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So I've been debating whether or not to pay off my auto loan for the past few months. I owe roughly $13.5k on my loan and I currently have about 22k in cash. My goal will be to purchase a house this summer.
Would it be a good idea to keep paying the loan as agreed to save up a larger cash sum or pay off the loan which will free up $451 / month in DTI?
It depends on alot of factors.
What DTI are you expecting to be in
what other debts do you have
what is our income (gross)
What is your FICO score and do you need that car loan as an open tradeline
Would you be able to then put that 500 per month back into savings to rebuild your savings back up to a decent level prior to closing on a home?
Generally speaking, unless you need to lower DTI, it is better to have open tradelines and more cash available. Then the LO can tell you towards the end of the process to keep the cash for reserves, pay down debt, put more money down up front, etc base don the situation. When you pay something off ahead of time like this it could take away your LO's room to massage the file a bit near the end.
Hey... a few factors here:
Only debt: $5900 student loans and 13.5k auto loan. No CC debt.
Income: 90k+
Current EQ FICO is 728.
Current savings: 22k-ish.
I'm just thinking though, if I wanted to put 20% down on a house, there's probably no way I could pay this car loan off and save up the difference before the summer. Maybe it would make sense to pay XX amount of months in principle or something...
Hi Cyan,
I'm trying to work backwards...you're talking about 20% down and sitting on $22k-ish savings. Are you looking at prices in the low, maybe mid $100k's?
Unless you have that student debt on a really short amort (high payment) or I'm really far off on price range, I don't see how it makes a big difference on your DTI at 90k.
At some point, that car loan's rate is a factor. If the payment doesn't hurt DTI, then rate is king. At 0%, I wouldn't pay it off. Even at 5% rate, if it meant that we either had to seek PMI or a higher-rate second mortgage on your home loan, you may/may not save by paying off that auto loan.
We can do envelope math on DTI with...
student loan monthly payment
ballpark home price
ballpark property taxes
My auto loan is at a 7.89 rate. It was the first car I purchased + my credit wasn't nearly as good as it is now. I purchased the vehicle back in April 2008 and financed $24.4k. For the most part... I've already paid the majority of the interest, looking at now roughly $75 / month and dropping. That'll be the last time I finance 95% of something again though.
Personally, I would not do anything. When applying for a loan, cash is king and if you have the cash (or will have the cash) for 20% down then I would not jeopardize that by stressing about the car payment. From waht I can gather DTI is not a real issue unless you are looking at ALOT more expensive houses that your posts suggest. ANd you are right on the car note, you are paying mainly principle at this point. IF you can put 13K (or that neighborhood) more down on a home, even at todays low rates, that will save you tons of money over a 30 year loan. Again, it also gives the LO alot of room to work with.
I don't you should have problems with the approval either way. It's probably just a financial decision.
If you're buying anywhere in that low- to mid-$100's range, the extra costs from not having 20% seem to be greater than the +/-$900/year in interest cost on the car. I don't think that I'd do anything either.