That New Car Will Cost You

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Mpj043319200001If you’re considering buying a home anytime in the near future, please think twice before purchasing your next car. I’ve had a couple different scenarios lately where the car payment has really impacted the home buyers.  Don’t get me wrong, I love cars.  Old and new alike.   Here’s how it impacts your home purchasing power (based on a 6% mortgage interest rate amortized for 30 years):

Car payment $400 = $66,700 of home

Car payment $500 = $83,395 of home

Car payment $600 = $100, 075 of home

You need to decide which is more important to you, $600 car payment or being able to buy $100,000 more home.   The lower your income, the more dramatic the car payment impacts you.   So if you’re Bill Gates…no sweat!  But if you’re Bill Gates,  you’re paying cash and you don’t have a car payment, right?!

In addition, when you finance that nice new car, significantly zaps your credit score.   This is because it’s a new debt at 100% of the credit line.   Credit scoring modules favor older established credit vs. new and you get dinged for have balances over 50% of the original loan amount/line limit (the same holds true for credit cards).  So if you’re trading in a car with a loan that you’ve been paying on time, having that old debt paid off also dings your credit score.

I know there’s nothing like that new car smell…but there’s also nothing like “Home Sweet Home”.

PS: If you are considering buying or refinancing a home located anywhere in Washington state, I am happy to help you! Click here for a no-hassle mortgage rate quote.

Comments

  1. Rhonda – This is something EVERY originator experiences! I once had a run of clients that purchased a new car after getting pre-qualified for new construction…you know the rest of the story. I now have my clients sign a form that tells them before they finance a car/furniture/etc., call me first. Thanks for the great post!

  2. Thanks, Tony. I’ve had three recent experiences…I’m not sure if it’s the thought of washing a shiny brand new car in the sunshine or what. But I do believe that it so easy to finance a car and has been relatively easy (in the past) to purchase a home. Clients must be thinking that home financing is just as easy…and we both know it’s not.

Trackbacks

  1. […] On this list of inquires, you can see that in May, the person was shopping for a car. If they did buy a car and have a new debt that is not yet reflected on the credit report, they will need to have the new car payment added to the loan application and be re-qualified with that payment. (Please DON’T buy a car when you’re getting ready to buy a home). […]

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