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Down payment savings versus car loan payoff?
Old 02-28-2011, 07:15 AM   #1
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Down payment savings versus car loan payoff?

I have been wondering about this for a while now and this seems like the place to ask. I'm 24 years old and in a secure job as a firefighter with a good amount of seniority, i.e. little chance of being laid off. I have a pension and I contribute a small amount into my 401k. My short term goal is to buy a house without stretching myself too thin. So without further adieu, here's my predicament:

I currently have over $20,000 saved up towards a down payment for a house. I also have 2 vehicle loans, one is a motorcycle with a (gasp) 11.9% rate and a car at a more manageable 5%. The motorcycle has $12,500 left and the car $10,500. I know, I know I'm young and got mesmerized by the bike. Life lesson...

Is my money more effective in a savings account available for emergencies or should I take, say $5,000-$10,000, and put it towards my motorocycle loan? While I don't generate interest on my savings, I am hesistant to take it out in case I come accross a great bargain on a house now. I also looked into refinancing the bike, keeping the same length of the loan but at a lower interest rate.

The other way to look at this is that it will raise my credit. Thanks in advance for your input! I know this is a little off topic from normal discussion, but I'm trying to build a solid financial foundation.
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Old 02-28-2011, 07:24 AM   #2
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If I were in your shoes I'd pay off that motorcycle loan in full. Then, replenish your savings each month with the motorcycle loan payment you're no longer making.
You may even want to split up that replenishment between savings and additional payment towards the auto loan principal.
11.9% is very high vs a savings account at ~ 1%.
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Old 02-28-2011, 09:46 AM   #3
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Originally Posted by joea132 View Post
I know, I know I'm young and got mesmerized by the bike. Life lesson...
Have you considered selling the bike? You'd save on insurance too.

Yes, personal decision, your call, but you did say it was a 'life lesson', so maybe you've already paid enough tuition and got enough from it?

I'd also want to have more than $20K saved before I buy a house. You want a solid emergency fund in place after the down payment money is gone. Houses and cars are full of surprises.

I agree that I wouldn't worry too much about a 5% car loan. If you save the money and decide to pay it off in full, fine. But I wouldn't pre-pay without a full pay off - if you pre-pay gradually, that money is tied up and you still have a monthly bill to pay.

-ERD50
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Old 02-28-2011, 09:54 AM   #4
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It kind of depends on how big a hurry you are in to buy a house. If you're in a big hurry, pay off the bike, sell it for what you can get, and once you've built your savings back up you'll qualify sooner for a larger or easier to manage mortgage since the bike payment isn't in the picture. That may mean taking a beating on depreciation on the bike though, meaning short-term loss for long-term gain.

If you're not in a hurry and believe that housing prices have not yet hit bottom or will be stable, pay off the bike to get rid of the high interest rate, keep the bike, and put the money you were spending on payments/interest toward your house fund.

Further complicating the calculation is what is your current housing cost. Are you by yourself in an expensive apartment or living with three other guys in an inexpensive rental? If your current living quarters are expensive, getting out sooner means that money can be directed toward your goals. Cheap housing now means you can save money faster for your house.
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Old 02-28-2011, 10:10 AM   #5
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At your age I had almost the exact same predicament, with almost the exact same sum between a car and a bike. I decided to pay off the bike and car as quick as I could, and it ultimately meant having more money more quickly.

I think I was paying something like $800/month for the car, the bike, and full coverage on both. Paying off the car and bike allowed me to switch to cheaper non full coverage insurance, and freed up all that money to stick in savings. Within a year and a half, I had my savings my more than back at where they were again.

If you freed up $XXX/month by paying off the car and bike, then take $20,000 and divide it by that $XXX to figure out how many months it would take to save that $20,000 again. Can you wait another couple of years before buying a house to build up your savings if you decided to pay off the vehicles?
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Old 02-28-2011, 10:48 AM   #6
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Thanks for the quick responses! I have been paying extra on both the car and more so on the bike. The housing economy is where it gets tricky. My parents are tight on money so I live at home paying them rent now. Its definetly a win win for all parties. My biggest concern is paying the bike off and finding a nice house for a steal but not having the money to purchase. Being that I'm in a good housing situation, I feel like I should save up a large down payment before I buy but I'm concerned that the prices will increase and I will be stuck in a seller's market.

I guess its more of a judgement call based on real estate at this point.
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Old 02-28-2011, 11:04 AM   #7
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I would not even consider taking on more debt(like a mortgage) when I have 2 vehicle loans. Pay off the motorcycle in full then continue your saving for a down payment on a modest home.
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Old 03-01-2011, 06:39 AM   #8
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Being that I'm in a good housing situation, I feel like I should save up a large down payment before I buy but I'm concerned that the prices will increase and I will be stuck in a seller's market.
Anything is possible of course but I think few others see that (rebounding housing market) happening any time soon.

You have the luxury of time and stable housing. As long as you pay the agreed-upon rent, mow the lawn, take out the trash, and can show your parents you're saving for a home they're probably happy to see you making progress. At least most would be.

My suggestion would be pay off the high-interest motorcycle loan and let the car loan ride if you're more comfortable with that, but plan on having that paid off too by the time you apply for a mortgage. You'll want all the available monthly cash flow you can get when you buy.

Trust me - once you own a home it's a rare day when you can get out of Lowes or Home Depot for less than $100!
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Old 03-01-2011, 02:50 PM   #9
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Originally Posted by joea132 View Post
Thanks for the quick responses! I have been paying extra on both the car and more so on the bike. The housing economy is where it gets tricky. My parents are tight on money so I live at home paying them rent now. Its definetly a win win for all parties. My biggest concern is paying the bike off and finding a nice house for a steal but not having the money to purchase. Being that I'm in a good housing situation, I feel like I should save up a large down payment before I buy but I'm concerned that the prices will increase and I will be stuck in a seller's market.

I guess its more of a judgement call based on real estate at this point.
i would suggest paying the minimum on the car and throwing any extra payments to the bike. not sure what kind of values we are talking about, but this should help as well.

with living at home, i would do as many others have said and just get rid of the bike loan at least, if not both loans. it's amazing how fast the cash will build when you don't have loans.
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