When I am ready to refinance my mortgage, should I take some cash out to pay off my “upside down” car?

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I have a 4.7% rate on car loan with 4 more years of payments. I’m upside down about $ 9000 (it was a stupid purchase!). I owe about $ 20k on the car. If I refinance my mortgage to a 30-year fixed (which would be about $ 284,000 at around 6%) and pay off the car, I would save about $ 470 a month (from what I now pay in car and mortgage payments) in the short run. I realize I would basically be extending the car loan to 30 years…

Is this a smart idea or completely stupid like the car purchase???

  1. Reply
    February 20, 2011 at 6:52 pm

    I’m not an expert, so remember that.

    I’ve heard both pro’s and cons for “debt consolidation”, but I’m always suspicious, when the people that are going to make the most money off you paying MORE money in the long-run, are the ones advocating it.
    Paying off your car over 30 years (which is essentially what you’re doing) is not smart!

    Also, I think the basic rule usually is, if it’s lowering your payments, you’re paying MORE in total dollars in the end.
    (The exception obviously being if you put more of a down payment in, but that’s the opposite of what you are doing).

    It’s always appealing to have lower payments, but it’s not smart if you’re taking a hit for that, and you are.

    The only way I’d say this makes sense, is if you are literally going to lose your house if you don’t do this.
    I don’t think that’s your situation.
    The car purchase was stupid. This would just compound the stupidity.
    I think if you’re really going to have a hard time with the payment, you should cut your losses and get rid of the car, and get one you can afford.
    I know, you love the car, and you don’t want to take a huge loss, but sometimes you have to compromise.

  2. Reply
    February 20, 2011 at 7:30 pm

    I think it is smart idea bcoz whatever interest you pay in mortgage is tax deductible and this is not the case in car payments.

    Also you can apply previous car payments to principal of the house loan and this will bring your loan period down and also it will be beneficial in interest.

  3. Reply
    Doctor Deth
    February 20, 2011 at 7:42 pm

    if you wind up saving that much by refi, just pretend the car loan is totally paid off – use some of the savings to make extra principle payments on the new mortgage to pay it off quicker – like keep paying the old car loan amt for the next 4 yrs as extra principle on the mortgage, – that way you’re basically paying 100% towards the principle with no interest on the “car loan” portion, and the car would really BE paid off in 4 yrs

  4. Reply
    February 20, 2011 at 8:22 pm

    Pay off the car and remember the lesson. The low rate on the car loan makes this approach a no-brainer. Also taking out cash in a refinance will usually increase your rate.

  5. Reply
    February 20, 2011 at 8:31 pm

    Can you afford both car and mortgage payments every month? If no, then you don’t have any choices. If yes, what are you plan to do with the extra $ 470 every month? If you will put it into an investment and get return over 6%, please go ahead to pay off your car loan.

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