Author Topic: Case Study- house down payment vs. pay off car loan early  (Read 18545 times)

FloridaStache

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Case Study- house down payment vs. pay off car loan early
« on: December 07, 2013, 04:53:18 AM »
Hi all- seeking some advice from the crowd. I've already got my guard up for incoming face punches due to the "car loan" mentioned in the topic of this post, but it's a carryover from my pre-Mustachian days.

Here's the deal:

We have about $9700 left on a car loan at 2.99%. ($348/month required payment)
We have no other debt.
We max out 401(k)/IRA contributions and make a modest $100 contribution to each of our kids' college funds each month and add more when we get windfalls. Kids are 8 and 4 so we have a ways to go.
We have a six-month "emergency fund" stashed in a CapitalOne 360 savings account at 0.75%.

After all this other saving/investing and monthly expenses we have another $1000 a month extra to put toward either paying off this car loan early OR saving for a down payment on a house.

We completed a short sale in August on a condo we had the misfortune and foolishness to purchase in 2005 and were hopelessly under water. With that behind us we would like to save up a good old fashioned 20% down payment and get a traditional 30 or 15 year fixed rate mortgage on a house in our current area. We are currently renting for $1000 per month. We can get a good home in our current area for $200K or less, so we will need about $40,000. To save this amount in a relatively risk free account I believe that I will need to open another CapitalOne account at 0.75%. That interest rate sucks but it is FDIC insured and with the relatively short 3 year saving horizon I don't believe that it's worth the risk of putting that in equities.

Despite the short sale we still have excellent credit, and I believe that we will be in a position to get decent credit terms in the 3 years it will take to save up the down payment.

So my question is, should I use my available $1000 to start the house savings now, and just pay off the car loan according to the regular schedule (done in 2016) OR pay off the car loan in 9 months and THEN start the house down payment?

Seems like from a purely academic/math perspective I should pay the car loan off aggressively to save the 2.99% interest as that is higher than the 0.75% I would earn in the savings account. However, I also know that the sooner I start the house savings the sooner we can buy the house. I view a paid off house as the cornerstone of early retirement, so I'd like to get that going sooner than later. My wife and I are 36 and feel like we lost 10 years with the under water condo debacle.

What do you think?  Feel free to challenge my assumptions and suggest alternatives not heretofore considered.

Self-employed-swami

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #1 on: December 07, 2013, 06:16:57 AM »
Is the car worth more than the outstanding loan? If so, I'd sell that ball and chain immediately, and buy a cheaper car in cash. For about $3,000 you can be riding in style and saving more cash, by not needing to make loan payments, and not having to carry full insurance.

Then you'll have an extra $400/month to save for a down payment.

If you are upside down in the car loan, I would take the difference from your emergency fund, pay off the loan, and sell it.

MMM has some wonderful blog posts on how to select and shop for used cars. I'm on my phone, or I'd be able to link them for you. But please go searching; Owning that car is just keeping you from attaining your home ownership goal at the moment. 

And I wouldn't leave 6 months worth of lion expenses in a low-interest spot, but that's just a personal preference. I used to have that 6 month cash savings account as well, but I now have a years worth of expenses available on my LOC, should we really need it.

And on that note, how much is in your emergency fund?? Is it close to the down payment amount you'll need? Cause I wouldn't discount the possibility of raiding it partially, once you are close to purchasing again, depending on how solid your numbers are (and your personal comfort level).

Good luck, you are so far ahead of most!

FloridaStache

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #2 on: December 07, 2013, 07:30:09 AM »
Swami- thanks for the response.  I should have mentioned that we are probably ~$1000 upside down on the car.  It is our only car despite being a family of four (I bike just about everywhere, including work commuting) so if I did sell it, I'd be back to even, then have to go into the emergency fund to buy the replacement car.  Now I'm back to one car, but immediately $3-5000 less in the emergency fund that has to be replaced.  The current car is a 2010 Fusion with 67K miles on it, so plenty of life left in it.  The way I see it, just paying off the loan and driving it into the ground is roughly the same as selling it and buying a newer car, but without the hassle.  And the interest rate is pretty low, and could be minimized further by early payoff.

My job is fairly secure, but I am the primary breadwinner for the family and my industry is somewhat shaky right now, so I treat that emergency fund as untouchable and mandatory.  I could definitely earn a higher return by investing that money, but the risk is too great for me.  I consider that the "cash" portion of my portfolio.  There is about $19K in there, so it could go toward the house down payment, but again, I view that money as an untouchable insurance policy against unemployment, sudden change in circumstances requiring purchase of an additional car, or other major unforeseen debacle.

Maybe that is too conservative for some here, but since I'm just getting my Mustachian legs under me I'd rather be safe than sorry.  I don't have the luxury of a LOC because I don't own a home to borrow against, and I don't dare rely on credit cards as backup!

Cooperd0g

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #3 on: December 07, 2013, 08:44:26 AM »
Based on your desire to have that much of an emergency fund I would pay off the car loan with cash from your emergency fund and start replenishing it with your extra $1000 per month.

Self-employed-swami

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #4 on: December 07, 2013, 12:48:41 PM »
Have you actually done the math on the hard costs of your fusion, versus a used car?

I think you are making 'complainy-pants' assumptions on that front.

From a purely math standpoint, pay the car loan off first, before you start saving for a down payment, but understand that you are making excuses about that car, and it is going to continue to hold you back, if you refuse to examine one of your major budget line items.

And about the cash emergency account, I used to do the same thing, and although it isn't the most efficient thing to do with the money, there are far worse decisions you could make.

FloridaStache

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #5 on: December 07, 2013, 02:29:12 PM »
Swami, here is the math that I have done. Let me know if you see it differently.

Emergency fund: $19000
Cost to sell Fusion: $9700 (assume $8k from car, $1700 from emergency fund)
Cost to buy non-crap replacement used car- at least $5000-$8K- wife is the primary driver with a 40 mile round trip commute (to be addressed by future house purchase) and we do 1600 mile round trip drives twice a year to visit family. So I can't have a piece of crap that will constantly break down, which is what $3k would buy.
So now if I am dropping 8K on a replacement car, and into my emergency fund for $1700, I don't see the advantage to this over just paying off the Fusion, possibly, as Cooperdog suggests, with a "loan" from the emergency fund.

If you think this analysis is off please tell me specifically why/how.  I'm also getting the sense that folks think I'm too conservative with the emergency fund- why is that? If something major happens, I have no other recourse- no HELOC to tap and no rich family members to hit for a loan.

If I'm crossing the line from reasonably conservative to complainypants please let me know. After a lifetime of mismanaging my finances I'm a bit gun shy.

FloridaStache

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #6 on: December 07, 2013, 02:31:41 PM »
To put it more succinctly it seems like since I would need to buy a used car anyway I might as well just "buy" the one that's already sitting in my driveway from the bank.

Self-employed-swami

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #7 on: December 07, 2013, 02:41:39 PM »
The problem with your assumption, is that you need to spend $5-8,000 on a used car, to get one of value. A decent used car can be found for $3,000 pretty much anywhere in the US.

Cooperd0g

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #8 on: December 07, 2013, 07:23:43 PM »
I think that it would be possible to find a serviceable car in the $3000-5000 range, but it will take some time and effort to sort through the crap ones. I don't think it is the end of the world to keep your current one, but you might be able to free up a couple thousand.

The amount of cash on hand for emergencies is a personal choice. I feel that it is unlikely for the stock market to crash so bad that you would lose the entire amount in a short period of time if you invest in index funds. That's why I keep my money working for me, but others like to have 6-12 months in super safe cash reserves. As I said, personal choice.

AccidentalMiser

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #9 on: December 07, 2013, 08:36:45 PM »
I'd split the difference and put half on extra principal for the car and half toward that downpayment until the car is paid off, then you'll have 1400/mo to save toward the house.

Given the driving you do and the fact that it's your only car, I wouldn't replace it with a 3k vehicle.  In my area, you can't get a reliable car for less than 6 to 8 thousand.

My 2 cents.

Self-employed-swami

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #10 on: December 07, 2013, 09:30:25 PM »
I'm beginning to think that no one else who has posted on this thread, has actually read many of the MMM blog posts...


Charlotte

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #11 on: December 08, 2013, 05:00:43 AM »
I think they've read them, but isn't the point of mustachianism to minimize your budget and prioritize your expenses according to what is important to each of us. We don't have to "do everything MMM does". At least that's what I believe....

I'd keep the Fiesta, too. But pay it off asap and drive it forever. Best of luck to you!

Cooperd0g

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #12 on: December 08, 2013, 06:29:23 AM »
I'm beginning to think that no one else who has posted on this thread, has actually read many of the MMM blog posts...

Not only is this post non-contributory, you don't even back it up and it comes off as rather condescending. Only two other people posted besides you and the OP. How exactly do my posts represent a non-MMM point of view? Perhaps you should read the rules of the forum again regarding Graham's Hierarchy of Disagreement. I'll even link them for you:

http://www.mrmoneymustache.com/forum/forum-information-faqs/forum-rules/

Self-employed-swami

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #13 on: December 08, 2013, 07:29:38 AM »
I'm beginning to think that no one else who has posted on this thread, has actually read many of the MMM blog posts...

Not only is this post non-contributory, you don't even back it up and it comes off as rather condescending. Only two other people posted besides you and the OP. How exactly do my posts represent a non-MMM point of view? Perhaps you should read the rules of the forum again regarding Graham's Hierarchy of Disagreement. I'll even link them for you:

http://www.mrmoneymustache.com/forum/forum-information-faqs/forum-rules/

I've been here for a while, but thanks for the finger-wag.

The day that face punches become unwelcome, will be the day I revoke my account.

I'm sorry if you interpreted my post as being condescending, but I am just starting to get tired of people who come here, and ask questions about what to do with their car loans, and when someone references the most frugal option, it gets poopooed by others. It's the equivalent of saying 'there there, it's alright' instead of providing an outside, independent opinion.


AccidentalMiser

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #15 on: December 08, 2013, 07:59:37 AM »
@Swami

I've read every MMM post, most of them twice.  I am also bright enough to tease out the principles and render my opinion on what I would do in a given situation. 

I simply can't see selling one 8k car and buying another, particularly when the OP would have to spend 2k to get the deal done.  Rather than post links to posts we've already read, maybe you could post some links to some reliable 3k cars. 

I know you're trying to be helpful.  So am I.

sassy1234

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #16 on: December 08, 2013, 08:18:30 AM »
I would keep the car.  I think it is okay to own a nice car, especially if a you only have one and you bike a lot. 

As far as your original question of saving for a down payment vs. paying off the car, I will give you my two options. 

1. Do both: save half for a house and put the other half towards the car.  Saving for a house can be motivating.

2. Because your job is not totally secure, I would pay off the car first, then save for a house. 

It is really up to you.  Good luck. 

BPA

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #17 on: December 08, 2013, 08:56:25 AM »
It is up to the OP.  Everything is.

But if we are talking about true MMM badassity, SWAMI has it right, I think.

Are there degrees of badassity?  Maybe.  But for those like SWAMI and others who might read the OP and cringe, there is nothing wrong with stating what they think should happen...especially in a thread where someone asks for advice.

And citing forum rules when someone is giving a "facepunch" is ridiculous.  Personal attacks are one thing, but a facepunch?  I'm with SWAMI on this one.  And how many times does MMM get called arrogant, condescending etc. in some of those ridiculous comments sections of articles he gives interviews for.


FloridaStache

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #18 on: December 08, 2013, 09:56:32 AM »
As the OP, I understand and accept what Swami is saying, and I had anticipated such a facepunch when I logged my original post.  And I truly do appreciate the honest opinion, even if I may not fully understand or agree.  And thanks for pulling all the car posts together- I plan to re-read them for further insight.

I have ready every MMM post, many more than once.

I'm not totally convinced of the availability of quality, dependable $3000 used cars that will hold up for many more years, but I will be the first to admit that I have not researched this option at all, mostly because A: I'm afraid to because I don't know a lot about cars and B: in my younger days I had a whole series of inexpensive unreliable used cars that ended up costing a fortune in repairs, and C: it's time consuming and a hassle to buy and sell used cars.  Yeah, I know, if I were MMM I would say damn it all and just run off and do it, but I'm not him.

It's one thing for MMM to talk about all these great used cars, but the fact is that if his blows up he's got hundreds of thousands of dollars sitting around to replace it.  I would have to go into my emergency fund in that situation, and I'm not (today) entirely comfortable doing that.  Complainypants? I guess.  After years of mismanaging my money, and after spending the last year going through a short sale, ditching actively managed funds for Vanguard, optimizing/discarding insurance, going from two cars to one car, starting full time bike commuting, and implementing lots of other things from the blog, I am just kind of worn out with all the financial tinkering here for a bit. 

I do sincerely appreciate all the advice and opinions from everyone here- much good food for thought.

BPA

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #19 on: December 08, 2013, 02:08:06 PM »
:)  I think you've accepted the facepunch well actually.

I don't know your situation, but was curious to know if you need a car at all.  I guess in a way I am really lucky that I've never had luxury of owning one and so have always lived where there was reliable public transportation and live close enough to work that walking and cycling are possible. 

Not ever owning a car has saved me a lot, but it's not for everybody.


Self-employed-swami

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Re: Case Study- house down payment vs. pay off car loan early
« Reply #20 on: December 08, 2013, 02:18:01 PM »
Thank you for seeing the spirit in which I was posting, Florida, even if we don't agree.

I would, from a mathamatical standpoint, pay the loan off, with every spare penny you have, and start saving for a down payment once the loan is gone.

This isn't a criticism of anyone here, but I've never understood the fear of mechanical things, like cars. My Dad is a mechanic, and I grew up knowing that's whatever got taken apart, could always be put back together, (sometimes with a little swearing for good measure). I don't change my own oil (my Dad likes to do that, it helps him feel like he is still needed in our lives), but I know the schedule at which my vehicles need things like oil changes, and I have all the tires mounted on rims, so I can change them over in the driveway if needed. I know what sorts of sounds might indicate a problem that needs further investigation. Overall, despite my glaring lack of knowledge in automotive repair, I just don't have a sense of fear about it.

I have a family member that sticks their head in the sand about anything car-related, and will just wait to do oil changes until someone else takes and does it for her. And I have friends that pay someone to switch their snow and summer tires, despite the tired being mounted on rims.

I find that the fear of the unknown, particularly with vehicles, is one of the main reasons people spend before they need to. With everything that is available by googling, I just wish that people took a little more time to research and investigate things themselves.