The other day I got the following question from a reader:
“My husband and I are selling our house and will be netting a profit of $52,000. We are building a $300,000 house and were wondering if we should pay off a Tahoe for $12,000 so we can get rid of a $600 payment or should we put all $52,000 into the new house. I guess I’m asking what the pros and cons would be. Thanks”
My instant response was to pay off the car and put the rest of the money towards the house, and this was for several reasons:
1. The payment on that truck is $600 a month, which is a large amount of money to pay on a single car each month.
2. Tahoes are plummeting in value because of the price of gasoline and their lack of fuel efficiency. So continuing to make the payments for X amount of months while the value drops each month at the same time really made no sense to me.
3. The reader would still be able to put $40,000 towards the house after paying off the car. It is not like they were using all $52,000 to pay off the loan; they were only going to use $12,000 of it, leaving quite a nice chunk to put on the house.
4. You can deduct mortgage interest from your taxes; you cannot deduct car loan interest.
If I had this choice to make, I would pay off the car immediately as it instantly frees up $600 a month and would still leave me with $40,000 to put towards the house. What would you guys have done if you were in this situation?