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Need advise for better use of $3k:

Getting ready to approach local bank for Mortgage loan for a new home construction.

Should I payoff Auto loan in full or use this money to payoff 30% of revolving  credit card balance ?

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krishna4u said:   Need advise for better use of $3k:

Getting ready to approach local bank for Mortgage loan for a new home construction.

Should I payoff Auto loan in full or use this money to payoff 30% of revolving  credit card balance ?

  If you are carrying ~10k of CC debt, perhaps you should postpone the new home construction.
ETA: Payoff the loan with the higher interest rate (likely the CC debt).

stop borrowing more money

Pay off the CC, and don't carry a balance on your CCs unless it's at 0%.

The above answers are correct, you should be leary of large new purchases if you are paying high interest on revolving credit card debt and generally you would always want to pay that off first.

However, if you insist on getting a new construction loan, there are other factors to consider. From a cashflow perspective, can you qualify for the new loan with your liquidity? This question may best be posed to you lender if they need you to have more cash or if you need to reduce higher monthly payments on your auto loan. Once paid off you may also reduce your insurance premiums by cancelling comprehensive coverage.

Otherwise, the answer will almost always be financially savvy to pay down your highest rate balances. Pay it off and don't run up a credit balance that you can't pay off during each billing cycle.

What are your interest rates? How do you make such decisions or ask such questions without factoring in the interest rates on each of the outstanding balance??

For getting "approved" for a larger mortgage amount, the answer is the opposite of what's given so far. DTI only takes into account the payment amount. Auto loans are usually amortized for only a few years, so the payment vs balance will be a much larger number in general than credit card balances.  This is especially true when the auto loan is near the end of its term.  For example, my monthly payment for a remaining ~$4500 auto loan balance is almost $500 a month while the payment for a $17000 credit card balance is only $170 a month. Clearly the DTI would come out much better by removing $500/month debt payments as opposed to removing only $45/month in debt payments.

As to whether you should be doing so and applying for largest mortgage possible while holding the credit card balances, that's a different question and we also don't have all the information. People above are making assumptions (however correct they might be) to arrive at the suggested actions.

Maybe, like me, you're temporarily floating balances at ~1-1.5% effective APR (accounting for the 2% transaction fees I paid with 0% offers) while maxing out your 401k and IRA contributions at $23500. In that case, maybe it's ok. (*but, high individual credit card balances vs individual card credit limits will drive down the credit score, possibly costing a lot more for a higher mortgage rate/fees --- Unless you have it on some business cards that don't report to consumer CR or factor into FICO )

Or, more likely you may be overextended already and aren't saving anything and still running up credit card debt and now want to "maximize" the mortgage amount you're approved for -- In which case it's probably a very bad idea.

You have $3k of spare change floating around and are wondering where to put it to maximize its effect on your credit and/or DTI. Are you going with a 100% financing mortgage or something?

nm

If it's me, I'm paying off the secured debt with the higher minimum monthly payment first.

Ask the local banker you have in mind for advice given, they should know the mind of the mortgage underwriters.

krishna4u said:   Need advise for better use of $3k:

Getting ready to approach local bank for Mortgage loan for a new home construction.

Should I payoff Auto loan in full or use this money to payoff 30% of revolving  credit card balance ?



Definitely DONT pay off the car loan. I paid off my car loan and the next month my credit score dropped 50 points!

jJellybean said:   
krishna4u said:   Need advise for better use of $3k:

Getting ready to approach local bank for Mortgage loan for a new home construction.

Should I payoff Auto loan in full or use this money to payoff 30% of revolving  credit card balance ?



Definitely DONT pay off the car loan. I paid off my car loan and the next month my credit score dropped 50 points!

  That's only likely if you had a really thin file (say, zero or only a couple credit cards remaining open.  Or worse, just a bunch of rent-to-own company "no interest for XX months!" accounts).  Credit mix is a very low portion of the score and AAoA doesn't change until the closed account falls off 10 years later.

One of the most stupid things one can do is buy a new home when existing debt is oozing out of his/her ears.

The other stupid thing to do is to worship the credit score. Stop borrowing your way through life and hold onto your hard-earned money for a change.

Rent cheaply and work aggressively towards your income and saving ratio while still young so you can pay for everything including house purchase with cash later.

Yeah not many people is able or willing to do that. I get it. That's what makes me smile knowing I am in a better position than normal people even when the recession hits or negative life-changing events occur, or that I do not contribute free money in the name of interest to help banks build their skyscrapers.



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