Being in the real estate world, I’m constantly seeing people write and receive the largest checks they will ever see in their lifetimes. A lot of the time, people see these large checks and think, “Man, I should take some of that and buy a new car,” instead of putting it all into a down payment on the next house.

While buying something outright is usually a great idea, in this situation it’s going to cost you way more then you realize. What most people forget to do is the simple math.

This is not financial advice; I am not a financial advisor. Please consult a professional in your area about your specific situation.

Let’s say you just sold your house and received net proceeds of $60,000. You’re debating taking half that money from the house sale and paying $30,000 cash for that shiny new Honda you’ve had your eye on. At face value, this idea sounds like a financially smart way of purchasing a new car.

You need to do the math. You always need to see how much something is going to cost you in the long run.

Buying a car outright is only going to cost you $30,000. If you were to get a zero-down loan at 5% for 60 months, it will cost around $566 a month and around $34,000 at the end of the loan term. The $30,000 cash sounds way better, doesn’t it?

Now you have to look at how much it’s going to save you in that next house if you were to utilize that money as part of your down payment.

Sticking with our example, let’s say your next house is going to cost $300,000. What would that extra $30,000 in down payment do if you don’t buy that car?

After doing some more math, that extra down payment would decrease your mortgage payment by $180 a month. That doesn’t sound like much compared to the $566 monthly car payment. But removing that $30,000 from your down payment will cost you $64,000 over the 30-year loan term.

Any of these numbers can be easily checked on your own with payment and amortization calculators.

Now you just paid Mercedes prices for your $30,000 Honda.

It gets even worse…

That Honda could also cost you Maserati prices.

Most lenders making home loans for buyers who don’t have 20% equity will require private mortgage insurance to protect the lender from default. The mortgage insurance in the $300,000 example above will cost you roughly $180 a month on top of your regular mortgage payment.

Now if that loan is an FHA loan, the mortgage insurance will be in effect for the life of the loan. That means that $30,000 that you could have put on your down payment but decided to buy a Honda with will now potentially cost you over $125,000 if you pay insurance over the full loan term.

Congratulations, you just bought a Maserati but only got a Honda.

To recap, if you had left the extra $30,000 in the down payment, you would have put 20% down and would have avoided mortgage insurance completely, and reduced your principal amount, leaving you with less to pay interest on.

These are important things to look into when buying or selling a home.

If you’re in an FHA loan and think you have over 20% equity in your home contact me. We can discus ways of getting your mortgage insurance off your loan.

Car with Cash $30,000
Car with loan $566 x 60 months = $33,960
Home with $180 additional mortgage payment x 360 months of loan payments = $64,800
Home with additional mortgage insurance payment plus additional mortgage payment $180 + $180 = $360 x 360 months of loan payment = $129,600