Put 5% down on mortgage or paying off car loans?

Question

I am pre-approved for a 100% financing or 5% down.  I have the 5% down payment already saved and I'm wondering what makes more sense.  

A) Taking a 100% financing mortgage (80/20 mortgage structure) and use the 5% I had saved to pay off our car loans (total of $420/month, both still have 2 1/2 years worth of payments on them) I would still have roughly 2% of my down payment in cash left after paying off the cars.  

B) Put a down payment of 5% on our mortgage (with an 80/15/5 strutcture)

The monthly difference in our mortgage payment between the 100% scenario and the 5% down scenario would be $200.  I would have an extra $420/month if my cars were paid off.  

What makes the most sense?  Is it worth paying off non tax-deductible debt and end up with a larger mortgage payment and the bigger tax deduction that would go along with that?  Does does affect my chances of refinancing sooner rather than later if interest rates went down?

teran_realtor · Accepted Answer

Since you're actually asking this question, I'm going to assume (dangerous thing) that you will be disciplined in your use of your dollars.....
.... pay off the cars.  And don't go getting car loans any more.  Apply the extra $220 toward the 20% 2nd loan, and pay it off early.  Instead of re-financing, you'll just be left with the 80% loan at that point.

Interest rates go up and down in cycles.  They've been at the bottom of the cycle for a good long time now.  In a few years, don't expect or plan on them being lower than today.

Get the best interest rate you can on the 80% first, and plan on keeping that loan.  Pay off the 20% 2nd as fast as possible.

Tracie · Answer

1

robert_byrne · Answer

The above advice is good.  With mortgage interest being deductible, you might as well take the route that gives you the highest monthly cash flow (paying off the auto loan).  

However, depending on the arrangement you have with the seller, be aware that you may have to pay closing costs for the loan.  If the seller will not be covering any closing costs, plan to pay roughly 3% of the loan amount as closing costs.

Depending on how fast your home appreciates, refinancing in a couple years may be a financially sound decision (depending, of course, on the current interest rates).

Make sure you deal with a competent loan officer that can advise you based on your plans.  If you have good credit and stable empoyment history, you should be looking at aproximately 6.5% on the primary loan (the 80% loan)

Anonymous · Answer

Would you borrow money at 5.5% and at 8% to earn 3 - 4% ? Now go get 2 more jobs pay down the Equity loan in one to two years cause manure happens . The house won't be first to go But. Oh about hose(house) equity interest. Would you give me $6000 - $10000 a year so you can have a "tax break" of $2000 to $3000 . YES? i'll send you info on where to send the checks.

Put 5% down on mortgage or paying off car loans?

4 Answers