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Is your car payment straining your home buying budget?
The average monthly payment on a new car was $737 in 2024, which can make it hard to save for a home. Refinancing, however, may be able to help by lowering your monthly car payment and freeing up more of your income.
But will refinancing your car affect your ability to buy a house?
The short answer is yes. Taking out any type of credit before a mortgage will impact the home-buying process, but that’s not always a bad thing. Here’s a closer look at the pros and cons of refinancing a car before buying a home and when it can make sense.
Refinancing your car loan can impact your ability to get approved for a mortgage for the following reasons:
The auto loan refinance process can lead to temporary credit score drops which can make it harder to get approved for a mortgage right after. The first drop comes when you apply for the loan and undergo a hard credit check. Then, you may see drops when the new loan hits your credit reports, impacting your payment history, amounts owed, credit mix and credit history length.
The extent of your credit score dips and the recovery time will depend on factors like the length and depth of your credit history. However, you’ll likely see a rebound within a few months if you make your payments on time, don’t apply for new credit and keep your credit utilization ratios down.
Refinancing your vehicle usually changes your monthly car payment which directly affects your debt-to-income ratio (DTI). Your DTI then impacts your ability to buy a house because mortgage lenders use it to assess the risk you present and house you can afford.
If refinancing your car increases your monthly payment, the DTI increase can make it harder to get approved for a mortgage or lead to higher rates. Conversely, if refinancing lowers your payment, the DTI decrease can help you qualify for a mortgage and get lower rates.
If you refinance your auto loan shortly before applying for a mortgage, it could complicate the approval process. New loans don’t typically show up on credit reports right away, so mortgage lenders may request your auto loan documents to get the details they need.
Now let’s take a closer look at the potential benefits to consider when deciding if you should refinance your car before buying a house or skip it for now.
Refinancing may enable you to reduce your monthly payment by securing a lower interest rate, extending your loan term or both. If it does, you can use the difference to boost your house savings. For example, if your current auto loan has a $630 monthly payment and you refinanced into a $470 monthly payment, you could send an extra $160 per month to your house fund.
However, when considering auto refinance quotes, be sure to weigh the monthly savings against the overall costs. Extending your loan term can lower your monthly payment amount, but it also leads to higher overall costs.
Refinancing into a lower payment also helps to lower your DTI. For example, if you have $3,000 in monthly debt payments and you earn $8,000 per month, your DTI would be 37.5%. However, if you reduce your monthly car payment by $200, your DTI will drop to 35%.
DTI is a key factor mortgage lenders consider when determining not only your eligibility for a home loan but also your interest rate and maximum loan amount. Most lenders prefer DTIs under 36%, although some allow up to 45% — or even 50% in the case of FHA-insured loans.
Shaving a few points off your DTI may help you get approved for a mortgage, get a larger loan amount or get a lower interest rate. While the difference it makes may be subtle, it can have a big impact over 30 years.
Some auto loan lenders offer cash-out refinancing, which means you can borrow more than you owe on your car and cash out the difference. If you go this route, you may be able to use the excess money to help cover your down payment or closing costs.
For example, if you owe $15,000 on your vehicle and get approved for a $20,000 cash-out refinance auto loan, you would pay off your $15,000 loan balance and could use the remaining $5,000 for your upfront housing costs. However, check with lenders you’re considering as restrictions on acceptable down payment funding sources can vary.
While this can be a helpful way to get funds for the purchase of a home, it does come with drawbacks. First, you’ll need sufficient equity in your vehicle to be able to take cash out. Second, the full loan will be secured by your vehicle so your vehicle could be repossessed if you default. Third, a larger loan will also likely increase your monthly payment amount, DTI ratio and overall borrowing costs. You’ll have to run the numbers to see if it makes sense overall.
What’s the bottom line — should you refinance your car before buying a house?
Whether you should or not depends largely on your home buying timeline and if you can qualify for a lower monthly payment. If you’re saving for a down payment and your purchase is still more than six months away, refinancing could make sense if you get offered a good deal.
However, if you’re actively shopping for a home or preparing to submit mortgage paperwork in the next few months, it likely won’t be the best move due to the temporary credit changes.
Looking for more answers? Read on to learn about the ins and outs of refinancing a car when a home purchase is on the horizon.
Yes, refinancing a car will impact your credit reports, credit scores, monthly expenses and DTI which are all considered when you apply for a mortgage. Getting into a lower monthly car payment can lower your DTI and help you get approved for a mortgage. However, it can be beneficial to wait for your credit scores to recover from the refinance before applying for a mortgage.
After refinancing a car, it’s best to wait until your credit score recovers before applying for a home loan. While the recovery timeline can vary, it often takes a few months of following credit best practices such as making on-time payments, keeping your credit utilization down and not applying for new credit.
It may not be worth it to refinance your car if you’re planning to buy a house within six months or if you don’t stand to gain meaningful savings. For example, if you can only save $20 per month and plan to buy a home in three months, the benefits of $60 in savings probably won’t outweigh the costs of the temporary credit drop.
Getting an auto loan will typically cause temporary credit score drops, require a down payment and increase your DTI — all of which may negatively impact your ability to get a mortgage.
Yes, leasing a car will affect buying a house. Lease payments on a home or car are generally counted as recurring monthly debt obligations so are factored into your DTI ratio.
Understand how refinancing your vehicle could impact your mortgage application while planning your home purchase and if it's the right decision.
