Choice to pay off car loan or mortgage, what should I do

amother

Babypink

Wed, Feb 15 2017, 7:53 pm

I take itemized deductions on my tax return every year. My mortgage is 5 percent interest and car loan is 2 percent. Being that I get a tax credit for the mortgage, should I rather lay down the car loan 1st even though it's less interest paying every month?

cozyblanket

Wed, Feb 15 2017, 8:07 pm

I assume the amount owed on the car is less than what you owe on the house... in that case, pay off the car. Get yourself debt free except the house! Yes, a little Dave Ramsey speaking... and the tax credit for the house is another reason.

finprof

Wed, Feb 15 2017, 8:17 pm

It's usually best to pay off the higher interest rate items first but since interest on a primary residence is tax deductable you really need to calculate the after tax rate to compare them. The after tax rate on your mortgage is your mortgage interest rate*(1- your marginal tax rate). If that is still higher than put the money towards the mortgage first, off not put it towards the car loan.

I forgot to add that if you can claim the car as a business expense then it is also tax deductable.

doctorima

Wed, Feb 15 2017, 9:05 pm

As others have said, the general rule is to pay off the highest rate first. But practically speaking, without knowing your tax bracket, I assume that the extra 3% on your car loan is likely dwarfed by the reduction in taxes you get from the mortgage interest, not to mention that the car loan is also much smaller, so I would pay that off first.

amother

Babypink

Wed, Feb 15 2017, 10:55 pm

finprof wrote:

Sorry to sound ignorant but what's marginal tax rate?

finprof

Thu, Feb 16 2017, 10:15 am

It is not ignorant at all! I'm sorry, its just finance jargon for the tax rate paid on the last dollar earned. In the US we have a progressive tax system which applies higher tax rates to each section of income, the marginal tax rate is the highest one that applies to you. https://www.irs.com/articles/p.....-2016

SixOfWands

Thu, Feb 16 2017, 10:39 am

doctorima wrote:

I may be completely wrong, but if the amount remaining on her mortgage is so small that its about the same as paying off a car loan, its likely that the payments are almost entirely principal, so there's not much of an interest deduction left.

doctorima

Thu, Feb 16 2017, 11:04 am

Where did OP say that the amount remaining on her mortgage is about the same as what's left on her car loan? She just asked which one to focus on paying off first.

SixOfWands

Thu, Feb 16 2017, 11:12 am

doctorima wrote:

Where did OP say that the amount remaining on her mortgage is about the same as what's left on her car loan? She just asked which one to focus on paying off first.

The thread is entitled, "Choice to pay off car loan or mortgage, what should I do" I read that as she had the money to "pay off ..." not pay down or make an extra payment towards, either her car loan or her mortgage.