Refinancing a Car Loan Before Buying a House
Go Back To Previous PageFor many Americans, the “American Dream” includes owning a home. And for many of us, that dream starts with taking out a mortgage. But what if
you already have a car loan? Should you refinance your car loan before buying a house? How does refinancing a car loan work? Both options have pros and cons, and your choice will depend on your financial situation. Refinancing your car loan before buying a house can help you save money on interest and may make it easier to qualify for a mortgage. But it can also extend the length of your car loan and may increase your monthly payments.
Buying a house is a big decision; there’s no right or wrong answer when refinancing your car loan first. But if you’re considering purchasing a home shortly, it’s worth considering the pros and cons of both options to see what makes the most sense.
The Pros of Refinancing Your Car Loan Before Buying a House
1. You may save money on interest
Getting pre-approved for a loan is one of the most brilliant things you can do when buying a car. It gives you the upper hand in negotiations with the dealership and lets you know exactly how much car you can afford.
If you have a high-interest rate on your current car loan, refinancing before buying a house can save you money on interest. Refinancing at a lower interest rate will reduce the amount of interest you pay over the life of your loan and could also lower your monthly payments. Either way, getting pre-approved for a loan is a smart move that can save you money.
2. Better Approval Chances with a Lower Debt-to-Income Ratio
Lenders consider your debt-to-income ratio one of the most critical factors when approving or denying your loan application. This is the percentage of your monthly income that goes towards debt payments. Mortgage lenders typically like to see a debt-to-income ratio below 36%, so if yours is higher, you may have trouble getting approved.
Refinancing your car loan is one way to lower your monthly payments and get your debt-to-income ratio in a more favorable range. You can choose a longer loan term when refinancing, lowering your monthly expenses.
You can also shop around for a lower interest rate, which will reduce the amount of interest you pay over the life of the loan. If you’re planning on buying a house soon, refinancing your car loan is a smart move that can help you improve your chances of getting approved for a mortgage.
3. You may be able to shorten the length of your loan
Refinancing your car loan can be a great way to save money on interest and reduce your monthly payments. When you refinance, you essentially take out a new loan with a lower interest rate and use the proceeds to pay off your existing loan. This can help you save money on interest over the life of the loan and may also make your monthly payments more manageable.
In addition, refinancing can also help you get a better deal on your car insurance. If you have a higher interest rate on your loan, your insurance company may require you to carry collision coverage, which can add to the cost of your policy. By refinancing at a lower rate, you may be able to drop this coverage and save money on your car insurance premiums.
The Cons of Refinancing Your Car Loan Before Buying a House
1. You may extend the length of your loan
If you’re currently close to paying off your car loan, refinancing can reset the clock and extend the length of your loan. This can cost you more in interest over time and may increase your monthly payments.
2. You may have to pay fees
When refinancing your car loan, you may have to pay specific fees, such as an origination fee or a prepayment penalty. These fees can add to the cost of refinancing and may reduce the overall savings you’ll achieve.
3. Your credit score may dip temporarily
When you refinance your car loan, your credit score may dip temporarily. This is because opening a new loan account will result in a hard inquiry on your credit report. However, the impact on your credit score should be minimal and improve over time as you make on-time payments.
The Bottom Line
There’s no right or wrong answer when refinancing your car loan before buying a house, and the best option for you will depend on your financial situation and goals. If you’re considering refinancing, compare offers from multiple lenders to find the best rates and terms. And be sure to weigh the pros and cons carefully to decide if refinancing is right for you.
Just as with getting your home ready for resale, you may need to take some time to renovate your credit and budget before you can jump on your next opportunity.
Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.
