pay off car loan or continue building savings?

EricaOO · July 2014

I'm not sure if there is a right answer to this but it's probably best to know my financial goal: Next spring my husband and I will begin to search for a home to buy (first time buyers). I currently have 11k saved. I have 7k left on my car loan. Do I pay off my car loan now or continue making regular payments until the car is paid off in 2.5 years? If I pay off the loan now, I will be left with 4k in the bank which is not alot for our down payment (my DH has a couple thousand saved too). However, my in-laws have offered to help with a down payment and I think it will be a generous amount. In the meantime, with the car loan paid, I would have more money to put towards savings each month. Does this make sense?? What would you do?

formerlyGDaisy09 · July 2014

how much house are you looking to buy and how much are you wanting to put down?

what is your current car payment?

what I'm wondering is if you pay off your car and can put the amount you were putting towards car payments into savings, how fast would you re-coup the $7K? it would be nice to go into owning a home without car payments...but you need what you need for a DP...

brij2006 · July 2014

I would pay off the car with the amount in your savings, then start saving for a 20% down payment.

Also, if you have more debt besides just the car (ie student loans or H's car), then I would focus on paying all of those off before saving up and buying a house. Be debt free before getting a mortgage. You will thank yourself later.

MommyLiberty5013 · July 2014

How much is the monthly payment on the car loan? What's the rate?

Xstatic3333 · July 2014

Well, I can tell you what we did...

We have car loans at 4% (3,700 left) and 6.9% (8,500 left). I know, yucky rates. Both were purchased pre-MM lifestyle, but at least they are practical, reliable cars. The 6.9% car is too old to refinance. We are also not especially debt averse if the debt is reasonable, at a good interest rate, and used to leverage extra to savings.

Both payments are small relative to our income. We've been paying extra on the 6.9% loan, enough to have it paid off in 3 years. We close on our house Friday. After the dust has settled, we will replenish our e-fund if it takes a hit (we don't expect it to but I've been warned that closings are crazy) and then our next big goal will be to pay off both cars quickly. We still have our e-fund though; that's essential for both buying a home and getting a mortgage. We want the car debt gone to free up cash flow for daycare so we can think about TTC while maintaining our lifestyle and savings rate.

So basically, I guess it all depends on the numbers involved. What's your target house price? What's the interest rate on the loan? What's your debt vs. savings preference? Your debt to income ratio? Etc. etc.

Xstatic3333 · July 2014

I'd also add that I feel when dealing with family and money, it's best to plan as if they won't contribute anything and then see their gift as "bonus." They would have to sign a letter saying their money is a gift that doesn't need to be repaid, and for some types of loans (a 95% conventional like we got comes to mind) a certain percentage needs to come from you, not them. The bank will consider money "yours" if it's been in your account 2-3 months.

emily1004 · July 2014

Pay the car loan off.

jlaOK · July 2014

I would pay off the car, build a 3-6 month emergency fund, and then save for a down payment on a house. I know that sounds like a boring plan but it is the advice that I wish someone would have given DH and I.

We bought our first home with no money down, no real savings, and lots of debt. Luckily nothing horrible happened but a lot of things could have happened. We luckily found the Dave Ramsey program and it completely changed how we handled our money. We sacrificed for a few years but have put ourselves in a great position for the rest of our lives.

Squeeze as much as you can from your budget. It'll suck in the short term but you will be so happy you did and it will ultimately get you into a house sooner.

hoffse · July 2014

I'm not adverse to debt either. H and I have a car loan, and we close on our first house in 2 weeks. Honestly, it's not a big deal for us - we should be able to pay off the car after we close if we had to for some reason, but frankly our interest rate is 1% which is below the rate of inflation. It's only a 36-month loan, so we plan on taking our time with it (for now at least).

That said, I don't think it's wise to assume your inlaws will come through. I also don't think it's wise to assume that the money will come without strings. Let me be clear: I actually do have parents who are capable of lending me money with no strings and no oversight. I refinanced my law loans through them to get a substantially lower interest rate, and they are basically using it as an investment with a guaranteed return since they are approaching retirement. But they are VERY unusual in this respect, and it's definitely not something I would have done if they had ever indicated that they would hold it over me.

Personally, I wouldn't want my parents having any say over my first house. And I CERTAINLY would not want my inlaws having a say. It's one thing to run decorating ideas by my mom or MIL. It's another thing to feel like you have to go with every idea they throw out there because they basically funded the entire thing.

Also... $11K may not get you as far as you think. Our closing costs and prepaid costs alone are around $5,500. Our sellers are paying for most of it, but that's not something you can bank on. You also want to have enough left over post-closing that you can afford to replace something if it breaks right after moving in. We're closing Aug. 4. If the A/C breaks on Aug. 5, that's on us and it's something that MUST be fixed right away. We live in Alabama, and A/C is not optional.

Anyway I guess this doesn't answer your question. You need to do what's best for you. But it seems to me like you are banking on something that may or may not happen... and you may not be giving yourself enough of a financial buffer if you are going to be buying within the next year.

smbenevides1989 · July 2014

Like others have said, it would depend on your interest rate and your monthly payment, and whether or not you are paying extra on your loan. H and I have been going back and forth for months about whether or not we want to continue living where we are vs. buying a home before next fall. We have ultimately decided that we wanted the extra security, extra money in the bank, and less debt by paying off all our current debt and DH's car loan (minus my car) and save up for a DP/closing costs/moving fees within the next three years. If things go well, could we just simply move before hand? Yes, but I want to be able to just pay all the debts off and a reasonable pace while I continue to live our current lifestyle. Just by us paying off all those debts, we will be able to recoup in a faster timeline than before. That to me is worth paying off our debts more quickly.

formerlyGDaisy09 · July 2014

@hoffse makes a really good point about things breaking. You just can't anticipate what might happen. When we bought our home in 2012, it came with a dishwasher that was 23 years old, a 15 year old stove, and a fridge, washer, and dryer that were less than 2 years old. We basically assumed that the dishwasher might break soon and decided , worst-case we can wash dished by hand for a while and compared to other appliances dishwashers are cheap.

exactly 2 months after moving in the refrigirator died...so 2 hours of a repair man's time to tell me it was un-fixable (I could buy a $600 replacement part, plus his time, and that might fix it, or the broken compressor could just be a symptom of the actual problem). so 2 months after closing H and I were refrigerator shopping. fortunately we had the cash for it, but it wasn't something we could have predicted. and our dishwasher from 1989 is still going strong, *knocks on wood*

als1982 · July 2014

Ideally, I would pay off your car loan now and then continue to save toward a house.

And if you're so worried about things breaking or needing repairs in the first year, I'd either purchase, or negotiate into the purchase of the home, a home warranty. I had one my first year and it saved me thousands out of pocket. I used it on the disposal, clothes dryer, and even when the outgoing waste pipe from my bathroom burst at the valve in the basement (fun!).

EricaOO · July 2014

The car payment is $290/month. We live in a high cost of living area. Our home will be around $400k. With the help of my in-laws, we will be putting around 20% down. The savings I have will either be an emergency fund or will help with the down payment.

Besides a small credit card balance, the car loan is my only debt. A previous poster advised to go into the mortgage debt-free. That sounds so appealing.

hoffse · July 2014

I mean....

20% down on a $400K house is $80K. Closing costs on a house like that are going to be somewhat high as well, most likely - many banks do a 1-1.5% origination fee on the loan, etc. unless you shop around well. We got our origination fee waved, but our loan is through a bank that's a client of mine.

Do you really want to take $80K from your inlaws? And are you going to have plenty (I would say at least $15K) leftover for closing costs, moving expenses, and a cash/emergency cushion?

Honestly, taking $80K from your inlaws sounds like a recipe for disaster to me. I don't know about yours, but mine would probably hold it over our heads for the rest of our marriage. No thanks.

Note: home warranties do NOT cover everything. In fact, there are tons of exclusions in them. I suggest not relying on your home warranty to cover you in case something breaks in the first year. You really need a decent cash cushion after the dust settles from closing/moving. People can debate the amount, but I personally would want no less than $5,000 in an emergency account as a homeowner. Just in case.

formerlyGDaisy09 · July 2014

I know this is a to-each-his own sort of thing, but I would never want to be indebted that much to my ILs or my opwn parents. I would feel judgement everytime i spent money on anything. right after college my dad helped me purchase a car, I had $3000 to my name and needed a car to be able to get to and from work, my dad lent me $6000, and between my cash and some savings bonds I was able to make an $8000K down payment on a car (I financed $8000ish).

Until the day I paid off the last penny of that loan to my dad I felt the need to justify every single dime I spend to my parents. My mom would say something like "oh those are cute shoes" an I felt like I needed to explaing, first why I needed those shoes and second what a good deal I got on them...so rather than just saying "thanks" I'd say something like "thanks, my old running shoes were really worn out and were starting to hurt my knees, these are from last season, I got them 60% off"

What kind of obligation are you going to feel towards your ILs if thye help you with that much of a DP? Are they going to expect that your home is open to them whenever?

I'd rethink taking that much money from your ILs.

I'd consider paying off the car loan and putting the $300 a month into your savings to build towards that 20% plus the $15K for closing/moving costs hoffse mentioned, and 3-6 months expenses (this would be expenses in your new home) in an e-fund.

pay off car loan or continue building savings?

Re: pay off car loan or continue building savings?

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