Paying off Car Loan vs. Saving

thisuser · March 2015

Hello, first-time poster, long-time lurker! I started lurking a few months ago and have gotten some really great ideas and inspirations, so thank you!

I am wondering if you could help me out with a question... My DH and I are selling our house- mostly for something bigger and in a different area (school district for LO, work commute change, etc). We unfortunately will not be walking away with a ton of money (thank you housing crash 8 years ago!), but enough to pay off a private student loan ($15k), cc bills (manageable, never late payments, at about $3k, taken out mostly for the end of school (me) and for getting the house on the market), and a bit more in the bank. After we close (soon!), we will be moving in with my mom. She has a big house and is out a lot, so looking forward for the inbetween spot and hoping to stay there between 6-9 months (we will be paying her "rent"- only $500/month). So, finally, my question is, should we aggressively pay down our current car loan ($400/mnth, $15k owed) or save money for a down payment for our next home or both? We will have about $3k leftover every month after everything (student loans, daycare, gas/car, groceries, tiny bit of fun money, etc) and I'm torn with where to put it. I want the car loan gone as it is high and also adds to our DTI ratio... However, I want a decent down payment. I'm at peace knowing that we won't have 20% down (sorry, I know not a popular opinion!) but we live in a HCOL area. We will be paying off the PMI at closing, though.

Soooo... What should I do?!

Thank you!

MommyLiberty5013 · March 2015

What's your car loan's interest rate?

How long was the original loan term for? And, how long to you have left on it?

What make/model of car? Year?

thisuser · March 2015

The interest rate is high- about 6%. It was bought used and is a 2010. It was a 5-year loan and there's about 3 years left on it. It's a Lincoln MKZ.

This was mostly my husbands decision to buy (obviously I chimed in) as it replaced a car that he had for over 10 years and drove until dead. He doesn't mind the monthly payments and we pay a bit over the minimum, but I will never again have such a high car loan! Ugh.

Xstatic3333 · March 2015

I would work backward from the types of houses you want to buy. To keep your housing payment very comfortable (25% of take home is one good metric) how much of a DPN will you need? You'll need at least 5% to get a conventional loan. Also make sure you'll have money for closing, moving, and associated purchases, and still have a e-fund left behind.

If you can get enough money and still attack the car loan, I see nothing wrong with going for it!

simplyelise · March 2015

I think my answer would probably depend on how expensive of a house you're going to look for. But the draw of being able to pay off that car in 5 months, thus helping your mortgage interest rate and making you guys debt free (sounds like it, at least), would be hard to say no to. Another 5 months and you'd have over 17k for a down payment (adding in the 400 extra for those 5 months). If you're okay putting 10% down, that could buy a lot of house.

als1982 · March 2015

I would pay off the car. $15,000 isn't going to make much of a difference when it comes to a mortgage unless it gets you to 20% down or you have a term much lower than 30 years.

Also, what do you mean by 'paying off the PMI at closing?'

thisuser · March 2015

Great points everyone, thank you so much!

Re: 'paying off the PMI', at closing we can pay a lump sum (typically only a few thousand dollars) to payoff PMI. This is based on credit and how much of a down payment you have. It takes away the monthly payment and is much less expensive than a monthly payment over 30-years. Of course we will go over everything once we have solid numbers, but that's what I'm leaning towards now as I hate the thought of monthly PMI.

Or maybe we will just live with my mom for forever, ha

Erikan73 · March 2015

Make sure to put a chunk of that money aside for your taxes for next year because if you come out ahead on the sale of your house I believe (I'm not a CPA) that you have to declare that as income unless you can show that you've turned around and put that money back into a new home.This way in case you are still at your moms at the end of the tax year and you do have to declare the income, you'll be prepared in case you will owe.

simplyelise · March 2015

I'm pretty sure you'll be good on not having to pay taxes on the profit, but this article from turbo tax really lays it out so you can see for sure: https://turbotax.intuit.com/tax-tools/tax-tips/Home-Ownership/Tax-Aspects-of-Home-Ownership--Selling-a-Home/INF12035.html

AprilZ81 · March 2015

Erikan73 said:
Make sure to put a chunk of that money aside for your taxes for next year because if you come out ahead on the sale of your house I believe (I'm not a CPA) that you have to declare that as income unless you can show that you've turned around and put that money back into a new home.This way in case you are still at your moms at the end of the tax year and you do have to declare the income, you'll be prepared in case you will owe.

If the house has been their primary residence for 2 of the last 5 years there is no capital gains tax for the first $250,000 of profit.

short+sassy · March 2015

thisuser said:
Great points everyone, thank you so much!

Re: 'paying off the PMI', at closing we can pay a lump sum (typically only a few thousand dollars) to payoff PMI. This is based on credit and how much of a down payment you have. It takes away the monthly payment and is much less expensive than a monthly payment over 30-years. Of course we will go over everything once we have solid numbers, but that's what I'm leaning towards now as I hate the thought of monthly PMI.

Or maybe we will just live with my mom for forever, ha

Interesting, I have never heard of this. Learn something new every day!

AprilZ81 · March 2015

short+sassy said:

thisuser said:
Great points everyone, thank you so much!

Re: 'paying off the PMI', at closing we can pay a lump sum (typically only a few thousand dollars) to payoff PMI. This is based on credit and how much of a down payment you have. It takes away the monthly payment and is much less expensive than a monthly payment over 30-years. Of course we will go over everything once we have solid numbers, but that's what I'm leaning towards now as I hate the thought of monthly PMI.

Or maybe we will just live with my mom for forever, ha
Interesting, I have never heard of this. Learn something new every day!

We had three options for our PMI (we only put down 10%).

1) Monthly PMI payments

2) Lump Sum PMI

3) Lender Paid PMI (via a slight increase in interest rate).

We went with lender paid PMI because it was the lowest over all cost per year.

formerlyGDaisy09 · March 2015

AprilZ81 said:

short+sassy said:

thisuser said:
Great points everyone, thank you so much!

Re: 'paying off the PMI', at closing we can pay a lump sum (typically only a few thousand dollars) to payoff PMI. This is based on credit and how much of a down payment you have. It takes away the monthly payment and is much less expensive than a monthly payment over 30-years. Of course we will go over everything once we have solid numbers, but that's what I'm leaning towards now as I hate the thought of monthly PMI.

Or maybe we will just live with my mom for forever, ha
Interesting, I have never heard of this. Learn something new every day!
We had three options for our PMI (we only put down 10%).

1) Monthly PMI payments
2) Lump Sum PMI
3) Lender Paid PMI (via a slight increase in interest rate).

We went with lender paid PMI because it was the lowest over all cost per year.

we were not given any options for how to pay PMI (we bought when we were a little less MM with 5% down, it's worked out OK but I'm not sure I'd do it again)

however we do have a few options for getting rid of PMI:

1. we can wait to reach 80% of the original purchase price of the home

2. we can pay to have the house reassessed once we feel we're at 80% the current value of the home.

We're opting for option 2. option 1 would take another ~2-3 years to reach. Right now we're just about at 80% of what the town's latest appraisal, but this is for taxes, so it's likely high but it is pretty close to Zillow's estimate. once we're done with the basement renovation (permitted work that adds a 3rd bedroom and another 400 sqft of finished space to the house) we're certain that we'll appraise well over the mark we need to hit.

The more I hang around here and the more stories I hear about PMI the more I know I want to avoid it, if possible when we buy our next home.

short+sassy · March 2015

@formerlyGDaisy09, just be really careful with Zillow. They are often WAY, WAY...sometimes crazy WAY off on their estimates. However, sometimes there are actual sales for an area listed. Those are true numbers, though you still need to be careful and look at how long ago the sale happened. I've seen it where the sale happened 2-3 years ago. Not exactly current and a bank's appraiser will typically only look at sales that have happened within the last 6 months.

For example, I've been looking to buy a second rental property. I looked at one this weekend that is worth maybe...MAYBE on a good day...$75K. Probably more like $65-$70K. This is an area of town where I am pretty familiar with the housing prices. Zillow zestimated this house as being worth $283,000. I literally almost fell out of my chair laughing. I wish I could buy up these houses for $70K and sell them for four times that much. (And now I gently land myself back into this reality.)

Instead of Zillow, look at one of those realty websites that list houses for sale on the MLS. Like realty.com or Latter&Blum's website. Do a search for your zip and see what similar houses are being listed for. Of course, "listed" and "bought" are two different things, but it should at least get you into the ballpark.

If I were you, I'd wait until your renovation is done. That should add a nice chunk of change to your equity and put you at the 80% mark or more, if you are already close to that number.

thisuser · March 2015

Thank you, everyone!

Also, regarding Zillow, I have also noticed that their prices seem very inflated. I did forget that PMI can be taken off at 80%- thanks for the reminder and best of luck getting it removed @formerlyGDaisy09

formerlyGDaisy09 · March 2015

short+sassy said:
@formerlyGDaisy09, just be really careful with Zillow. They are often WAY, WAY...sometimes crazy WAY off on their estimates. However, sometimes there are actual sales for an area listed. Those are true numbers, though you still need to be careful and look at how long ago the sale happened. I've seen it where the sale happened 2-3 years ago. Not exactly current and a bank's appraiser will typically only look at sales that have happened within the last 6 months.
For example, I've been looking to buy a second rental property. I looked at one this weekend that is worth maybe...MAYBE on a good day...$75K. Probably more like $65-$70K. This is an area of town where I am pretty familiar with the housing prices. Zillow zestimated this house as being worth $283,000. I literally almost fell out of my chair laughing. I wish I could buy up these houses for $70K and sell them for four times that much. (And now I gently land myself back into this reality.)
Instead of Zillow, look at one of those realty websites that list houses for sale on the MLS. Like realty.com or Latter&Blum's website. Do a search for your zip and see what similar houses are being listed for. Of course, "listed" and "bought" are two different things, but it should at least get you into the ballpark.
If I were you, I'd wait until your renovation is done. That should add a nice chunk of change to your equity and put you at the 80% mark or more, if you are already close to that number.

yes, this is true. I've done some research comparing zillows estimates to recent sales in the area (via official town records). in our case, zillow's estimate almost exactly matches the town's appraisal. This does make me think that both are slightly high...again it's in the town's best interest to appraise high so they get more property tax. however both those values are the value we would need the house to appraise for right now to drop PMI, so I'm fairly confident that after we finish the basement and increase from a 2BR to a 3 BR and have more finished space it will be worth our time to pay for a new appraisal from the bank. we did buy at the beginning of 2012 when home values in our area were still way down, sale prices have been steadily rising in our neighborhood in the last 2 years. there have been quite a few sales as the neighborhood had many elderly residents when we moved in.

short+sassy · March 2015

Meh! Don't even get me started about tax assessment offices.

The year I bought my house, I went down to the assessor's office when I got my tax bill for the next year. They valued my house at $210K...the one I had JUST bought for $81K. Umm...yeah.

I brought all my closing paperwork, including my appraisal which showed the home valued at $125K. The assessor lowered the value to $135K. I was like, "But I just bought the house for $81K...and even my own appraisal that was done less than 6 months ago is $10K less than yours." He said he took that into consideration and that was why he lowered it to $135K. Argh! Still way too high but, whatever. You can't fight city hall. I was just grateful they lowered the assessment to at least something sort of close to the value.

Then the tax bill the year after that was back to a $210K value. I stood in line for 11 hours to dispute the assessment...because that's how we roll in Orleans parish/county (rolling eyes). I brought my previous paperwork...including the previous year's assessment. Only to have the assessor say, "Well, I don't know what you want. We really can't do better than the $135K assessment you received last year." I literally gripped my chair to stay calm and keep from screaming. I replied, "Yes, exactly. All I am asking is for you to lower this year's assessment to last year's number. As you can see, it was erroneously raised a large amount. If it was the same as last year's, I wouldn't even be here." His reply, "Oh, okay. I see that now. Sure, I can change it back to $135K." (Banging my head against the wall).

I found out each area of the city gets reassessed every four years and I just had the bad luck that my area was reassessed the year after I bought my house. Hence why I had to do the excruciating reappraisal dance two years in a row. All has been calm since then, but my area is due for a reappraisal for the 2017 tax year, and home values have gone up a crazy 12% and 13% (respectively) over the last two years. A good thing for sure! But I'm already dreading the 2017 tax bill.

formerlyGDaisy09 · March 2015

short+sassy said:
Meh! Don't even get me started about tax assessment offices.
The year I bought my house, I went down to the assessor's office when I got my tax bill for the next year. They valued my house at $210K...the one I had JUST bought for $81K. Umm...yeah.
I brought all my closing paperwork, including my appraisal which showed the home valued at $125K. The assessor lowered the value to $135K. I was like, "But I just bought the house for $81K...and even my own appraisal that was done less than 6 months ago is $10K less than yours." He said he took that into consideration and that was why he lowered it to $135K. Argh! Still way too high but, whatever. You can't fight city hall. I was just grateful they lowered the assessment to at least something sort of close to the value.
Then the tax bill the year after that was back to a $210K value. I stood in line for 11 hours to dispute the assessment...because that's how we roll in Orleans parish/county (rolling eyes). I brought my previous paperwork...including the previous year's assessment. Only to have the assessor say, "Well, I don't know what you want. We really can't do better than the $135K assessment you received last year." I literally gripped my chair to stay calm and keep from screaming. I replied, "Yes, exactly. All I am asking is for you to lower this year's assessment to last year's number. As you can see, it was erroneously raised a large amount. If it was the same as last year's, I wouldn't even be here." His reply, "Oh, okay. I see that now. Sure, I can change it back to $135K." (Banging my head against the wall).
I found out each area of the city gets reassessed every four years and I just had the bad luck that my area was reassessed the year after I bought my house. Hence why I had to do the excruciating reappraisal dance two years in a row. All has been calm since then, but my area is due for a reappraisal for the 2017 tax year, and home values have gone up a crazy 12% and 13% (respectively) over the last two years. A good thing for sure! But I'm already dreading the 2017 tax bill.

yes, our town appraised the house 20K higher than the bank did when we bought it, so much closer than yours. I argued a little with the town assessor and he said all he could do was lower the status of the house from "Excellent" to "good" I have no idea how that figures into the town's tax formula. if this renovation ups our home value from the town's prospective too much I will most definitely be down there fighting it.

I have been consulting both our bank financial advisor in strategizing when to have our home reassessed by the bank, they all seemed to be in agreement that based on recent home sales our planned renovation should put us squarely in a position to drop the PMI from our mortgage.

short+sassy · March 2015

@formerlyGDaisy09, good luck with that! I'm sure it will feel great and be a nice savings to finally drop that PMI anchor off your loan and budget. While I understand why banks require it, from a homeowner's perspective it is just throwing money into the fireplace every month.

I realize you may not have an FHA loan. But nowadays, PMI follows FHA loans for the life of the loan. Pure evil and totally unnecessary, IMO. Fortunately, I put 20% down for my primary residence, so I don't have to deal with it. But still, I think it is an injustice for others.

My next real estate purchases are purely for investments and banks REQUIRE a 25% down payment for non- owner occupied real estate. So I'm like, "Yeah! No PMI, " then, "Darn it! I have to make a 25% down payment, lol."

formerlyGDaisy09 · March 2015

short+sassy said:
@formerlyGDaisy09, good luck with that! I'm sure it will feel great and be a nice savings to finally drop that PMI anchor off your loan and budget. While I understand why banks require it, from a homeowner's perspective it is just throwing money into the fireplace every month.
I realize you may not have an FHA loan. But nowadays, PMI follows FHA loans for the life of the loan. Pure evil and totally unnecessary, IMO. Fortunately, I put 20% down for my primary residence, so I don't have to deal with it. But still, I think it is an injustice for others.
My next real estate purchases are purely for investments and banks REQUIRE a 25% down payment for non- owner occupied real estate. So I'm like, "Yeah! No PMI, " then, "Darn it! I have to make a 25% down payment, lol."

I think ultimately it was to our advantage to get into the real estate game when we did, so we paid PMI for just over 3 years, hopefully we've ultimately made up for it in savings on a lower purchase price and will cme out ahead in gains when we sell. hopefully we win the game! the plan is to roll the PMI savings into our student loan snowball, so it won't make much difference to our budget in the short term, but should be worth it in a few years.

brij2006 · March 2015

My recommendation would be to pay off the car (plus any other outstanding debt you may have left), then save a 6 months of living expenses/emergency fund (if you don't have one already), then start saving for a house.
This will set you up the best financially, for the what ifs of homeownership. If you can, live with your mom until you have these financial goals met. Even maybe discuss with her what your financial plans are to move into a different home and why you would like to stay there longer than originally planned.

Paying off Car Loan vs. Saving

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