You have to compare long-term and one-times costs with each option.
CR-V will have higher long-term costs:
* Interest on higher debt load
* Longer to pay off
* Higher insurance premiums (x2 because you'll be required to keep collision until you pay off the loan)
* Greater depreciation
The Yaris will have higher one-time transaction costs:
* Current depreciation hit when you sell/trade CR-V (if you sell privately, you'll reduce the hit, but there may be a tax advantage to trading, plus you're preventing future depreciation on that car)
* Fees in purchasing Yaris (plus possibly state sales tax depending on how you sell CR-V, buy Yaris and what state you're in)
* Probably get less for your CR-V and pay more for the Yaris since it sounds like you're going through a dealer to trade
Can you sell the CR-V privately for $26k or more? If so, can you still roll the debt into the dealer financing for the Yaris?
The way I see it, you have a $25k debt + $25k car + $7k debt + $2k cash. The fact that you're "upside down" only really matters when you're negotiating financing at the dealer. If you trade the CR-V for $25k and get the Yaris for $10k, now you have $10k debt + $10k car + $5k debt. You have less car AND less debt (which means less insurance, lower gas costs, less future depreciation and less interest on loan payments). The fact that you still have more debt than car does not change - you've just done a good job of reducing your monthly expenses.