Opinions Wanted: Payoff Car With Home Refinance?

[Spacep0d]

Hi there Teslarati!

I'm looking for your sage advice here.

I'm in the process of refinancing my home. I owe 27k on my car. I'm thinking about taking out 27k from the refinance to pay off the car. The home refinance rate would be 2.375% vs. 5.99% for the car. My credit is good but not excellent, otherwise I'd have gotten a better rate.

I plan to keep the car forever or until the battery life is gone, or until the range is depleted too far. Even then I'd consider a new battery at the end of its life.

If the car is totaled I do have good Tesla insurance so I'm covered there.

Is this a good idea or am I off my rocker? Anything I should know that maybe I didn't think about yet?

The savings is $270 a month! That covers my insurance payment through Tesla with $150 left over. What do you think?

These cars hold resale so well that I see little risk in my view. It's in a garage every night, and I work from home.

Thanks!

 

[Krash]

It is a better deal than you think since you likely get to write off your mortgage interest on your taxes and it doesn't sound like the car is a business deduction.

 

[sightman]

What is the payment term on your refinance loan? Versus your current car loan?

 

[Spacep0d]

What is the payment term on your refinance loan? Versus your current car loan?

Refinance: 15 year term. I can also recast the loan payment if I pay down 10k or more, so it'll recalculate loan payments with no additional paperwork or qualifying.

Car loan: 6 years.

Neither has a pre-payment penalty.

 

[Spacep0d]

It is a better deal than you think since you likely get to write off your mortgage interest on your taxes and it doesn't sound like the car is a business deduction.

Aha! Good point. I can write off the mortgage interest indeed. Thanks!

 

[Nix Alba]

Hi there Teslarati!

I'm looking for your sage advice here.

I'm in the process of refinancing my home. I owe 27k on my car. I'm thinking about taking out 27k from the refinance to pay off the car. The home refinance rate would be 2.375% vs. 5.99% for the car. My credit is good but not excellent, otherwise I'd have gotten a better rate.

I plan to keep the car forever or until the battery life is gone, or until the range is depleted too far. Even then I'd consider a new battery at the end of its life.

If the car is totaled I do have good Tesla insurance so I'm covered there.

Is this a good idea or am I off my rocker? Anything I should know that maybe I didn't think about yet?

The savings is $270 a month! That covers my insurance payment through Tesla with $150 left over. What do you think?

These cars hold resale so well that I see little risk in my view. It's in a garage every night, and I work from home.

Thanks!

This is really a question of cashflow vs total cost. Which is more valuable to you?

Rolling the value of the car loan into your fifteen year mortgage certainly reduces the interest rate, but not necessarily the total interest you'll pay since you're paying for it over the entire 15 years as opposed to over the remaining 54 months of your car loan. (I'm assuming that since you joined TMC in 4/19 that is about when you obtained your 6-year / 72-month car loan).

Assumptions:
* The additional principal and interest component of your mortgage will be about $178.10 / month
* You'll receive somewhere around 15% as a mortgage interest deduction each year (I'm not a tax guy, so I may not have done this correctly)
* Your current car loan payment is somewhere around $448 / month
* Your current car loan has 54 months remaining

This results in the following:

Total of payments for option 1: -$27,463
Total of payments for option 2: -$24,646

The NPV of option 1 (Roll into Mortgage) is about $3,864.
The NPV of option 2 (Continue with car loan) is about $5,467.

Option 2 has the most value, and is the least cost. However having an additional $270 / month in cash flow gives you more options. You could use it to pay down your debt sooner (and therefore reduce the total amount of interest paid) or just enjoy life more.

Here's a link to the spreadsheet I used to generate these numbers: Dropbox - Cash Flow Comparison.xlsx - Simplify your life

 

[CertLive]

A car is a depreciating asset. Your home depending on how much it costs to run usually is not. I would assume if you are keeping the car until it runs no more then if current trends continue and even in these crazy times prices sneak up. Then paying off the car faster using the uplift of your house is well worth it especially with the tax incentives mentioned above. In fact it could be even better if you use the monthly payments gained to accelerate payment of the mortgage.

 

[SageBrush]

OP, you are confusing cash flow with finance charges

Your savings are about $27,000 * 3.6% the first year, and then less as time goes on because you would be paying down the car loan if you keep it. As a very rough rule of thumb you can linearize the savings as 1/2 of 3.6% per year for the years of the loan so the total savings of rolling e.g. a 6 year car loan into the home is equal to 27,000*0.018*6 = $2916. That is about $40 a month. Figure another couple dollars in tax deduction savings.

Why 3.6% ?
Your apr dropped from 6% to 2.4%

Pros and Cons

• The car loan, by virtue of having a shorter payoff schedule, forces you to repay your debt quicker. Nothing stops you from taking the extra cash flow from the refinance and plowing it into your debt (or even better, investing) but only you know if you have the discipline to act that way.
• Rolling the car loan into the house reduces your future flexibility to take out home equity

• The obvious -- you are paying more interest with the car loan

 

[dmurphy]

Aha! Good point. I can write off the mortgage interest indeed. Thanks!

But can you though? In many cases, the standard deduction is now high enough that itemizing - unless you have some huge writeoffs - doesn't make sense. Obviously everyone's situation is different so consult an accountant.

I can just say in our situation, with the SALT deductions capped at $10k, we don't benefit from itemization now. (The SALT cap especially is a gut punch here in NJ ...)

 

[Spacep0d]

This is really a question of cashflow vs total cost. Which is more valuable to you?

Rolling the value of the car loan into your fifteen year mortgage certainly reduces the interest rate, but not necessarily the total interest you'll pay since you're paying for it over the entire 15 years as opposed to over the remaining 54 months of your car loan. (I'm assuming that since you joined TMC in 4/19 that is about when you obtained your 6-year / 72-month car loan).

Assumptions:
* The additional principal and interest component of your mortgage will be about $178.10 / month
* You'll receive somewhere around 15% as a mortgage interest deduction each year (I'm not a tax guy, so I may not have done this correctly)
* Your current car loan payment is somewhere around $448 / month
* Your current car loan has 54 months remaining

This results in the following:

Total of payments for option 1: -$27,463
Total of payments for option 2: -$24,646

The NPV of option 1 (Roll into Mortgage) is about $3,864.
The NPV of option 2 (Continue with car loan) is about $5,467.

Option 2 has the most value, and is the least cost. However having an additional $270 / month in cash flow gives you more options. You could use it to pay down your debt sooner (and therefore reduce the total amount of interest paid) or just enjoy life more.

Here's a link to the spreadsheet I used to generate these numbers: Dropbox - Cash Flow Comparison.xlsx - Simplify your life

Wow what an answer. Thanks! Cash flow is more important to me if I had to pick one. I see what you mean about 15 year vs. 6 years. You're correct on the timing and payment amounts.

Great analysis. I do prefer cash flow and it'll cover my insurance as well as consolidating the payment to one location. And, I do plan on paying the house down aggressively, so cash flow will help there too. I also want to keep investing in TSLA beyond my 36 shares, so I plan to keep doing that too.

 

[Spacep0d]

But can you though? In many cases, the standard deduction is now high enough that itemizing - unless you have some huge writeoffs - doesn't make sense. Obviously everyone's situation is different so consult an accountant.

I can just say in our situation, with the SALT deductions capped at $10k, we don't benefit from itemization now. (The SALT cap especially is a gut punch here in NJ ...)

You're right, I need to ask my accountant both we've been getting tax benefits from the mortgage for years. I'll check with him though to be sure.

 

[Spacep0d]

A car is a depreciating asset. Your home depending on how much it costs to run usually is not. I would assume if you are keeping the car until it runs no more then if current trends continue and even in these crazy times prices sneak up. Then paying off the car faster using the uplift of your house is well worth it especially with the tax incentives mentioned above. In fact it could be even better if you use the monthly payments gained to accelerate payment of the mortgage.

It's my goal to aggressively pay down the house, and the extra cash flow helps with that. In months where I don't aggressively pay it down, it'll cover car insurance and then some. Thanks for your response!

 

[Spacep0d]

OP, you are confusing cash flow with finance charges

Your savings are about $27,000 * 3.6% the first year, and then less as time goes on because you would be paying down the car loan if you keep it. As a very rough rule of thumb you can linearize the savings as 1/2 of 3.6% per year for the years of the loan so the total savings of rolling e.g. a 6 year car loan into the home is equal to 27,000*0.018*6 = $2916. That is about $40 a month. Figure another couple dollars in tax deduction savings.

Why 3.6% ?
Your apr dropped from 6% to 2.4%

Pros and Cons

• The car loan, by virtue of having a shorter payoff schedule, forces you to repay your debt quicker. Nothing stops you from taking the extra cash flow from the refinance and plowing it into your debt (or even better, investing) but only you know if you have the discipline to act that way.
• Rolling the car loan into the house reduces your future flexibility to take out home equity

• The obvious -- you are paying more interest with the car loan

Thanks for the post! Loan to debt ratio is still very good based on what I know I could borrow. No other debt aside from the house/car. Cash flow could be used for investing (in TSLA) or paying the mortgage down faster, for sure. My goal is to pay the mortgage as quickly as I reasonably can.

 

[dmurphy]

You're right, I need to ask my accountant both we've been getting tax benefits from the mortgage for years. I'll check with him though to be sure.

Yep, worth checking in for sure. The standard deduction and SALT limits changed with the 2018 tax year... we used to enjoy a mortgage interest credit and a credit for our (stupidly high) property taxes. Now we just take the standard and walk away with our tail between our legs ...

Best of luck! You're asking all the right questions here. Good stuff!

PS - that 15-year mortgage is spectacular. Great choice. We did it 6 years ago at 3% and couldn't be more thrilled. We're already at a point where even at the 2.375% you're getting, a refi doesn't make sense. The title costs alone makes it unprofitable. So we'll just ride this one off into the sunset....

 

[Michelle_eriw]

Another possible option is to refinance the car. You might be able to lower the interest rate and payments. This would free up your home equity for other purposes.

 

[jrweiss98020]

I'm in the process of refinancing my home. I owe 27k on my car. I'm thinking about taking out 27k from the refinance to pay off the car. The home refinance rate would be 2.375% vs. 5.99% for the car. My credit is good but not excellent, otherwise I'd have gotten a better rate.
. . .

Is this a good idea or am I off my rocker? Anything I should know that maybe I didn't think about yet?

The savings is $270 a month! That covers my insurance payment through Tesla with $150 left over. What do you think?

$270/month for how many months? Then, how much MORE will you be paying every month, for how long?

Maybe you can refinance the car, as someone else noted, maybe with a home equity line of credit (HELOC) at near the same rate as the mortgage. Then pay off the car ASAP.

 

[sightman]

This is really a question of cashflow vs total cost. Which is more valuable to you?

Rolling the value of the car loan into your fifteen year mortgage certainly reduces the interest rate, but not necessarily the total interest you'll pay since you're paying for it over the entire 15 years as opposed to over the remaining 54 months of your car loan. (I'm assuming that since you joined TMC in 4/19 that is about when you obtained your 6-year / 72-month car loan).

Assumptions:
* The additional principal and interest component of your mortgage will be about $178.10 / month
* You'll receive somewhere around 15% as a mortgage interest deduction each year (I'm not a tax guy, so I may not have done this correctly)
* Your current car loan payment is somewhere around $448 / month
* Your current car loan has 54 months remaining

This results in the following:

Total of payments for option 1: -$27,463
Total of payments for option 2: -$24,646

The NPV of option 1 (Roll into Mortgage) is about $3,864.
The NPV of option 2 (Continue with car loan) is about $5,467.

Option 2 has the most value, and is the least cost. However having an additional $270 / month in cash flow gives you more options. You could use it to pay down your debt sooner (and therefore reduce the total amount of interest paid) or just enjoy life more.

Here's a link to the spreadsheet I used to generate these numbers: Dropbox - Cash Flow Comparison.xlsx - Simplify your life

You win the internet today for THE most helpful post. I too thought about the numbers but you laid it out so clearly. Virtual high five

 

[Paul-K]

Keep it simple.

Do the refi and yes take the cash to pay off the car.

But, make the same monthly car payment you’re making now as an additional monthly principal payment. Guarantees you are saving money.

By the way, that’s a very good rate especially taking “cash out” if you’re not paying discount points. Hope you locked it in, lots of upward pressure on interest rates and the feds are adding an extra half-point to the costs of refinances that lenders will be instituting over the next couple of weeks.

 

[Spacep0d]

Keep it simple.

Do the refi and yes take the cash to pay off the car.

But, make the same monthly car payment you’re making now as an additional monthly principal payment. Guarantees you are saving money.

By the way, that’s a very good rate especially taking “cash out” if you’re not paying discount points. Hope you locked it in, lots of upward pressure on interest rates and the feds are adding an extra half-point to the costs of refinances that lenders will be instituting over the next couple of weeks.

It's locked in for another month! Thanks for the advice!

 

[DDHEverything]

Aha! Good point. I can write off the mortgage interest indeed. Thanks!

That assumes you are itemizing. Most didn't itemize prior to the standard deductible doubling last year, so likely even fewer now. You need to schedule out the interest you would be paying on that $27k over 15 years at a lower rate as compared to 6 years at higher rate.