Car payments are often one of the biggest monthly debts, and a common reason people fail a lender’s debt ratio test. Rolling a car loan into your mortgage can help, with one big caution.

When it can make sense

  • The car loan rate is high, for example from dealer financing with poor credit
  • The monthly payment is straining your budget
  • You’re consolidating anyway and want to clear your debt ratios

The big caution

A car loses value quickly and usually lasts far less than 25 years. If you spread a car loan over a full mortgage amortization, you could still be paying for this car long after it’s gone. Keep paying it off on roughly the original schedule. See why a lower payment can still cost more.

Round numbers, for illustration only: a $25,000 car loan with four years left might have a payment of about $600 a month. Rolled into a mortgage over 25 years, the payment might drop to around $150, but you’d pay interest on that car for 25 years. If you keep paying about $600 a month toward the mortgage instead, you’d clear it in roughly the original four years at a lower rate.

Car loans and qualifying

Lenders count your car payment in your total debt service ratio. A large car payment can be the single thing that stops you qualifying for a mortgage. Paying it off at closing can make the difference between approval and decline, which is a legitimate reason to include it even if the rate isn’t high.

Low-rate car loans

If your car loan has a low promotional rate, it’s often better to leave it alone.

Leases are different

A lease isn’t a loan you can simply pay off. Ending a lease early usually involves buying out the vehicle or paying fees. Ask the leasing company what a buyout would cost before including it.

Check for penalties

Some car loans charge for early payout. Ask the lender for a payout statement dated for your closing.

Negative equity

If you owe more on the car than it’s worth, perhaps from rolling an old loan into a new one, consolidating clears the loan but not the loss. Plan to keep the car long enough that you’re not doing it again.

Your next car

Once the loan is gone, start setting aside what you’d have paid each month. When it’s time for the next vehicle, you’ll have a down payment, or even the full price.

This article is general information, not financial or legal advice. Lender requirements, rates and fees change and depend on your situation.