Refinancing: Bad Idea?

[Anonymous]

So I just closed on a house and will begin making mortgage payments in June.

My car is one year old, purchased new last year, and has about $17,000 left on the loan at around 7% interest.  My credit union has offered to refinance my auto loan--lower interest rate which will cut my monthly payment from 360 a month to about 290.

I'm not sure what to do--on the one hand, basically, the loan will "reset" and I'll be paying five more years; on the other hand, I've never had a mortgage payment before and having lower car payments (and thus more cash) appeals to me.

Any thoughts or suggestions? 

[Anonymous]

I must be missing something..... Refi would result in a reset of the loan to 5 years (60 months).  You owe approximately $17K on the loan now.  If payment drops to $290 a month for 60 months your total of payments would be $17,400.  If your CU is willing to give you an almost 0% APR on a refinance, then it is a no brainer to go through with the refi.  

[Anonymous]

Ooops--sorry--car loan would be for six years, not five--still a good idea?

[Anonymous]

Your original loan was for 5 or 6 years?  I am no accountant or anything, I am just plugging numbers into some of the calculators to look at the total interest paid in each scenario.  If the difference is X dollars over the course of the 2 loans, only YOU can determine if that extra amount of money is worth the reduced payment and extended timeline.

[Anonymous]

Yes, it is a good idea to refi for the lower interest rate.  You might look at 60 months, sometimes you get a better rate.  So, if the 72 month rate is lower, 60 months might do even better.

HOWEVER, I suggest that after you refi, continue to make your $360 per month payments on the auto.  In other words, since you can afford current payment amounts, use the refi lower rate to pay extra principle so that you get out of debt sooner.  Then the "reset" as you call it is not a factor.

Lastly, the lower rate also gives you the benefit of being able to make the lower payment "on occassion" if you have a cash flow tight month.  However, I HIGHLY suggest that you use the opportunity to pay the auto faster by continuing to pay the $360 rather than only paying the required minimum 290.  That will put an extra $840 per year on the loan.

[Anonymous]

You know, your advice makes great sense--I think it's the initial part of owning a home and getting things I must have (for example, since I've rented all my adult life so far, I've never actually had to mow the lawn, so I need a lawnmower) that concerns me...

At the same time, though, as you say, I want the car payment paid off as quickly as possible.  The refinance on the car would give me more leeway; pay the 360 mostly, pay the 290 when cash flow is a little tighter--I do not want to have to put regular household expenses on credit cards!

Thanks for your great advice! 

[Anonymous]

Don't forget to budget savings and emergency funds.  Do not make the mistake of living check to check.  If you don't have savings or emergency funds (or too little) then divert the extra cash for now to savings and then get busy and have a garage sale, ebay and craigslist sale to raise more cash with the "stuff" that you don't need, don't want, don't use, can live without or is luxury that really isn't necessary.

[Anonymous]

PS: since you are now a home owner, do not be afraid to shop your homeowners and auto policy around. You may get a combined product discount from an agencey

[Anonymous]

My auto insurance is with State Farm, so I went to them first for homeowner's insurance--they gave me a good policy on the house and a big discount on my auto insurance, so I went with them.  (State Farm has always been good to me because I've been driving 25 years with no accidents or tickets--no claims filed, ever.  They like me, I guess, because I give them money and never ask for any back!)

[Anonymous]

You're a regular insurance company dream