I thought it was $3200. Anyhow, $900 difference wouldn’t be a modest car payment. $400-500 would be. My 3 yr loan payments on a new Accord are close to $700/mo. It’s true about the 401k loan, that it goes back to him eventually; I was thinking about his cash flow.[/quote]
2400 + 450 + 250 = 3100. But I won’t squabbnle over $100.
You should consider that you account for the $250 you are paying yourself back, plus the fact that you are paying down over $500 per month in principal.
It’s true that both of the impact cash flow, so he does need to make sure he can handle this.
But when comparing to rent, both the 401k loan and principal paydown are zero net change to net worth and should be considered as such.
The 401K loan is simply a transfer of funds from one account (his checking account) to another account (his 401k). This is a zero change in net worth.
That brings the comparison down to …
Own: 2850
Rent : 2200
The difference ($650) is less than your new Accord payment. If you consider that he would be paying down principal at $500 per month (in the first year). It is really a modest difference in cost compared to renting (using change in net worth as the cost).
Consider what happens over 5 years :
In 5 years, rent is likely to have increased by a couple hundred bucks. The principal paydown would be nearly $700 per month.
Consider what happens over 7 years:
In 7 years, rent will likely have increased by 250 bucks a month. The principal paydown would be about $750 per month and PMI could be removed as the loan would drop below the threshold for PMI removal. At that point his monthly cost could be considerably cheaper than rent. All this assumes zero net change in house price over the next 7 years.
