Reader Question: Pay Off A Car Or Put More Down On A House?

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?

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Comments (14)

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  1. Robert says:

    Sell the car…why not pay cash for a used, more fuel efficient car. I’m not sure what her income is, I’m guessing she makes at least 100k per year but she has the opportunity to save money on gas and pay off a car. I’m not sure how attached to the Tahoe she is, but she can save more that $600/month by getting a different car in addition, like you said she can get rid of it while it still has some value…Though if she makes less that 100k..like 40 or 50k then everything changes….

  2. Laura says:

    I agree with you David, kill the car loan and get a $600/month raise. Use that $600/month for the house or let it grow in ING Direct.

  3. WealthBoy says:

    The first thing I would ask your reader is which is more important, cash flow or saving money? Paying off the vehicle would improve their cash flow because the monthly principal and interest payment on $12k financed over 30 years will be much smaller than a vehicle loan. Most people are more concerned with cash flow and would more than likely pay off the vehicle loan because it would provide the biggest cash flow benefit.

    However, if the interest rate on the vehicle loan is lower than the interest rate on the new mortgage, maintaining the car payment will actually save more money (but monthly cash flow would be worse). The total payment on the mortgage will be a little bit better because of the smaller loan amount and total interest over the life of the mortgage will be smaller because of the smaller loan amount. In addition to saving interest on the mortgage, the (total and monthly) financing cost of the $12k with the vehicle loan will be lower because the vehicle loan has a lower interest rate. Of course, monthly cash flow will be reduced because the total monthly payments for the vehicle loan and mortgage will be much higher than having just a single mortgage payment.

    In the long run, keeping the vehicle loan could save money if the interest rate is lower than the new mortgage. If the interest rate on the vehicle loan is higher than the new mortgage, then I would say it’s a no-brainer and it would be best to pay off the vehicle loan. Otherwise, it is up to your reader to decide if they would prefer to save money or improve their monthly cash flow.

  4. David says:

    Selling would be great, if you could sell used full-size SUV’s nowadays. The market has collapsed for them because of fuel prices.

  5. Llama Money says:

    No question, pay off the car and put the rest toward the house. Well, that’s assuming they already have a solid emergency fund in place. If not, drop $20k in the bank immediately, and put the remaining $20k down on the house.

    As for selling the Tahoe and getting a fuel efficient car, I’m on board with that too. But then again, that wasn’t the question posed 🙂 Losing that fat $600 payment will do wonders for this couple’s financial situation.

  6. Holly says:

    I would definitely pay off the car, then I would make sure to have a good 3-6 month emergency fund, then I would put the rest on the house. What freedom it is to not have a car payment and to have money for anything that could come up. I don’t think you can assume to sell the Tahoe. You don’t know their situation and what their needs are. We have a Yukon XL and it isn’t anywhere near fuel efficient. We looked at Odesseys when we bought and at the time(2003) used Odesseys were the same price as a Yukon. The difference is the room. We have 5 kids and usually are carrying extras so the Odyssey would not have given any extra people room. But, having trunk space was the big thing. The Odyssey was small, like a trip to the grocery store alone would have been too much. We always have baseball bags and stuff that we really need more room. I don’t regret at all paying more in gas to have what will carry our family. We also wanted to be able to pull a camper and boat and can load heavy things with the seats down.

  7. Kyle says:

    Ideally I would say sell the car and buy a used compact, but if that’s not realistic I think it’s a no-brainer to pay off the Tahoe first.

  8. It depends how you plan on financing the house. With a $52,000 down payment, you would only need to come up with $8,000 more for 20% down. If you reduce it to $40,000 available by paying off the car, you are going to be pretty far from a 20% down payment.

    If you don’t put 20% down, it’s likely that you might have to pay PMI or use a piggyback loan at a higher rate. Would either of those outweigh the costs of the interest on the car? Something to think about.

  9. If it were me I would put it down on the house. The reason being that the lower house payment (about $70 a month lower) will last for 30 years. In a few years the car is going to be paid off anyways and then you will have a paid for Tahoe AND a lower house payment.

  10. […] a good example. Here’s an example inspired by a post David at MyTwoDollars made in which a reader asks whether to pay off a car loan or increase the down payment on a new home: My husband and I are selling our house and will be netting a profit of $52,000. We are building a […]

  11. I agree with Ashley #8 above. To use the money to pay off the car is effectively the same as financing the $12k balance over 30 years.

  12. Double says:

    Pay off the car loan and put the rest of the money to the house.

  13. […] Two Dollar helps his reader with whether she should pay off her car or put more money down on a house.  I agree with David’s response.  Do […]

  14. john7334 says:

    I’d definitely put more money down on the house – but without knowing more than a few other variables, it really is impossible to answer this question.