Author Topic: Rolling Car Loan into Mortgage  (Read 14642 times)

sabertooth3

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Rolling Car Loan into Mortgage
« on: December 17, 2014, 06:29:05 AM »
Heard on the radio today (not a personal finance broadcast) that the DJ's friend rolled his car loan into his 30-year mortgage. DJ then said it was the best financial decision he's ever heard of. I couldn't facepalm myself hard enough.

boarder42

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Re: Rolling Car Loan into Mortgage
« Reply #1 on: December 17, 2014, 06:36:13 AM »
may not be a bad thing if its a low interest rate and the house has equity already.  i finance all my cars still b/c i can get sub 3 rates.  i mean i buy cheap.  like 5400 dollar cars when i need a new one and finance. 

probably not the case here but...

thd7t

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Re: Rolling Car Loan into Mortgage
« Reply #2 on: December 17, 2014, 08:26:00 AM »
Even at today's mortgage rates, you're paying for a car for thirty freaking years!  At 3.5% (which is unusual for a 30 year), you're paying 60% in interest!

boarder42

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Re: Rolling Car Loan into Mortgage
« Reply #3 on: December 17, 2014, 12:18:17 PM »
even if he is paying that in interest over the life of the loan he will statistically make more on his money if he invests it instead of paying it in cash..  say the car is 30k and you invest that 30k at 7% over 30 years thats worth 268k.  while the loan has only paid 21650 in interest plus the 30k in principal at 4% so he comes out way way way ahead in 30 years if he can drive the car that long. 

debt isnt bad.  bad debt is bad. 

thd7t

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Re: Rolling Car Loan into Mortgage
« Reply #4 on: December 17, 2014, 02:11:23 PM »
You're not getting 7% returns, though, because every year, you have to subtract 3.5% as a fee for the loan, so the return is really 3.5%.  This is also ignoring any expense for trading and funds.  I'm not saying it's nothing, but it's not as advertised.  That's the part of leverage that people love to ignore.  He's coming out somewhat ahead and only if he drives the car for 30 years.

powersuitrecall

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Re: Rolling Car Loan into Mortgage
« Reply #5 on: December 18, 2014, 08:18:33 AM »
While it makes sense to invest rather than paying cash for a car of the same value, that's probably not really what's going on here. 

Most likely it's a guy who financed an expensive new car that he didn't have the cash for.  The term is probably 5 or 6 years, and by rolling it into a mortgage he can cut his monthly down by a lot, even if the mortgage is at a higher rate of interest.

Cost of car$ 30,000
Car loan rate1.9 %
Car loan term5 years
Car loan Payment$ 524 / month

Now lets throw this into the mortgage ...

Mortgage term30 years
Mortgage rate4.0 %
Car Payment Portion in Mortgage:$ 143 / month

Magic!  His monthly just went down!  How incredibly fucking terrible of an idea could this be?  In 30 years, that shiny new car will be dust.  Consider that if he is like most other hot blooded car sucking consumers, in 5 years he's going to want to trade up.  Can he afford it?  Let's find out:

Interest paid so far5,679
Principle paid so far2,880
Amount outstanding27,119
Cost of new car with trade in15,000
New Car Payment portion in Mortgage$ 221 / month

Woah!  Who can't scrape up an extra $80 a month for a new model?  Maybe while he's at it, he'll refinance his mortgage out to the full 30 years again.  That would make the new payment $200 / Month.  What a bargain!  Take THAT, future self ... right in the nards.

Depreciating assets have no place in a mortgage.  The reality is that folks will justify the entry price of a new car because they can afford the monthly when they do this.
« Last Edit: December 20, 2014, 11:01:02 AM by gashford »

viper155

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Re: Rolling Car Loan into Mortgage
« Reply #6 on: December 19, 2014, 06:40:09 PM »
may not be a bad thing if its a low interest rate and the house has equity already.  i finance all my cars still b/c i can get sub 3 rates.  i mean i buy cheap.  like 5400 dollar cars when i need a new one and finance. 

probably not the case here but...

Guess what? YOU need a facepunch. Both of your statements are not smart. At all.

Bob W

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Re: Rolling Car Loan into Mortgage
« Reply #7 on: December 19, 2014, 08:22:28 PM »
It is a great strategy if used properly.

boarder42

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Re: Rolling Car Loan into Mortgage
« Reply #8 on: December 20, 2014, 08:42:26 AM »
Correct I'm sure its not being used properly but cheap loans are a good way to keep your capital available to make more money.  This basically falls into the payoff mortgage vs invest debate neither are necessarily bad if you can be diligent and invest your savings you will typically come out ahead carrying good debt and investing the saving. It's pretty simple math.