Mortgage 3.875%, car loan 2.69%, which to pay extra first?

[ninaprincess]

I have no math skills but have some extra money sitting in the savings account collecting 0.5%. Not sure which one I should put my extra money into.

Car loan balance is $25,000
Mortgage balance is $340,000

Mortgage is 30 years, car loan is 5 years. Mortgage comes with tax deduction.

Gracias,

[carlsbadworker]

It depends on your marginal tax rate.

[Coronita]

delete never mind. My math skills suck these days.

[UCGal]

The rule of thumb is to pay off the highest interest rate first.

I found an interesting article that does the math…

http://www.mymoneydesign.com/personal-finance-2/mortgage-refinance/which-is-better-paying-down-your-auto-loan-or-mortgage/

[Hobie]

Car is a depreciating asset. And when financed you are required to carry Collision insurance. Also, monthly payment is less on car so extra payments will go to principal and have a larger effect on total of all payments P+I. So, short of running numbers, my gut says; pay off car first, save insurance, then bank rest for rainy days.

[svelte]

I bet it comes out close to a wash so personally, I would pay off the car first as it is the first debt you could completely pay off.

Another thing to consider: hope that money that is just sitting around is not your rainy day fund. You need to have some readily available cash as a rainy day fund, in case there is a job loss etc. And don’t forget a job loss could be due to accident, health issue, etc, beyond the control of you or your company.

Once your income goes in the tank, it’s hard to get another loan.

[no_such_reality]

I’d kill the car loan.

They’re close so I’d head towards one less payment and less mandatory monthly cash flow in case of unfortunately employment circumstances.

[Coronita]

I would keep your cash on hand and do something else with it to return you more than 2.69% or 3.875%.

I take 1/2 of that money look into a very very stable stock that pays a decent dividend, and buy shares roughly over the next couple months, making sure that the shares purchased has the “reinvest dividend” selected. You can find some that are 5%+. I wouldn’t put everything in there. Maybe 1/2.

I wouln’t be in a hurry to pay off the mortgage at all. The rates are ridiculously cheap. In fact, I would consider refinance over and over again as rates drop .25% or more.

I would be doing everything I could to build up my cash position today, and trying to push out my fixed rate loan obligations as far out as I could….As such, I would think about paying off the car loan by cash-out refinancing $25k from my primary and pay of the car loan if that was an option…
My thought process is that the money I’m putting into a car right now that is mine, is considerably more expensive than money that belongs to the bank and will be returned over 30 years, as the dollar tanks… Not to mention that the extra $25k that I pull out of my primary mortgage, the interest I pay on it would be deductible on schedule A while the car loan is not. So I would run through the numbers to see if it would make sense to do that, using turbo tax and such.

But then again, I’m kinda stupid these days so I don’t know..

[sreeb]

Assuming you have a 30 yr fixed, I wouldn’t pay it off early. There is a significant possibility that the dollars you eventually use won’t be worth much.

So the car.

[Myriad]

Depends on whether you plan to invest the money or not in a rate expected to be higher than the loans. Probably makes sense to invest in a Roth IRA first and then pay down the highest rate.

Generally, it doesn’t make sense to hold cash right now. Also doesn’t make sense to pay more interest to get a tax deduction for 1/3 of the interest.

[Coronita]

I don’t know I think paying off the car loan with cash now is a big mistake.

OP is giving up a safety net and opportunity cost of the $25k by paying off the car loan early.

Though car loan rate is lower, the term is probably a lot shorter than the 30 year home loan.. Which means she is probably paying a considerable amount of her disposable income in present day to the car.

One the other hand, the home loan is spread over 30 years. Her present day payments will be much lower, and that means she would have a lot more she can do today to make her money grow, because she’ll have more to work with today. Not to mention as she makes her payments, years later, the dollar will have considerably depreciated…

Also ,while it’s been proven that a home loan is dischargeable in a forclosure, I’m not so sure a car loan is as easily forgiven, even if the car is repossessed (sorry, never took out a car loan myself). And reality is that, in CA you can probably live with owning a home. But it would be really really hard to get around without a car (which for most purposes is a necessity in so-cal)… So if the crap hits the fan, personally I would rather lose my house than lose my transportation….

I think if the OP thinks the can beat the 3.875 in an investment product(s) consistently year after year, than she would be better served pushing as much of her debt as far out as possible. If on the other hand, she doesn’t feel she can, beat 3.875 but can beat 2.69 consistently year after year, then she probably should keep both of her loans…And if she feels she can’t even beat 2.69, then she probably should just pay off the loan, assuming she has sufficient safety cushion/emergency fund.

But in reality is, something less than 3% probably doesn’t make *that* much of a difference to really warrant paying it off early.

[scaredyclassic]

I guess on average people stay in their homes the same length of time as a long car loan.

[joec]

Does anyone here listen to Rob Black and your money? He talks about not paying off a mortgage a lot.

In regards to the car loan, I think the interest on some of those are so low now that unless you are making bank and maxing out everything, there are probably better uses for it in terms of longer term investments, emergency savings, 401k, IRAs, 529s, etc…

If I had to pick one, I’d choose the car loan, but this question is easier to answer depending on a lot more of your personal factors like age, job, insurance needs, long term care, etc…

[no_such_reality]

Investments can suck.

Jobs get lost.

Cash flow dries up.

Debt however, always wants it’s due.

[patb]

[quote=Hobie]Car is a depreciating asset. And when financed you are required to carry Collision insurance. Also, monthly payment is less on car so extra payments will go to principal and have a larger effect on total of all payments P+I. So, short of running numbers, my gut says; pay off car first, save insurance, then bank rest for rainy days.[/quote]

Hobie is right.

Car is a depreciating asset, it’s depreciating at a 5- 10 year rate so add 10-20 percent to it’s rate. House is depreciating at 25 year rate, so add 4% to house rate.

So figure the car is costing somewhere between 14-25% in true cost.
while house is running at 7 percent.

[Author]

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