Should You Roll Your Car Loan Into Your Mortgage?

Paying off debt should be a priority for most people, but deciding the best way to consolidate loans can be tricky. One option some consider is rolling an existing car loan into their mortgage. This may seem appealing to simplify payments into one place, but it requires caution to avoid increased costs.

The Risks of Combining Loans

On the surface, folding a car loan into a mortgage seems prudent since mortgage rates are lower. However, this overlooks the impact of compound interest on the car loan principal over the long-term mortgage.

For example, take a $30,000 car purchased with an 8.31% 5-year car loan, costing $36,769 total with interest. Refinancing that into a 30-year 4.3% mortgage more than doubles the interest to $77,710! Even over just 5 years, the interest jumps from $6,769 to $47,710 by rolling into a mortgage.

Without disciplined extra payments, the mortgage approach backfires terribly. Only those who will aggressively repay the car loan portion within months or a few years avoid ballooning interest costs.

Analyze Your Financial Personality

Assess your financial habits to determine if combining loans suits you:

  • Do you save regularly, spend less than you earn, and avoid unnecessary debt? If so, you may have the discipline to make extra mortgage payments work.
  • Alternatively, if you carry revolving balances, have little savings, and struggle to pay bills on time each month, combining loans likely creates more issues.

If you lack financial restraint currently, build healthy money management habits before considering loan consolidation.

Requirements for Success

For diligent borrowers who will repay quickly, here are tips for successfully folding a car loan into a mortgage:

  • Refinance or take out a larger mortgage to add the car loan amount.
  • Be prepared to repay through higher monthly payments over 1-3 years, not dragged out over 30 years.
  • Automate biweekly or weekly additional payments specifically targeting the car loan portion.
  • Monitor closely to ensure you stay on track paying the car balance quickly.
  • Accept that refinancing charges and title transfer fees apply. Account for these in the total cost.

Weigh Your Best Options

Before deciding, run the numbers for a car loan, mortgage refi, and other alternatives like a personal loan. Compare total interest paid over the necessary loan terms based on your repayment ability.

Rolling a car loan into a mortgage only generates interest savings if you have the financial discipline to repay that portion rapidly. For most, a separate car loan with accelerated payments makes more sense. But for diligent borrowers motivated to be debt-free, strategic consolidation can work.

Analyze your unique situation carefully to pick the most affordable debt repayment strategy. This helps you maximize savings while minimizing the risks of combining loans.