Personal Finances OR Fun With Math (but not really)

Other Chit-Chat
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Ok. I’m having trouble talking to anyone in my personal life because it’s so easy to get bogged down in the math (and their brain starts to hurt when I start talking about it ), so I figured I’d ask here where people are a little more used to the more complicated math. :wink:

I am refinancing my house. Current mortgage is 4.25% with 25 years and $130,000 left. New rate is at 2.625%.

I also need a new vehicle. I need a truck to tow an RV and it would help with my work, and eventually starting my own business. I’m assuming a purchase price of $45,000.

Our initial idea was to take $39,000 out of the mortgage (keeps us at 80% loan to value so we don’t pay PMI) and finance the $6000 on a vehicle loan (or maybe the truck won’t cost that much, I’m just assuming the math here) But now my husband and I are debating if it’s a good idea.

I understand getting a 3.99% (through my bank) or even 0% (if we could find it) vehicle loan would get us the lowest interest, but the monthly payments would be too high. (calculated at worst case 3.99%, $45,000 = $615 mo-±House payment @ $1095) But if we took out the extra $39,000 the monthly payment would be lower ($1265 mortgage + $82 vehicle loan) We also discussed a middle ground where we take out 1/2 in the mortgage and 1/2 in a loan. ($1194 mortgage + $325 Loan)

We are getting a lot of push back about taking out ANY money from equity (family…I know they care about us) to finance a depreciating asset. But we will have to finance it one way or another, and we are taking out the refi anyway because of the cheaper rate. So it’s just a matter of adding on to that loan.

So, what do you think.

Option #1
My instinct is to go middle ground which gives some flexibility with the monthly payments after the vehicle loan is paid off, makes the mortgage part of it tax deductible and is really at the top end, (but still within) our budget.

Option #2
My husband wants to take out the minimum in the mortgage and get a vehicle loan. (that I’m convinced will strap our monthly payments too much, but he thinks we can “manage”)

Option #3
If we were to go with the high mortgage and lower monthly payments, we could use the extra monthly money to make monthly principal payments. It would make almost the entire amount tax deductible, but it would take 10 years of paying before we would replace the equity we took out. (although we don’t really plan on moving)

I know it’s a crazy question, and not at all robotics related… But honestly, my brain is now fried (of course I now have HUGE spreadsheets calculating the actual cost of each option, and there is no clear answer) I keep thinking I’m missing something. Can anyone think of an option I’m not thinking of? We’ve put the closing on hold because now we can’t agree.

Please let me know what you think is the best option and why. ANY opinions are helpful right now. Thanks for so much for reading.

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Treat a car as a disposable object. You shouldn’t take out a loan on a disposable object. Buy used with cash, anything over $10k is a stretch. The home refinancing is a very good idea.

I am curious to see what other’s input on this kind of life decision is, I suspect there might be a lot of variation by region.

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This is the most correct answer.

If it’s mission-critical to have a truck and you absolutely can not pay cash, I’m sure there’s something out there pre-owned for less than $45k. (Mind you, I come from a family where my grandmother described a farm truck as “fancy” because it had cloth seats and air conditioning.)

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I’ve found Truck investments to be particularly opinion-inducing among folks. Given they cost anything across an order of magnitude (10K->100k+).

Some have argued that the very expensive Ford Raptor is an viable investment tool. Not 100% sure I agree, but you gotta trust people who wear two t-shirts at once, right?

Having done car finance in the past, I’m also of the opinion to avoid it in the future. It got me a nice car, but those were not fun monthly payments. If you can swing it, I’d definitely consider going for a used Ford F150 or F250, try to get yourself more in the $20k range. Reducing that asset will make a lot of your options less worrisome, I think.

My overall opinion though: Go for whatever will induce the least stress. Family opinions included. Having the optimal financial solution is of no use if your blood pressure is at 500/300 every day from worry about it. Besides, situations change over time - especially 10-15 year timeframes. It’s really really hard to even choose what is actually “optimal” in the long run. Just pick something you can live with (and loose minimal sleep over) now, maybe review in a year or two and refinance if needed? Easier said than done, I know, especially if the analysis itself is what gives you peace. Still - don’t loose sight of the higher thinking. Unless you’re just really into collecting dollar bills, most folks care more about what good things the money can help them do, not the money itself.

It is crazy how much expectations vary on this. My parents always bought new (at around $25k) and ran them till they died. The van we had when I was in 2nd grade was the van that moved me out of college and into my first job… and they only got rid of it about a year ago. 300k on it, and they managed to find a buyer (???).

On the other hand, I know some very smart folks who work as engineers in the auto industry, and refuse to buy new cars. Used or nothing. Perhaps it’s because they had the knowledge and confidence to do advanced self maintenance, or possibly because they’d seen first hand the work that went into making the cars reliable… Not sure.

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This is probably the best advice, I know.

Thanks everyone. While I actually prefer to buy used myself, however, I’ve never had very good luck. My current vehicle I bought 4 years ago. (It was 6 years old) I’ve had to replace the entire front end frame, recently blew a ball joint, and various other problems. I don’t know anything about repairing a vehicle myself, so they typically end up being expensive repairs. (Car before that I replaced the trans. And the one before that my engine blew) Bad luck.

I really would like something newer, hopefully with less problems. (But with my luck, who knows right?) And I actually don’t like getting new cars every 4-5 years. My husband’s last car (he bought new before we met) he had for 16 years.

Honestly, I know the are emotions involved on all sides (again girthworm, good advice) and for my part, I’ve never had a vehicle newer than 5 years old. Ideally, one 2 years would be perfect. And that’s what I would look for first. But from what I’ve seen, that’s still 35-80 thousand dollars. (I lean towards the 35, but still) and would still require a loan of some kind.

Thanks again. I figure the more opinions I can get on this the better.

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Out of curiosity, which pickup are you looking at?

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I’m open, but I need the capacity to tow my current RV (about 5000 lbs) and would like the ability to upgrade to a 5th wheel in the future if possible.

Currently my priorities are:

  1. Back seat (but doesn’t need to be full 4 doors, just enough to put some suff and haul a few robotics kids, or a Burmese mountain dog :stuck_out_tongue_winking_eye: )
  2. Towing (at least 5000. But would like more)
  3. 6ft plus bed (I do upholstery so I need to be able to go to a boat and pick up the job if nessassary, and haul plywood ect.)

I don’t think it’s asking much of a truck, but most other vehicles just won’t do. We can get the A plan through Ford, but I’m definitely not married to the idea. (And it seems the new F-150s have a REALLY wide turning radius that I don’t like)

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Having driven a wide variety of small chevy, ram, and ford pickup trucks between 2012-2017 model years for work… Can confirm, some of the newer fords at least feel like they have a horrible turning radius, and I’ve more than once felt like an incompetent nincompoop while doing a 5-point turn to park one. Still, in terms of interior appointments and electronics and offroad-worthiness, the F150 XLT’s still seem to be the most coveted in the fleet.

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You can put me in the anti-debt camp as well. If only 10 years ago I knew what I know now, I wouldn’t have any debt. Time only goes forward though.

I just refinanced my mortgage from a 30 year fixed at 3.875% to a 15 year fixed at 2.5%.
Next time I’m in the market for a car, I would not use any of my home’s equity to finance the car. I wouldn’t finance the car either, but that’s my opinion.

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Since you are near a large urban area, it should be possible to find a truck that is around 3 years old in good condition with low mileage for less than $39,000 so you won’t need the auto loan. There will usually be some years of warranty left on them. Here in Texas, a lot of pickup trucks never carry anything more than groceries, bikes or dogs, even those rated at 1 ton.

An alternative is to buy a “stripper model” more commonly purchased as work vehicles. I see a lot of trucks and vans accumulating in dealer lots with the economic downturn. The interior won’t be as nice as one costing $45,000 and you probably won’t have much choice in the colour (mostly white). It is quite likely that you can push and get a bigger discount on those vehicles, especially if you go in at the end of the last month in a quarter.

Edited to add: With the flooding occurring in the Southeast due to Hurricane Sally, the supply of used vehicles may become tight. It became difficult to find used vehicles here on the Gulf Coast after Harvey so they were shipping them in from other states.

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My “day job” is real estate. The last housing crisis is often blamed on sub-prime loans, however at least in my area a huge percentage of the houses the ended up going across the auction block were people who used their homes as a cash machine. The loan histories often showed that the people purchased their home with 10% down but in a few years they were doing increasing 80-20 loans every year or two. In one instance Google street view showed the parade of the toys, like RVs, Boats and luxury cars that came with each re-fi.

So my vote is don’t use your house as collateral for a vehicle.

With trucks long term 0% financing is common and from my understanding you can get that with the A plan. So buy a popular combination put as little as 10% down and you’ll always be able to sell it for more than you owe so if circumstances dictate a need to reduce expenses. Heck you can probably buy the right truck, keep it nice and sell it yourself at 1 year old for what you paid for it in the first place, less the sales tax.

I highly recommend the Super Crew over the Super Cab. I have/had examples of both and I don’t see going with anything but the crew cab in the future. The additional space in the rear is well worth it in my opinion, I don’t use it for people nearly as much as cargo. But when you do put people in the back the difference is huge.

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Thanks for all the advice everyone. Just an update. Our negotiations have ended, and we have come to an agreement.

We went over ALL of our finances in detail and found several areas we could cut. (Mostly him. So honestly, I feel validated because he always has the new car and stuff. But, he was more than willing to cut some of his EXTRAS so I could have a new vehicle for once. And I really appreciate that he was willing to negotiate that.)

So with what I can contribute from my income, and the difference in the mortgage payment (which would have gone down anyway because we’re cutting the interest rate in half) as well as what he’s willing to contribute (cut) we should now be able to afford to finance a truck the traditional way.

Again, Thanks so much for the advice. I really appreciate it.

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One more thing to consider is the insurance for your truck. It will cost much more to insure a new one costing $45,000 than it would to insure an older one. It can be a nasty surprise for some people.

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My wife bought a truck just after she retired, 3.5 years ago. We found a used 5 year old truck for 16k, it meets all your requirments except for future RV upgrade (it tows 5000 lbs just fine, we’ve taken it on a few trips). Truck had 100k miles on it when she got it, which is pretty close to the sweet spot for depreciation vs. remaining life vs. price.

I’ve had good “luck” with our later model used cars, and the two new trucks she’s bought. Maybe because I know how to fix them, makes me good at picking them, and maintaining them? I don’t know.

but I do know modern vehicles are made a lot better than the old ones that I really enjoy playing with…my truck is a 1959 Chevy that I’ve had since 1977.

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There are of course some of us who remember when 100k was considered worn out and in fact often were quite tired if they didn’t toss a rod shortly there after. They also burned and leaked a lot of oil by the time they reached that many miles. My robot hauler, a former county vehicle, was purchased with ~180k on it and still doesn’t leak or burn any oil. Of course I can and do fix it myself and chose it accordingly.

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Certainly cutting unnecessary expenses to minimize financing is a great approach. But I would also suggest that you map out each approach on a spreadsheet so that you can compare the monthly costs and total cost over time of both the car and the house.

One other important thing to keep in mind: mortgage interest is typically tax deductible if you itemize your taxes. This means that if you paid $X dollars in interest in the year, and your marginal tax rate is Y%, your tax bill at the end of the year is lessened by X*Y. I will reemphasize that this is only the case if you itemize your taxes. There may be additional state-level tax deductions depending on where you live.

It is typically the case that loans on personal vehicles do not act as a deduction to your taxes, but I believe that if you are using it for your business, they do (although I have no personal experience with business vehicle taxes, so take that with a grain of salt).

In your case, the extra $39,000 in mortgage will result in nearly $39,000 * 2.625% interest in the first year. If your marginal tax rate is 25%, that will end up being a $250 tax deduction.

My last piece of advice: don’t blindly trust any advice on finances that you read on Internet forums (including mine!). There is plenty of bad advice out there. Do some learning on your own so that you can know what to trust and what to ignore.

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If you take out a mortgage because you’re then able to itemize deductions on your taxes, but only by a small margin, then you’re probably not really gaining any benefit. The greater the difference between what you could deduct, and the standard deduction, is “free money”, from that perspective.

Back when interest rates were high, it might have made sense to try to itemize. Not today.

btw just to give you an idea of how I see things, it’s as a retired husband with a retired wife, both 59, no debt, lots of money saved up, we own a home, and several cars. We never did live anywhere near the limit of our means, always well below. It pays off after a while.

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This was part of my argument as well. I had considered this and since I don’t own a business yet or use it for the business I work for, it wouldn’t be deductible otherwise. (The plan is to start taking “side jobs” until I can build up to start my own)

Oh…I have this in spades…part of the reason my head was going to fall off I think. Basically, with the smaller house loan, we would save about $13,000 (including the cost of the auto loan) but we would need to come up with an extra $350 mo. So by adding the savings we’re getting from the refi, and the other cost cutting methods we were able to come up with the monthly amount and save ourselves $13,000. My issue was always the monthly cost. I want to save as much as I can (would LOVE to be able to pay cash but, ummm, can’t, LOL) but it doesn’t help if I can’t get it because I can’t pay the monthly cost.

That’s good advice. Yeah, I don’t blindly trust anyone, even my parents. ;D But I do LISTEN to everyone’s advice, even if I don’t like it, and weigh it against what I believe to be true, because I know I can often miss small details and others have many experiences and wisdom that I haven’t encountered. I always want to be secure in my decisions (and beliefs) and I believe I should always be prepared to defend them with knowledge and logic if necessary. (I know it seems a bit philosophical)

Thanks, my parents always lived the same way and that’s the model I grew up with. Unfortunately, “living within my means” the way that they did would mean never getting ahead for me. I can pay my bills. (house, electric, ect.) and I’ve saved for years to buy used cars, which always cost me more in repairs in the end. (I would LOVE to learn to fix my own car, but honestly I don’t know anyone to show me. Everyone I know just takes them to get fixed.)

Over the course of my last 4 cars, about 20 years or so, from the time I bought them to the time I trashed them (only 1 was in good enough shape to really sell at a decent price ) I figured I spent an average of $3500 per year on a car. So about $290 per month. I can lease a car for that and have all the newest features and safety. “you won’t HAVE anything at the end of a lease” everyone says. Well, didn’t have anything at the end of those cars either (they were an average of 13 years old I think). So I figure it’s about the same. :smiley:

Although, I do still think buying over leasing is better, and I would rather buy one a few years old over a new one.

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Glad that you got to a happy point for both of you. You have the best thing in a relationship, the ability to communicate and reach compromises.

I’m in the school of not financing cars. I buy a new car, pay cash. Then while I’m driving it, I make “payments” into a savings account to pay for the next one. I also drive the wheels off them (Geo Prism 240K, PT Cruiser 180K, Nissan Cube @132K and still my daily driver. When I get to 25% of the cost of the car into repairs, it gets sold. (Does not include Oil, tires, alignments, etc.)

I buy new because I get to do the maint cycle on them. So I know oils been changed, car washed in salty winters, etc.

Lastly, be very careful of buying used cars. With the huge number of cars and trucks damaged by flooding across the last two years, there is a lot of hidden damage. Do the Carfax or other service to track where the car has been. And remember what Mom says “If it looks too good to be true, it isn’t”.

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However, in a cash-out refinance, the cash-out amount is only deductible if it’s used to upgrade the house. Buying a truck with the cash-out amount would mean the extra cash out is not tax deductible.