Can I Refinance My Mortgage and Auto Loan at the Same Time?
Refinancing involves replacing an existing loan with a new loan, hopefully one that offers a lower interest rate and/or more favorable terms. While it is possible to refinance your mortgage and auto loan simultaneously, it’s essential to consider the pros and cons of performing this kind of transaction before doing so.
- When does refinancing your home and your auto loan together make sense?
- How do you know you are getting a great deal on a home and auto refi?
- How do you find a bank or lender who will refinance your home and your auto loans?
When does refinancing your home and your auto loan together make sense?
“If your main goal is to get your monthly debt payments as low as possible, refinancing your home and auto loan together may be a good idea,” said Evan Wade, co-founder of Philadelphia Mortgage Brokers in Philadelphia.
Wade explains that since this strategy can free up some cash, it may make sense if your financial situation has changed and you’re looking for a way to reduce the amount of money you owe each month. However, he discourages his clients from going this route if possible because it usually means rolling your auto debt into your refinanced mortgage.
“In most cases, I do not recommend refinancing your mortgage and auto loan simultaneously as doing so stretches a short-term debt into a very long-term debt that can end up costing you tens of thousands of dollars,” said Wade.
Rick Bettencourt, board president of the National Association of Mortgage Brokers also believes that this type of transaction is not always a wise move, especially if you’re able to finance your car with 0% interest.
“Many auto dealers offer specials where borrowers with high credit scores can finance their vehicles with 0% interest. I always recommend leaving the car out of the [home] refinance in situations like this,” said Bettencourt. Like Wade, he says that refinancing your mortgage and auto loan at the same time only makes sense if you need to improve your residual income.
Should you refinance your mortgage in order to pay off your auto loan?
When it comes to doing a cash-out refinance on your mortgage to pay off your auto loan, Wade is also not a fan. A cash-out refinance involves turning the equity you’ve built in your home into cash. “If you choose to cash-out refinance, it may leave you with a higher interest rate and increase your monthly mortgage payments, so I don’t think this is a good strategy,” he said.
“You should be careful when doing a cash-out refinance because equity growth and rates are nearly impossible to predict. A cash-out refinance is not a long-term solution to debt. If you’re struggling with debt, you should be mindful of your spending instead,” cautioned Bettencourt.
Here’s a summary of the pros and cons of refinancing your mortgage and auto loan at the same time.
- You can reduce your monthly payments: Refinancing your mortgage and auto loan at once can lower your payments and improve cash flow, assuming you qualify for lower interest rates and/or you have stretched your mortgage out over a longer term. In this case, proceeds from your new home loan paid off your auto loan, leaving you with a single payment.
- You can take advantage of lower mortgage rates: When rates drop, you wouldn’t necessarily have to fold your auto loan into the new mortgage. This strategy can give you the chance to lower your monthly payment and use that money to pay down or pay off your car loan.
- You may increase the term on your current mortgage: While this might be considered a pro — a longer term could have the effect of giving you a lower mortgage payment, it’s usually more expensive in the long run. With a longer term, you’ll pay more in interest overall and be in debt for a longer period of time.
- You may lower your credit score: A home and auto loan refinance will cause a hard inquiry on your credit, which may lower your credit score and make it difficult to land favorable interest rates.
How do you know you are getting a great deal on a home and auto refi?
To find out whether you’re getting a great deal on a home and auto refinance, you should consider your interest rate, refinance cost and overall residual income improvement, or the amount of money you have left over after all debts have been paid.
“If the increase of the residual income allows you to recover the cost of the refinance in a short period of time (about two to three years), you’re likely getting a great deal on a home and auto refinance,” said Bettencourt.
By doing some simple math, you can determine whether you’ve landed a good deal. Here are some calculations you should make:
- Determine the total cost of refinancing your home and auto loan: To complete this transaction, you’ll likely need to pay application, origination, appraisal and document fees, to name a few. Add these fees to find out how much you’ll pay if you refinance your home and auto loan. You can also use LendingTree’s refinance calculator to help you out.
- Find out how much you’ll improve your residual income: Calculate how much money you’ll save each month if you pursue this route. If it allows you to boost your residual income and recover the cost of the refinance in a few years, you’ve likely found a good bargain.
How do you find a bank or lender who will refinance your home and auto loans?
To find a bank or lender who will refinance your home and auto loan at the same time, start by asking friends and family for recommendations. It’s also a good idea to consult a national nonprofit, such as the National Association of Mortgage Brokers.
Bettencourt suggests searching NAMB’s member database to find a bank or lender who would be open to this type of transaction. In addition, you can reach out to U.S. Bank and Bank of America as these are a few of the lenders who may allow you to refinance your mortgage and auto loan at the same time.
The bottom line
At first, refinancing your mortgage and auto loan may make perfect sense. After all, it can help you free up some cash every month and doesn’t require you to get a part-time job, move to a less expensive area or sell the things you own.
From a long-term financial planning perspective, however, it’s simply not a good idea. Since you may have a mortgage that’s substantially higher than your auto loan and you’re paying more interest on your mortgage, refinancing your mortgage first is typically a better option.
Once you refinance your home, you’ll likely enjoy lower monthly payments and can put the extra cash toward your mortgage or your auto loan. You can then make major strides toward becoming debt-free.