Home Loan Question

[Kevin80]

Right now I am looking to be a first time home buyer. I want to put down the 20 percent to avoid PMI. I will need about 20K for 20 percent. I have about 12 of it. I can get me someone to borrow the money for the other 8K until I would file a amended refund to get the govt. 8K credit back. But I will have spent almost all my savings doing this. Also I was thinking of paying the rest of my car loan off so that would be one less bill to pay. But the thing I am wondering is should I take the money I would use to pay off the loan and just keep paying it off by month and keep that money in the bank in case something would happen and I would need it or pay off the car to avoid paying extra interest each month. I also figured out that I would have about a extra 150-200 a month after paying all my bills is this a big enough cushion you think? Though I also do doante plasma which could give me a extra 200 a month on top of the 150-200 cushion. Any advice woud be a apperciated as besides choosing if I ever want to get married this will be the biggest choice to make buy or not to buy.

[creditcardfree]

We need a little more information.

What is the balance on your car loan? Interest rate?

Have you already found the home or are you still looking?

Is the $150/$200 that you have as a cushion each month before paying of the car or after?

[Runaway Finances]

My experience has been that people underestimate the cost of home ownership. If you are a first time home buyer, you will probably need to purchase many things you don't have (ie. lawn mowers, furniture, draperies, watering hoses, washer/dryer, etc.). These add up to a lot of money. There is seemingly always something that is "needed". So, you should talk to people who have owned houses for years and find out ideas of things you are going to need before you jump into this. $250/mo.is not a lot of cushion.

[Kevin80]

We need a little more information.

What is the balance on your car loan? Interest rate?

Have you already found the home or are you still looking?

Is the $150/$200 that you have as a cushion each month before paying of the car or after?

about 10K and around 6-7 percent. Yes I have found a home. the 150 would be after paying off the car. Thats why I was wondering though keep the money to pay off the car as a extra money in case something happens or pay it off all at once and get rid of that payment but then have very little in extra savings.

[creditcardfree]

I would not pay off the car since you only have $12K in savings.

As someone who bought a home over 12 years ago with about 5% down, I wish that we had waited to buy. I wish we had put the full 20% down. But I also wouldn't buy a home without a decent emergency fund, maybe 3 months of expenses.

Right now it looks like you'll use ALL your money to put down on the home. You will have a car payment and a house payment and no money to rely on if you were to lose your job, ect. You could lose the home and your house.

There will always be homes for sale. You also have until the end of the year for the new buyer's credit. Maybe you can wait and save more in the meantime.

Good luck.

[Kevin80]

I would not pay off the car since you only have $12K in savings.

As someone who bought a home over 12 years ago with about 5% down, I wish that we had waited to buy. I wish we had put the full 20% down. But I also wouldn't buy a home without a decent emergency fund, maybe 3 months of expenses.

Right now it looks like you'll use ALL your money to put down on the home. You will have a car payment and a house payment and no money to rely on if you were to lose your job, ect. You could lose the home and your house.

There will always be homes for sale. You also have until the end of the year for the new buyer's credit. Maybe you can wait and save more in the meantime.

Good luck.

actually I do have the money to pay off my car and put the 20 percent down but after that I would not have much savings. Thats why I was thinking of maybe instead of paying off my car just keep the money in the bank and just pay off the car each month with that money but I would still have it in the short term something would happen.

[momof1in150]

If you get an FHA loan you can use the $8K as part of the down payment. They set it up as a Bridge Loan and you pay it back after you get your refund back.

[disneysteve]

My experience has been that people underestimate the cost of home ownership.

Very true. Suze Orman always tells people to budget 40% above the mortgage payment to cover all costs associated with home ownership. So if your mortgage payment will be $1,000, figure that you'll actually need more like $1,400/month to cover all costs.

[creditcardfree]

actually I do have the money to pay off my car and put the 20 percent down but after that I would not have much savings. Thats why I was thinking of maybe instead of paying off my car just keep the money in the bank and just pay off the car each month with that money but I would still have it in the short term something would happen.

In that case, I'd probably still wait on paying off the car. You really still need that $10K or a good portion of it for an emergency fund. Use the extra money you make each month toward paying off the car.

Again, good luck!

[swanson719]

Paying off the car vs. putting the money in the bank is a simple question. If you are earning more interest in the bank than you are paying in interest on the car, then leave the money in the bank. Otherwise, and more likely, pay off the car. It's costing you money to keep it in the bank. Example - 6% car interest, 2% bank interest. You're losing 4% to the car company so they will let you have the money in the bank at 2%. It doesn't make any sense to do this.

Secondly, as far as the house goes, wait until you have no debt, and no payments. I know that sounds daunting, but it's for the best. No debt, no payments, a 6 month emergency fund, and 20% down. Then use Dave Ramsey's rule of no more than 25% of your take home pay on a 15 yr note. That allows you to still put 20%+ into a retirement account and Roth IRA and still live comfortably. Wanting a house is a want. Unless you can find a house for less than or equal to your current living costs, I would wait. You want a house to be a blessing, not a financial curse.

[creditcardfree]

You want a house to be a blessing, not a financial curse.

This is why you need to save the money (or some of it) as an emergency fund. Emergency funds aren't in place to make money on interest.

[swanson719]

The car note is $10K @ 6%ish interest. Paying it off saves $600 a year, and leaves $2,000 in his emergency fund. It also opens up an estimated $150 to $200 a month on the car note, though I don't see an exact number. I'm not suggesting using all of the $12K EF to pay off a car - you need some wiggle room, and $2,000 gives you that. You won't be having 20% down for a while, but you also will be living debt free and driving a car that is yours.

[Kevin80]

Ok I thought of something else. I pay off my car loan and I then take a 401K loan for like 5500. I borrow a couple grand from someone and then when I get my 8K from the govt. I pay back the 2 I borrowed leaving me with 6 grand in savings in case I need it for something. Would this be a bad thing?

[graceful]

Yikes, I wouldn't touch your 401K with a 10 foot pole!!!

Sounds very complicated to me. I would wait to decide to pay off your car loan until AFTER you got your $8k tax credit. Use the money that you would have used to pay your car loan off AS your EF and replace it with the tax credit.

[creditcardfree]

Yikes, I wouldn't touch your 401K with a 10 foot pole!!!

I completely agree. Never borrow from your 401K. Just because it is an option, doesn't mean it is a good idea.

If the car, is too burdensome, sell it and buy one for less money than the one you have now. Or skip buying the house for now.