If one has thought about refinancing car loans into home loan, it has proven that he or she has pretty enough smart juice in the brains to look for loophole in our life. Mortgage loan or home loan is always 20 or 30 years or even more, but all kind of car loans are usually less than 10 years even the $1.5 million Bugatti Veyron. Have you thought of why? This article has two part, you can also read part two here.

Car Loan vs. Home Loan

The main reason is because home, house, or property is something appreciate all the time, it only depreciates in certain circumstances. Conversely, car, automobile, or vehicle is something depreciates from time to time although it can be considered as an asset.

Many of us may not think about refinancing car loans and use the money to pay off home loan before, some people may not even know what it is. It is a way where you borrow money again from your own car, and use the cash to pay off your home loan or part of your home loan, when the home loan interest rate is higher.

This is good for people who already have a car and a house. It is good for people who have a car which is already paid off and need some cash to renovate the house. Let’s take some real life case study into calculation so that you can understand more and how it works.

Case Study

Ashley has a 2010 Mercedes-Benz E Class which she has fully paid off. She has recently bought a house at $150,000. Ashley compares many bank offers and finally gets the best home loan with the fixed interest rates at 7.5%. Ashley doesn’t want to go for normal rate as she worries to pay for high APR rate. With $15,000 as 10% down payment, Ashley would have to take $135,000 home loan.

Now the calculation goes like this. With $150,000 purchase price, $10% ($15,000) down payment, 30 years/360 months mortgage term at the interest rate of 7.5%, It is estimate that Ashley would have to pay $943.94 every month for 30 years. By the time she pays off the house, the total payment will be $339,818.25 without including the property tax, property insurance, PMI, and miscellaneous fees.

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Home loan are usually accumulate and the interest is calculate every single day. At most of the time, most of the money from the payment goes to the interest and not the principal. Look at the graph above, it takes almost 20 years just to pay off most of the interest.

Ashley brings her car to get quote for refinance. According to used car value, her Mercedes-Benz worth roughly $45,000 and she gets the best offer with the interest rates at 2.33% a year. Ashley thought about refinancing and finally she has decided to refinance her car loan and use the money to pay for home.

What you save?

With $60,000 ($15,000 initial down payment, $45,000 cash from car loan refinance) down payment, 30 years/360 months mortgage term at the interest rate of 7.5%. It is estimate that Ashely would have to pay $629.29 every month for 30 years. This time, the total payment will be $226,545.50. Not to forget the $45,000 and the costs to refinance car loan, Ashely would have to pay a total interest of $4,367.77 over 8 years time at 2.33% interest rate. In other words, the total interest rates will be $226,545.50 + $4,367.77 = $230,913.27.

Based on the case study above, Ashley save a total of $339,818.25 – $230,913.27 = $108,904.98, which is 70% of the house price. “Wah”, is what people usually do when they first see the calculation. This has proven refinance car loans for the purpose to pay off home loan is a smart move providing there is no bad credit, poor credit, no credit, or any bankruptcy.

See part 2: refinancing car loans into home loan part 2.