Personal Finance

Buying car in cash vs house downpayment

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  • Feb 22nd, 2010 8:18 am
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[OP]
Deal Addict
Dec 20, 2005
1310 posts
33 upvotes

Buying car in cash vs house downpayment

Hi,
My wife and I are looking at buying a house within the next 12-18 months.

We currently have one car (hers), which is 13 years old now, and will most likely need to be replaced before we buy the house. I don't have a car right now, but may need one soon for work, and will definitely need one once we move into a house since it won't be near good public transit.

I was always planning on buying the cars in cash to save money, but I'm wondering if it would be better to finance the car(s), as long as the finance rate is below that of the mortgage, and put whatever extra cash we have into the house to reduce the size of the mortgage.

We're on track to be able to afford a 20%+ downpayment on the house, regardless of the decision.

Thoughts?

Adrian
27 replies
Deal Addict
Feb 5, 2009
2323 posts
300 upvotes
As UrbanPoet said, the low financing is recovered through an inflated sale price, so that shouldn't be the determining factor. You'd have to sit down and crunch numbers for each possibility to see what's going to cost you more in the long run.

And don't forget that at 20% down you don't have to pay CMHC fees, so if the cash/financing decision will affect whether you'll be above or below the 20%, then don't forget to include that in your number crunching. (Since you specifically mention 20% I assume you're aware of this, but thought I'd mention it just in case.)
Deal Fanatic
Dec 11, 2003
7776 posts
281 upvotes
I think you are better off with buying the car in cash because the true cost of 0% financing is often 6-8% (read the fine print) because you don't get the cash incentive with financing.
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Deal Addict
Jun 7, 2005
4276 posts
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If your downpayment is over 20%, you can get a STEP mortgage (traditional mortgage + home equity line of credit, you get a line of credit for the difference of 80% of the home value - principal owed), and buy the car with that.

Paying down mortgage principal is the most important thing, the interest is insane.
[OP]
Deal Addict
Dec 20, 2005
1310 posts
33 upvotes
I think the total savings on buying the car with cash would be about $1000-1500, based off the cars we're looking at.

We'd have to pay the cars off in 3-5 years to get 0% financing. Hope this next section doesn't confuse too many people but I think I've figured it out.

I used this calculator:
http://www.tdcanadatrust.com/docs/mortC ... ulator.jsp

Compared the following:
$400,000 mortgage, 25 year amortization, 5 year fixed at 4.09% with extra monthly payments of $350 (amount we'd be paying if financing the car)

Gave monthly payments of $2,123.64 and an end of term balance of $325,541.21 after 5 years.

TO

$380,000 mortgage (assuming $20,000 car), 25 year amortization, 5 year fixed at 4.09%, extra monthly payments of $106.18 (difference in mortgage monthly payments between $400k and $380k mortgage)

Gave monthly payments of $2,017.46 (+ 106.18 = $2,123.64) and an end of term balance of $324,288.26

So it's fairly close. Basically, if the cash price is anything over $1,000 less than the finance price, it's probably worth doing due to less hassle. And this is assuming a best case scenario of a 5 year financing term at 0%, which very few cars are eligible for. I think the answer is in favour of paying cash for the cars in almost all circumstances.
Deal Addict
Jul 4, 2006
1006 posts
19 upvotes
Ottawa
FYI Dodge's 0% is a true 0% :)

I just bought a 2010 caravan and whether I financed or not did not affect the ridiculous ~8000 in incentives I received. They actually did not care how I paid for it.

In fact the 0% 3yr financing ended up being through ScotiaBank surprisingly. I was totally expecting it to be Chrysler Financial.
Jr. Member
Mar 10, 2003
143 posts
13 upvotes
What if he buys 2 Hyundai accents for $9995 + freightpdi and tax with the 0% over 3 yrs? I think the real question is will having payments for 2 cars affect their credit score regardless of teh 20% down payment and thus affect the mortgage qualification procees. I think its debt servicing ratio or something like that, but Im not a finance person so i'll let smarter people chime in. :D
Deal Addict
Nov 27, 2005
2877 posts
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Impossibles wrote:
Feb 19th, 2010 2:28 pm
Paying down mortgage principal is the most important thing, the interest is insane.
People always say this. That you should always pay down your mortgage first because it has so much interest. It's as if you will always save more money by paying down the mortgage first. But you should actually pay off whichever loan has the higher interest rate.

I have a mortgage > $100k and a LOC with $5k. The mortgage is at 1.5% and the LOC 3.25%. I put all my extra money into the LOC and not the mortgage...
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Jul 14, 2008
8102 posts
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crimsondr wrote:
Feb 19th, 2010 3:25 pm
People always say this. That you should always pay down your mortgage first because it has so much interest. It's as if you will always save more money by paying down the mortgage first. But you should actually pay off whichever loan has the higher interest rate.

I have a mortgage > $100k and a LOC with $5k. The mortgage is at 1.5% and the LOC 3.25%. I put all my extra money into the LOC and not the mortgage...

I'm no math whiz, but doesn't the 'better' option depend on the size of the debt? For instance, with a $1000 debt at 25% interest, and a mortgage of $200,000 at 4%, isn't your total interest cost greater (in dollars) with the mortgage?
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Nov 27, 2005
2877 posts
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onlineharvest wrote:
Feb 19th, 2010 3:32 pm
I'm no math whiz, but doesn't the 'better' option depend on the size of the debt? For instance, with a $1000 debt at 25% interest, and a mortgage of $200,000 at 4%, isn't your total interest cost greater (in dollars) with the mortgage?
It's totally dependent on the rate, not the size of the debt. The total interest cost of your mortgage will be greater, simply because you have more debt there. But paying off a smaller debt with a higher rate will always save you money in the end.

Your mortgage is $200,000 at 4%, LOC $1000 at 25%.
You can look at your mortgage as ($199000 + $1000) at 4%. For simplicity interest would be $200,000x4% for the year or (199000 + 1000)x4%. So you could look at the mortgage as two separate loans combined. But if you break it up, you can see that paying back $1000@25% would definitely save you more money than paying $1000@4%.

I'm not very good at explaining things so that might be confusing or not make any sense at all :cheesygri

edit: Also, with your logic you would not touch the $1k debt. So it would incur 25% interest every year until you paid off your mortgage. So basically that $1k debt would more than double every 4 years.
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Jul 14, 2008
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crimsondr wrote:
Feb 19th, 2010 3:49 pm
It's totally dependent on the rate, not the size of the debt. The total interest cost of your mortgage will be greater, simply because you have more debt there. But paying off a smaller debt with a higher rate will always save you money in the end.

Your mortgage is $200,000 at 4%, LOC $1000 at 25%.
You can look at your mortgage as ($199000 + $1000) at 4%. For simplicity interest would be $200,000x4% for the year or (199000 + 1000)x4%. So you could look at the mortgage as two separate loans combined. But if you break it up, you can see that paying back $1000@25% would definitely save you more money than paying $1000@4%.

I'm not very good at explaining things so that might be confusing or not make any sense at all :cheesygri

edit: Also, with your logic you would not touch the $1k debt. So it would incur 25% interest every year until you paid off your mortgage. So basically that $1k debt would more than double every 4 years.
I see what you're saying. Assuming I have an EXTRA $1000 to reduce debt, I would obviously put it towards the 25% loan (and this is what I would do if I were in this situation).
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Nov 27, 2005
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onlineharvest wrote:
Feb 19th, 2010 4:04 pm
I see what you're saying. Assuming I have an EXTRA $1000 to reduce debt, I would obviously put it towards the 25% loan (and this is what I would do if I were in this situation).
Yup. My mortgage is at 1.5% now, so it's always the last thing I pay. Although that may bite me later when P goes up :cheesygri
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Dec 31, 2009
1568 posts
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UrbanPoet wrote:
Feb 19th, 2010 12:13 pm
I find that car dealers build the cost of low financing into the price of the car...
I always see "0% financing!"
and somewhere on the same page "$1500 back on cash purchase!"
What? The dealer doesn't actually provide the financing so why would they try to recoup the cost of something that costs them nothing? You make it sound like the dealer is charged a fee by GMAC/Ford/whoever whenever they sell a vehicle at the low rates.

I can only speak for GM, but the dealer is given cash incentives to push the low borrowing rates. Matter of fact, a lot of time the customer is further ahead to take the 0% as opposed to paying cash because the dealer will often take this free cash into consideration when working out a deal. We get incentives not only from GM, but also from GMAC or whoever else might be providing the finance special of the week.

I should add that the worst thing a person could do is to sit at a dealer and pretend like you know all about how the financing works and dealer incentives and rebates and tell them how you should be getting this and that and the other thing. Trust me, the F&I people will laugh at you in the other office and this attitude will do more harm than good. They get the biggest laughs when somebody says "okay, but I read on the internet..."

Yeah, the F&I guys where I work can be jerks. But it's pretty much the same all over the place.

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