Yahoo Autos Should You Refinance Your Car Before Buying a House or Wait?
Buying a house is a huge financial commitment, and depending on your financial situation, you may need to take out a mortgage to make it happen. But if you have an auto loan and are thinking about refinancing, a common question is, "Should you refinance your car before buying a house?"
Refinancing a car loan involves replacing the original loan with a new one, typically from a different lender. Refinancing can reduce your monthly payments by extending the loan term or getting a lower interest rate.
So, should you refinance your car loan before buying a house? There's no right or wrong approach. However, it's important to weigh the pros and cons of each option before you make a decision.
Is refinancing right for you? Easily compare rates from lenders below.
How Car Loan Refinancing Can Impact Your Mortgage's Approval
If you choose to refinance your car loan, it can affect your mortgage approval in a few ways:
Temporary Drop in Credit Score
When you refinance your car loan, the lender will run a hard credit check, which lowers your credit score.
If you don't have great credit to begin with, this drop in credit can make it harder to get approved for a mortgage. The good news is that the dip is only temporary and should improve as you make timely payments.
More Paperwork
Car refinancing involves getting a new loan to pay off your existing loan. This new account will appear on your credit report. When you apply for a mortgage, that new credit account could raise questions from your mortgage lender.
In addition to the standard paperwork you have to fill out when applying for a home mortgage, the lender may also require you to provide a letter explaining the reason for the new account and why you opened it.
Impact on Debt-to-Income Ratio (DTI)
Refinancing your car loan will change your monthly payments by extending the loan term or lowering the interest rate. Refinancing your car loan to reduce your monthly payments can also reduce your debt-to-income (DTI) ratio.
Mortgage lenders consider your DTI when determining your mortgage eligibility and the amount of money they will lend you. The lower your DTI is, the better your chances of getting approved.
Cash for Home Down Payment
Some auto lenders will allow a cash-out refinance if you owe less than the vehicle's value, which will give you some of the equity in cash. You can use this money to make a down payment on your new home.
A cash-out refinance, meanwhile, will increase your auto loan amount. This increase could impact your DTI, as the auto lender may require you to make larger monthly payments.
Pros and Cons of Car Loan Refinancing Before Buying a Home
Now that you have an idea of how refinancing an auto loan can impact your chances of getting a mortgage, let's take a closer look at the pros and cons of refinancing first.
Pros
You Can Get a Better Rate on Your Auto Loan: You may be able to get a lower interest rate when you refinance your car loan, which can help you save money. Then, you can put that money you saved toward the down payment on your new home, as well as mortgage fees and closing costs.
The Effect on Your Credit Score Is Minimal: While a hard credit inquiry will certainly affect your credit score, it's not usually significant. This is especially true if you have a good credit score already. In this case, the slight dip in your credit score shouldn't dramatically affect the odds of a lender approving your mortgage or the rate it will offer.
You Lower Your DTI for Better Chances of Mortgage Approval: Refinancing your auto loan to lower your monthly car payment may decrease your DTI. A low DTI not only increases the chances of getting approved for a mortgage, but it also helps you secure a better interest rate.
Cons
The Hit to Your Credit Could Be Significant: The hit to your credit score when refinancing your car loan can be pretty significant if you have a short credit history, few accounts, or multiple hard credit inquiries on your report. Add in the hard credit inquiry when you apply for a mortgage and the odds of a lender approving your mortgage go down.
Refinancing Costs: If you are refinancing an auto loan with a new lender, you'll need to pay origination fees and costs. If you refinance with your current auto lender, you may face charges for closing your original car loan before the loan term expiration date. These costs can add up and reduce your potential savings.
Spending More in Monthly Payments: When you refinance your car loan, you can extend the loan term. But while the monthly payments will be lower, you typically pay more in interest over the entire loan period. You could end up paying more over the lifetime of the loan after refinancing. As such, refinancing an auto loan may not be the best move if you're close to paying off the loan.
