Effect of refinancing a car

[Sakuji]

Hi folks! Hoping some of you guys will be able to enlighten me on this one. It has been said that during mortgage application it is ideal that there should be new loan accounts/ inquiries atleast a year prior to application. Now six to nine months from now i plan on having my first ever mortgage. Scores at this time are in 740s with practically no debt except for a car loan that will be paid off after three more payments. Now im thinking of refinancing this car to add all the funds for downpayment and closing costs. My question is if i refinance the car will that be considered a new account if i apply for mortage in 6-7 months from now? What if i refinance it with the same bank will that still be considered a new account and a no-no mortgage wise? Im asking this because my front end dti limits my loan amount and i plan on bringing in instead more downpayment/ cash equity to reach the house price i want to achieve. Hoping for helpful responses.

[pizzadude]

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@Sakuji wrote:
Hi folks! Hoping some of you guys will be able to enlighten me on this one. It has been said that during mortgage application it is ideal that there should be new loan accounts/ inquiries atleast a year prior to application. Now six to nine months from now i plan on having my first ever mortgage. Scores at this time are in 740s with practically no debt except for a car loan that will be paid off after three more payments. Now im thinking of refinancing this car to add all the funds for downpayment and closing costs. My question is if i refinance the car will that be considered a new account if i apply for mortage in 6-7 months from now? What if i refinance it with the same bank will that still be considered a new account and a no-no mortgage wise? Im asking this because my front end dti limits my loan amount and i plan on bringing in instead more downpayment/ cash equity to reach the house price i want to achieve. Hoping for helpful responses.

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There really isn't a "one~year" rule....at least I've never seen it.   However people usually advise against applying for new credit because both the inquiries and new account have the potential to lower your score.      Even if you refi with the same lender I would expect that you'll incur inquiries ~ also your old account will be closed out and a new account will be created.     

So you are looking to take a new loan out based on the value of your car, is that correct ?    How much will you be able to borrow, and do you think that it will make a significant difference in the house that you will be able to purchase ?

[Sakuji]

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@pizzadude wrote:

There really isn't a "one~year" rule....at least I've never seen it.   However people usually advise against applying for new credit because both the inquiries and new account have the potential to lower your score.      Even if you refi with the same lender I would expect that you'll incur inquiries ~ also your old account will be closed out and a new account will be created.     

So you are looking to take a new loan out based on the value of your car, is that correct ?    How much will you be able to borrow, and do you think that it will make a significant difference in the house that you will be able to purchase ?

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Thank you very much sir for that quick response.

Well, the vehicle is an acura mdx 2010 which will be paid off in three months time. Current value at the same condition is around 20k+. Now, the lien holder's (Chase) agent whom I dealt with last time called me a few weeks back to say that he was really surprised that the vehicle is about to be paid off( I had a big windfall few months back that I used to pay bulk of the car loan capital; I guess in hindsight foolishly). Now he offered me if I want it to be refinanced on even a lower rate (< 3.0) at around the market value of the car. I guess he soft-pulled me. I gracefully declined his offer tho he said that if I ever change my mind to just give him a call.

@Anyway, based on my regular documentable income my front-end dti @ 31% will only loan me 250k. I have 20k cash right now and on the rate I’ve been saving I might have 30k at the end of 6-9 months (at which I plan to start the mortgage process). Now, I live in an area where the target houses that I’m currently looking at run around 280k’s. Assuming that all factors (i.e income, target price) stay the same, I surmised that only way I can reach that price threshold is either to find a lender who will allow me a higher front end dti (> 31%; which I don’t have a control) OR increase my cash equity to fund the difference. If I refinance the car say at 15k @ 3 years will require a payment of +/- 400usd which at 9 months of payment will still net me +/- 11k cash to add to the reserves which I think is significant. Since I practically don’t have other debt except for the car, the back end dti is not really an issue (I guess).

Now, the main reason asked above question is to find other options that I can personally control and improve my chance to achieve the target price. I do understand that new accounts/hard inquiries are frowned upon with regards to obtaining mortgage but I have not “read” anything categorically saying if a refinance auto loan is considered a “new loan”. I honestly don’t know the answer on this and a green horn on the mortgage process and that’s the reason of the post.

I truly am grateful to this Forum because of all the advice and first hand experience people like you have been giving to people like me. Without those, I really can’t say where will I be right now.

Hoping for more enlightening answers.

[StartingOver10]

Your car loan is calculated in your back end ratios, not the front end.

So if you refi your vehicle to pull $$ out so you have additional down payment that will help your front end.

If the vehicle is paid off, then it helps your back end ratio.

But having a lower interest rate/payment won't help your front end ratio.  Do you have a loan officer you know and trust for the mortgage? This would be the type of question you need to ask him/her. (Not the retail branch officer - I mean a true loan officer).

[Sakuji]

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@StartingOver10 wrote:

Your car loan is calculated in your back end ratios, not the front end.

So if you refi your vehicle to pull $$ out so you have additional down payment that will help your front end.

If the vehicle is paid off, then it helps your back end ratio.

But having a lower interest rate/payment won't help your front end ratio.  Do you have a loan officer you know and trust for the mortgage? This would be the type of question you need to ask him/her. (Not the retail branch officer - I mean a true loan officer).

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Yup, you are correct. The auto payment is currently small and my only debt (plus it's about to be paid off) it doesn't bother my back end ratio. I was just trying to find ways to increase my cash equity to reach the price point I'm trying to achieve since my loan amount is being limited by income and front end ratio.

Well, after thinking throughly about it I decided not to pursue refinancing. I'll just try to scrape more dollars from expenses to add to savings. Will also trying putting more hours at work.

Thank you very folks for all the clarification.