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Money question

Discussion in 'The VIP Lounge' started by Saurav, May 28, 2007.

  1. Saurav

    Saurav Active Member War Zone Member

    Scenario: Looking to buy a car. Loan would be in the 5.something % range. House has a 2nd mortgage / equity loan in the 7.something % range.

    Options:

    1. Make a smaller down payment on the car. This adds the largest monthly payments, doesn't do anything for the house, and keeps more money in the bank.

    2. Make a larger down payment on the car. This reduces the additional monthly expenses, but puts money into the lower rate loan.

    3. Make a smaller down payment on car, put the extra money into the mortgage. This increases monthly payments, but pays down the more expensive loan.

    Which makes the most sense? Which would you do?

    It seems to me that the right answer would be "Pick a down payment that gives you a monthly payment you can afford, and put the rest into the mortgage". But if my math/thinking is off, that would be good to know :)
     
  2. Steve Tannehill

    Steve Tannehill New Member War Zone Member

    Always pay the highest interest loan first--it costs you more money.

    - Steve
     
  3. Chris White

    Chris White New Member

    Mortgage interest is deductible and car loan interest isn't. That changes the effective rate, depending on your tax bracket.
     
  4. Michael M

    Michael M Active Member

    What the Dr said. There is a chance you could end up deducting so much that the actual intrest is lower than the 5% you could get on the car. Sorry, I don't know how to figure it out though. :shrug:
     
  5. Mike B

    Mike B Well-Known Member Donor War Zone Member

    If you are bracketed around a third (fed & state) then it will be a wash.
     
  6. capsuleri

    capsuleri Well-Known Member

    Some auto makers are advertising very low rates for their new cars, usually 24 month or 3 month. I think I saw an advert for 1.9% for 36 months from Acura.

    You need to calculate which way to go - borrow from home equity vs non-tax deductible car loan based on your tax bracket. Large down payment vs small downpayment depends upon how much you will earn on the money in the bank or if invested. It's all a balancing game. I wish there was a modeling program to do just this.

    What cars are you considering? Just curious.
     
  7. AndrewM

    AndrewM New Member

    A house is also (typically) an appreciating asset, nothing wrong with paying off a mortgage early, but I'd pay off all other debt first before sending money to the mortgage banker, and since the markets are doing fairly well I'd also send money off to the retirement accounts before paying down a mortgage.
     
  8. Saurav

    Saurav Active Member War Zone Member

    Heh... yep.

    I think I've settled on a 1-2 yr old Camry. I'd like to get an Outback, but those are harder to find or they cost more than what I'm looking for. This will be for the wife/baby thing - replace her car, I'll keep my Celica for now. My FIL owns a car lot, so he can get us cars at dealer auction prices. Which is pretty sweet :)

    Yeah, my 401K is maxed out, and my wife puts in the max into her SEP IRA too. We don't have any personal IRAs outside of that... I keep thinking I should start one, but I usually end up spending my tax refund on toys ;)

    So... that's good advice on the tax deduction thing which I hadn't thought about at all. I'm glad I asked here :) OK, I need to look for an 'effective mortgage rate' calculator.
     
  9. capsuleri

    capsuleri Well-Known Member

    Bankrate.com.
     
  10. Saurav

    Saurav Active Member War Zone Member

    Thanks.
     
  11. cjd

    cjd New Member

    My car buying tip: keep the loan at 3 years or less. Though longer warrantied cars you can push this, the primary goal is to make sure you don't get unexpected repair bills while you're also paying the car down. Because THAT is what causes problems.

    For a used car with minimal warranty coverage, I would opt for as short a loan as possible and bank any money left over. You'll be wanting more rainy day fund in this case (though hopefully not, you never know when a storm'll blow in...)

    C
     

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