What to Consider Before Rolling Your Car Loan Into Your Mortgage
If you currently have an outstanding auto loan, you may be thinking about rolling it into your mortgage to simplify payments or benefit from lower mortgage interest rates. While this move makes sense in some situations, there are important factors to weigh first:
How much is left on your car loan?
If you have a significant balance remaining, folding it into your mortgage spreads payments over many additional years. This results in more interest paid overall compared to aggressive payoff through a separate car loan. Consider only rolling in a car loan if less than a year or two of payments are left.
What is the interest rate on your mortgage?
Most mortgages have lower interest rates compared to auto loans, so consolidation can reduce the interest you pay on the car loan balance. But if you have a higher mortgage rate, paying off the car loan as-is likely saves on interest expenses. Crunch the numbers to see if the rate difference provides actual savings.
How long is left on your mortgage term?
Adding a car loan amount will be most cost-effective if your mortgage already has 20+ years remaining. The car loan essentially takes on the same length term at lower interest. If you have only 5-10 years left on your mortgage, keep the car loan separate and refinance your home if needed.
Can you make extra payments?
Without dedicating additional money to pay off the car loan portion faster, your total interest costs will be much higher over the long mortgage term. Make sure you can budget for larger monthly payments to repay the car balance within a couple years.
Are closing costs and fees worth it?
Refinancing a mortgage or taking cash out means paying closing costs and loan origination fees. Factor these into your total savings calculation to see if consolidation makes sense long-term after covering upfront expenses.
How is your credit?
Since a refinance or cash-out mortgage requires new underwriting, excellent credit improves your chances of approval and securing the best interest rate. If your score needs work, focus on that before consolidating.
Can you get better auto loan terms?
Rather than rolling it into your home loan, see if you can simply refinance the car loan itself for a lower rate or payment. This avoids mortgage costs and risk of over-amortization.
Rolling debts into your mortgage can generate interest savings in specific circumstances if done strategically. But the risks of increased total costs over time are real. Analyze your situation carefully based on the above criteria to make the right decision.