Q: My wife and I plan to look for and hopefully purchase a house this spring. We have been preapproved for a decent amount (approximately $400,000). Although we are looking now, current inventory is lacking and we feel after the new realty season in our area (traditionally the week following Super Bowl Sunday) we should be able to find something we like and can afford. We are determined to find a house that we can easily live in for at least a decade.
In the meantime, we currently have two automobiles that eventually need to be replaced. We plan to replace them with newer used cars. My 1997 Mustang needs $1,200 worth of repairs to make it safe to drive. It would be a game of Russian roulette to continue navigating Chicago winters (read: snow) with my current set of tires. (I actually ended up putting in $400 in other repairs the other day.)
The question is: Do we repair the Mustang or use the $1,200 toward purchasing a newer used vehicle? If we invest the $1,200 into the car, we reduce our emergency fund or our down payment fund. However, if we take on even a small auto loan, our mortgage interest rate might be slightly higher than we could get otherwise, and over the life of the home loan, even a quarter percent higher equates to approximately $20,000 in extra interest.
What would you advise for people who are ready to buy a home in a couple of months but essentially need to replace their vehicles now? –Icarus
A: When I first saw your question, I suspected it might be more of an automotive question than a real estate one, but as I explored your concerns a bit more deeply, I saw the real estate nature of your ultimate question. I appreciate that you are being so thoughtful and deliberate about your money and trying to avoid making a misstep that will cost you later.
If this had been a few years ago, I might have advised you to try to gut it out with your cars, just making the minimal investment in them you can get away with to bring them to a basic level of safety, given that you expect to buy a home in the next month or so.
It is time-honored real estate wisdom that buying a car on credit right before you buy a home is one of the easiest ways to shoot yourself in the foot, because the additional debt can impact your debt-to-income ratio, can either or both reduce the dollar amount of mortgage dollars for which you qualify, or increase the interest rate you are charged.
So, generally speaking, the insider real estate advice would be to wait a couple of months, close the deal and then buy your car.
But I can tell you with zero hesitation that even the best-qualified buyers on today’s market who plan to buy as soon as the weather thaws and sellers start that spring listing flood are still seeing it take two, three, even four times as long to close the deal on their homes as they expected it would. Everything on today’s market takes longer than it used to.
Despite the flooded market, buyers often have elevated expectations for the value they want to receive, and often spend much longer hunting for a house in the condition and location they want, and which is also in the price range they want to spend. This is exacerbated by the vast numbers of foreclosed homes on the market that are notorious for having condition "challenges," so to speak.
In addition, another large chunk of the homes on the market is comprised of short sales, which can take as long as six to 12 months to close escrow on, after you get into contract, through no fault of either the buyer or the seller, depending solely upon the speed at which the seller’s bank moves.
In fact, the data shows that in your neck of the woods, it is not uncommon for short sales to comprise as much as 44 percent of the listings on the market — that’s quite a bit higher than the national average.
So, even if you are able to find your home in the next few months, there is a very real chance that it will be much later in the year before you actually close escrow on it and move in.
Additionally, the fact that you describe your car’s current condition as unsafe trumps the potential for paying a fraction of a percentage higher on your home loan because you deplete your down-payment funds by a tiny bit. And, actually, it doesn’t sound like you’ll be using that $1,200 toward your emergency or down-payment funds.
Rather, it sounds like the $1,200 will either need to go toward making auto repairs or putting something down on a used car in better condition than your current car is.
Ultimately, my first line of advice is to talk with your mortgage broker. If you are as fiscally conservative and responsible as your question implies, there is a real possibility that you are short-shrifting.
The rule of thumb about not buying a car before you buy a house might not be valid in the event that your credit, income and assets are so robust (vis-à-vis your planned homebuying spend) that you could put the $1,200 on a used car, trade in or sell your old one, and not impact your mortgage qualifying or interest rate at all!
Additionally, the $20,000 of additional interest you referenced in your question is (a) entirely tax deductible as mortgage interest, and (b) probably an overestimate, based on a 30-year loan life, which you’ve said your plans are to stay in the home closer to 10 years than 30.
The other flawed assumption is the idea that $1,200 is the sum total of what your current car will need for repairs between now and the time that you buy a home. What if, God forbid, you spent the $1,200 and did the repairs, only to have something else, potentially something more costly, break down on the vehicle? The fact that you just recently had to make $400 in unexpected repairs is proof that this is a very real possibility.
My sense is that, at the very least, it behooves you to make the investment in making your car safe to drive. And it’s even possible that it makes sense for both your auto and housing needs to actually buy a newer vehicle.
So sit down and talk over this issue with your mortgage broker, and get a definitive answer about whether buying a newer car will actually impact the terms of your mortgage, and by how much. Your mortgage broker could very well come back and say that you could bear an auto loan up to ‘X’ amount of dollars before impacting your mortgage situation. Only then will you be truly equipped to make the smartest decision about whether to repair your car or buy a newer one.