 vehicle).
I of course now have enough assets to where I can also remove PMI (assuming the value of my house hasn't dropped substantially).


Get rid of PMI.

Pay off your car. Two new cars? Yikes. Honestly, I really am of the opinion that debt is bad. Play with fire if you will, but get out of debt and stay out, and keep those cars for 15 years.

whattodonow
Posts: 51
Joined: Wed Jul 13, 2016 11:58 am

Re: Auto Loan vs Mortgage

Postby whattodonow » Tue Jun 20, 2017 9:13 pm

ryman554 wrote:
whattodonow wrote:I'm a mix of person A and B I guess, in your above example, since I currently have enough asset to pay off car (it's 2017 by the way), but as already stated it's <1%.
I'm also person B because I have a conventional mortgage with a flat fee PMI (mortgage is less than 3 years old), that has cost me around $4300 so far.
No other debts (this includes full ownership of a 2016 vehicle).
I of course now have enough assets to where I can also remove PMI (assuming the value of my house hasn't dropped substantially).


Get rid of PMI.

Pay off your car. Two new cars? Yikes. Honestly, I really am of the opinion that debt is bad. Play with fire if you will, but get out of debt and stay out, and keep those cars for 15 years.


The 2016 vehicle replaced a 2004 vehicle that was costing us more than it was worth.
The 2017 vehicle replaced a 2011 vehicle that was costing us more than it was worth.
Both our credit scores are above 800.
Over $500k net worth excluding house at age 30.
Just timing of the new house, and then the vehicles going to crap put us in short term bind. If you'd call it a bind.

I'm not a fan of debt either, we both had student loans which we paid off, CC debt from college which we paid off, etc.
A car loan at 0.9% is a drop in the bucket, hence it not being a huge issue.

The main comparison I was looking at was freeing up $680/month cash flow after paying off car loan versus $119/month PMI payment.
Of course the benefit of eliminating PMI through a refinance is that I'm also lowering the interest rate on the mortgage.

MindBogler
Posts: 451
Joined: Wed Apr 17, 2013 12:05 pm

Re: Auto Loan vs Mortgage

Postby MindBogler » Thu Jun 22, 2017 6:35 pm

Tc99 wrote:
MindBogler wrote: Your car loan is at .9%, you can put 29k in an account at Ally and come out ahead. There is no reason to pay that off early while you still have PMI.


You sure about the first quoted sentence? Does Ally pay more than inflation and taxes that beats a rate of 0.9% if your only two choices are to pay off the car or invest it at Ally?

I do agree with you're second sentence on paying down the mortgage to get rid of the PMI instead of the car loan.

Ally doesn't have to pay more than inflation, it has to produce a return less taxes that is >= .9%. A one year breakable CD is paying 1.35%. With a 25% marginal tax rate and a 6% state income tax that wins (.9315% after tax). Chances are a longer term CD that matches the vehicle duration would pencil out even better. The point I'm trying to make is that it would be crazy to trade liquidity for a loan balance that is already losing to inflation. The mortgage rate + PMI are the low hanging fruit. A lower mortgage rate + removing PMI could be near equivalent to paying off the auto loan from a cash flow perspective.

Here is a basic estimate:

$281k @ 4.625 yields a PI payment = $1445.
PMI of $119/mo
Cost per month: $1445 + $243 = $1564

Assuming the value of the house is unchanged at $281,000, let's look at a refinance that brings cash to close in order to remove PMI. They need an 80% LTV on their refinance to avoid PMI. At Penfed a 30yr mortgage is 3.75% right now.

Loan amount for 80% LTV = .8 * $281,000 = $224,800.
Current loan balance = $248,000
Cash to bring the balance to 80% = $23,200.
$224.8k @ 3.75 yields a PI payment = $1041

The monthly cash flow improves by the difference between these PI payments plus PMI:

(Old PI + PMI) - New PI = Monthly Cash Flow
(1445 + 119) - 1041 = $523

The OP could save $523 a month by refinancing to remove PMI, lowering their interest rate by nearly 1% in the process.

Edited to reflect the OPs PMI payment which I missed as it was included in a previous post.

lazydavid
Posts: 807
Joined: Wed Apr 06, 2016 1:37 pm

Re: Auto Loan vs Mortgage

Postby lazydavid » Fri Jun 23, 2017 7:39 am

dm200 wrote:BEFORE paying down mortgage to eliminate PMI, make 100% sure that this can be accomplished. I am not up on all the rules, but I am quite sure that some of this has changed in the last few years making it more stringent on eliminating PMI. It would be a shame if you paid a big lump sum - and it did not eliminate the PMI.


I just checked a couple of recently-updated sources, and it looks like the change is that automatic termination now occurs at 78% LTV instead of 79%. You can still request cancellation at 80%.

whattodonow wrote:The 2017 vehicle replaced a 2011 vehicle that was costing us more than it was worth.


More details on this one please. I'm sure fellow BHs will want to know what model is this abysmally bad.

whattodonow
Posts: 51
Joined: Wed Jul 13, 2016 11:58 am

Re: Auto Loan vs Mortgage

Postby whattodonow » Fri Jun 23, 2017 8:37 am

lazydavid wrote:
dm200 wrote:BEFORE paying down mortgage to eliminate PMI, make 100% sure that this can be accomplished. I am not up on all the rules, but I am quite sure that some of this has changed in the last few years making it more stringent on eliminating PMI. It would be a shame if you paid a big lump sum - and it did not eliminate the PMI.


I just checked a couple of recently-updated sources, and it looks like the change is that automatic termination now occurs at 78% LTV instead of 79%. You can still request cancellation at 80%.

whattodonow wrote:The 2017 vehicle replaced a 2011 vehicle that was costing us more than it was worth.


More details on this one please. I'm sure fellow BHs will want to know what model is this abysmally bad.


The 2011 was a jeep grand cherokee, which I bought used at the time (2012), it was certified pre-owned, so came with warranty.
I put 120k miles on it, so outside powertrain warranty. Tappet valves started failing (and there are a lot of them), costing $1k to fix/replace a piece.

whattodonow
Posts: 51
Joined: Wed Jul 13, 2016 11:58 am

Re: Auto Loan vs Mortgage

Postby whattodonow » Fri Jun 23, 2017 8:38 am

MindBogler wrote:
Tc99 wrote:
MindBogler wrote: Your car loan is at .9%, you can put 29k in an account at Ally and come out ahead. There is no reason to pay that off early while you still have PMI.


You sure about the first quoted sentence? Does Ally pay more than inflation and taxes that beats a rate of 0.9% if your only two choices are to pay off the car or invest it at Ally?

I do agree with you're second sentence on paying down the mortgage to get rid of the PMI instead of the car loan.

Ally doesn't have to pay more than inflation, it has to produce a return less taxes that is >= .9%. A one year breakable CD is paying 1.35%. With a 25% marginal tax rate and a 6% state income tax that wins (.9315% after tax). Chances are a longer term CD that matches the vehicle duration would pencil out even better. The point I'm trying to make is that it would be crazy to trade liquidity for a loan balance that is already losing to inflation. The mortgage rate + PMI are the low hanging fruit. A lower mortgage rate + removing PMI could be near equivalent to paying off the auto loan from a cash flow perspective.

Here is a basic estimate:

$281k @ 4.625 yields a PI payment = $1445.
PMI of $119/mo
Cost per month: $1445 + $243 = $1564

Assuming the value of the house is unchanged at $281,000, let's look at a refinance that brings cash to close in order to remove PMI. They need an 80% LTV on their refinance to avoid PMI. At Penfed a 30yr mortgage is 3.75% right now.

Loan amount for 80% LTV = .8 * $281,000 = $224,800.
Current loan balance = $248,000
Cash to bring the balance to 80% = $23,200.
$224.8k @ 3.75 yields a PI payment = $1041

The monthly cash flow improves by the difference between these PI payments plus PMI:

(Old PI + PMI) - New PI = Monthly Cash Flow
(1445 + 119) - 1041 = $523

The OP could save $523 a month by refinancing to remove PMI, lowering their interest rate by nearly 1% in the process.

Edited to reflect the OPs PMI payment which I missed as it was included in a previous post.


MindBogler,
Not to mention I no longer need an escrow account, so I'll free up more monthly cash flow by not having to contribute to it for taxes, etc.
Of course I'll need to ensure I have the cash available when the bills are due.


Return to “Personal Finance (Not Investing)”

Who is online

Users browsing this forum: chefann, FB01, furikake, RudyS, Salmon, theplockishot, Yahoo [Bot] and 79 guests