Will a refinance on a car loan hurt chances for buying a home?

[Anonymous]

Our finance company called and wanted to know if we would be interested in refinancing our auto loan for a lower interest rate and monthly payment.  However would that hurt on our credit when we are looking at trying to purchase a home in about 4-6 months. 

[DallasLoanGuy]

Depends....

Sure, you may drop a few points.... but that will be offset by a lower pmt and could be a wash as far as underwriting goes.

what is your scores?

[Anonymous]

What do you mean by could be a wash as far as underwriting goes? Sorry but this is all new to me. We do not expect to apply for a loan until we get our scores up some more, working on that had a few things deleted and paid down the cc balances just waiting on them to update. Score are 559, 589, and 567. Not great but much better than the low 400 we started with a year ago.

[DallasLoanGuy]

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smooshiesmom wrote:
What do you mean by could be a wash as far as underwriting goes? Sorry but this is all new to me. We do not expect to apply for a loan until we get our scores up some more, working on that had a few things deleted and paid down the cc balances just waiting on them to update. Score are 559, 589, and 567. Not great but much better than the low 400 we started with a year ago.

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from an underwriting standpoint.... if you lower your debt ratio with this refinance of the auto, it may very well be worth the few points you lose for establishing new credit.

do you really think you can lower your rate that much?

[Anonymous]

Not sure if I can lower it much or not. We will find out today. Unless it is a significant amount should I not do it?

[MattH]

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@Anonymous wrote:
Not sure if I can lower it much or not. We will find out today. Unless it is a significant amount should I not do it?

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That would depend on many factors. You need to find out how much lower the interest will be and how much any fees will cost. Once you have the numbers, sit down with a spreadsheet or an online loan amortization calculator and figure out where you will stand on the day your current loan is scheduled to be paid off under the terms of the new loan. Some people focus just on the monthly payment, but that can be a major mistake if it fools you into taking out a new loan with a longer term that will take you that much longer to pay off than the old loan. Of course if you have some spare cash the simplest way to reduce the interest on your auto loan is to pay more than the scheduled monthly amount, and you can do that without filing any paperwork.

In general, the lower the rate and the longer you have been making payments on your existing loan the less likely a refinance will be worth doing. If for example you are 3.5 years into a 5 year loan then you have already paid something like 85 to 90 percent of the total interest for this loan. With home mortgages, of course, the loan terms tend to be much longer because houses last longer -- there are not too many 15-year or 30-year auto loans around. So the time window when refinancing can make sense is much longer with a home loan than with an auto loan.

You also need to ask yourself, why are they offering me this deal, what's in it for them? It is possible that a deal makes sense for both parties, but you need to run the numbers to determine whether you will benefit; you can be sure the lender's bean counters have already run the numbers from their perspective!

The best sites I know for loan amortization calculators are
www.mtgprofessor.com
www.bankrate.com