Benefits of Refinancing Your Car Before Buying a House
Buying a house is one of the biggest financial commitments you’ll ever make. Taking out a mortgage is the most common way to make your dream of homeownership come true.
But what if you have a pending car loan and are considering refinancing? Should you refinance your auto loan before buying a house or wait till the loan is settled? While there is no right or wrong approach, most people tend to choose the former option.
To settle the entire refinance car vs mortgage debate, let’s take a look at some benefits of refinancing your car before buying a home:
It Can Lower Your Debt-to-income Ratio
Refinancing a car loan is acquiring a new loan to pay off your existing auto loan. In most cases, refinancing offers extended repayment periods and lower interest rates. This has a significant impact on your debt-to-income (DTI) ratio, which is one of the first things mortgage lenders investigate.
DTI represents a percentage of your income that goes toward paying debts, such as auto loans, credit card loans, and student loans. When you refinance your car before applying for a mortgage, you reduce the monthly auto payment by securing a lower interest rate.
For example, if your car payment is currently $600, and refinancing brings it down to $400, that extra $200 could make a positive difference when mortgage lenders assess your application.
It Leaves a Minimal Effect on Your Credit Score
One of the biggest concerns people have when refinancing their car loans is the potential impact on their credit score. Fortunately, refinancing only has a minimal effect on your credit history. Most lenders run a hard inquiry, which may lower your credit score by a few points.
However, in the grand scheme of things, this effect is small and short-lived. A slight dip in your credit score would not negatively impact your mortgage request.
You Can Secure Better Mortgage Terms
As discussed earlier, mortgage lenders evaluate your DTI ratio and credit score before approving your loan request and offering an interest rate. By refinancing your car, you can manage to keep the DTI ratio and the credit score in a favorable range.
A lower DTI ratio will indicate to lenders that you have financial flexibility, increasing your chances of securing lower interest rates for mortgage payments. Whereas, a good credit score means you can qualify for better mortgage options, such as lower down payment requirements and reduced mortgage insurance costs.
All in all, refinancing your car can help streamline the process of acquiring a mortgage.
It Can Lower Monthly Expenses
Refinancing your car loan means getting lower interest rates. This can help you free up cash that can go towards your goal of homeownership. Down payment, insurance costs, moving expenses, and home maintenance – These are some of the biggest expenses that come with buying a home.
By refinancing your auto loan before buying a house, you can reduce the risk of financial strain. Create some breathing room in your budget and make homeownership less stressful in the long run.
