Should you pay off a car loan early or save cash for a house?
Deciding whether to pay off a car loan early or save cash for a house down payment depends on your mortgage Debt-to-Income (DTI) ratio and your auto interest rate. Because mortgage lenders cap total monthly debt payments at 36% to 43% of gross income, wiping out a $600 monthly car note often increases your maximum home borrowing power far more than adding a few thousand dollars to your down payment.
However, if your car loan carries a low interest rate under 4% and paying it off would drain your liquid cash reserves, keeping the cash for closing costs is safer. Mortgage underwriters require buyers to show post-closing emergency funds, and emptying your bank account to eliminate cheap auto debt can get your home loan denied at the final underwriting stage.
««Are you out of your mind trying to buy a house while you're still making payments on a depreciating tin can in your driveway?! You are BROKE! Stop playing sophisticated Wall Street interest-rate gymnastics, eat beans and rice, kill that stupid car note today, and don't you dare call a realtor until you actually own your steering wheel!»»
««Handing a bank $15,000 of scarce liquid cash to extinguish a locked-in 3% auto loan while inflation and high-yield accounts sit higher is financial illiteracy disguised as morality. Liquidity is option value during a housing transaction; once you wire your cash reserve to the auto lender, you cannot eat your paid-off bumper when the roof leaks after closing.»»
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