Refinance Your Home Loan to Pay for Car?

Refinance Your Home Loan to Pay for Car?

Should you refinance your existing home loan to pay for your car loan? When you first think about the logic it doesn’t sound like a financially smart choice to make, but after doing some math could you actually save some money? Let’s start with some sample numbers and see what the crazy world of math tells us….

Let’s start with a car loan that you opened exactly one year ago. In January of 2007 you financed a car for $16,000 for 5 years at 7.5% interest. Your payment would be $320 per month. Let’s now assume that you have lived in your current home for exactly 5 years and financed $200,000 for 30 years at 6.75% interest. Your current house payment would be about $1297 per month.

Next, we will assume that you have paid only the minimum payments on both loans so the balance on the car loan is $13,730 and the balance on the home loan is $188,229. The value of your home is now $235,000. The combined total of both loans is $201,959. The current interest rates for Kentucky are 5.625% for a 15 year fixed loan with these numbers. You will have to borrow about $206,000 to cover closing costs so the total numbers for the loan is $206,000 for 15 years. The payment will be about $1,700 per month. The combined total payments for your previous two loans (home $1297 + car $320) were $1617. You will raise your total monthly payments by about $85 but pay your house off in 15 years instead of the 25 years you had left.

Now, we have to figure out how much money we are out over the 4 years remaining on the car loan. If you would have kept the two old loans you would pay a total of $2,129 interest over the 4 remaining years of the car and a total of $49,437 (assuming you pay the extra $85 to this loan) in the 4 years of the home loan, for a total of 51,566 in interest over the four years. With the new plan you will pay a total amount of $45,595.

If you continue both loans and the new loan for the lifetime of the loans after 4 years you would be able to apply another $320 per month to your house payment because the 1st car loan would be paid for a total extra of $405 per month. This would pay the loan off in a total of 255 months or about 21 years and you will have paid a total of $129,309 interest on the home and the $2,129 on the car for a total of $131,438 in interest. The new plan will pay off the loan in 15 years and you will pay a total of

So in my unprofessional opinion I don’t necessarily think it’s a bad plan to pay off a car loan with a lower interest rate refinance on your home as long as you greatly shorten the term as in the example I have used. The major drawback to this idea is that after 4 years your initial car payment would be paid $99,439.

In summary

Pros:

• Forced to pay the house off in 15 years
• save about $30,000 in interest
• lower interest rate

 Cons:

• to purchase a new car at the end of the term you would have to come up with additional monthly payments not budgeted

 Let me know what you think?