Can I Buy a Car After Refinancing My House?

Refinancing your mortgage can be a smart financial move to lower your interest rate or tap into your home equity. But what if you also need a new car around the same time? You may be wondering, “Can I buy a car after refinancing my house?”

The short answer is yes, you can buy a car after refinancing your mortgage. However, there are some important factors to consider before taking on an auto loan right after refinancing your home. Read on as we explore whether it’s a good idea to buy a car after refinancing and things you should keep in mind.

Understanding Mortgage Refinancing

Before diving into the implications of buying a car let’s review what mortgage refinancing entails. Refinancing a mortgage simply means taking out a new loan to replace your existing home loan.

There are a few key reasons homeowners choose to refinance

• To secure a lower interest rate and reduce monthly payments
• To shorten or lengthen the loan repayment term
• To switch from an adjustable-rate to a fixed-rate mortgage
• To tap into home equity through a cash-out refinance

The refinancing process involves submitting a new mortgage application and going through underwriting. Once approved, your new lender pays off your old mortgage loan and you begin making payments on the refinanced loan.

Timing Considerations When Buying a Car

While there is no hard rule against buying a car shortly after refinancing your home, the timing does warrant careful thought. Here are some considerations around the timing of purchasing a car after refinancing your mortgage:

• Wait for new mortgage to be finalized – It’s generally recommended to wait until after your new mortgage loan has officially closed before taking on additional debt like a car loan. New applications can complicate the underwriting process.

• Allow time for credit score to rebound – The refinancing process may cause a small temporary drop in your credit score. It’s smart to allow time for your score to rebound before applying for auto financing.

• Assess budget with new mortgage payment – Make sure you have a good handle on your new monthly mortgage payment and budget before adding a car payment.

• Be mindful of loan limits – Lenders typically limit the number of loans you can take out within a certain period. Check if you’ll hit any limits.

Evaluating Whether You Can Afford a Car

The big question most homeowners have is – can I afford a car payment in addition to my newly refinanced mortgage? The answer lies in carefully evaluating your financial situation.

Here are some tips for determining if you can afford a car after refinancing your home:

• Review your debt-to-income ratio – Most lenders limit this ratio to around 36-45% of your gross monthly income going toward debt payments.

• Look at your monthly expenses and budget – Make sure you can comfortably afford the added car payment and associated costs like insurance and gas.

• Consider your emergency fund – It’s wise to have 3-6 months of expenses saved before taking on new debt. This provides a cushion for unexpected expenses.

• Understand the total cost of owning a car – Factor in things like maintenance, repairs, licensing fees and taxes.

• Get pre-qualified for auto financing – This helps you understand what rates and terms you may qualify for.

As long as the additional debt fits within your budget and income limits, buying a car after refinancing can be manageable with proper planning.

Impacts to Your Credit Score

An important factor when timing your car purchase is the potential impact on your credit score. Here’s how refinancing your home and taking on an auto loan can affect your score:

• Mortgage refinancing – This may cause a small temporary drop in your credit score. It’s common for scores to rebound within a few months as you make on-time payments.

• Auto loan application – When you apply for a car loan, the hard inquiry will result in a minor ding to your credit score. Too many inquiries in a short timeframe raises red flags.

• Higher credit utilization – Adding an auto loan will increase your credit utilization ratio, which can negatively impact your score if too high.

To minimize damage, space out your loan applications by a few months and keep utilization low by limiting balances.

Alternatives to Buying a Car Right After Refinancing

If your budget is tight or you want to be extra cautious about protecting your credit score, there are a few alternatives to consider beyond buying a car right after refinancing:

• Wait 6 months or more – Give yourself some breathing room and time for your financial situation to stabilize before adding debt.

• Buy used instead of new – Opting for a used car instead of new can save you money on the purchase price, registration, taxes and insurance.

• Lease instead of buy – Leasing usually comes with lower monthly payments than financing, but you won’t own the car.

• Use public transportation – If possible, rely on public transportation for a while until you’re in a better position financially to buy a vehicle.

• Save up to buy in cash – Save money for a larger down payment over time so you can keep your auto loan small or avoid one entirely.

The Bottom Line

At the end of the day, whether to buy a car right after refinancing your home comes down to your personal financial situation. While possible for some households, for others it may be better to wait or find an alternative solution. Carefully assess your budget, credit score impact, loan qualifications and overall financial goals. If in doubt, consult with a financial advisor for guidance on your specific circumstances. With prudent planning, you can make the best decision for your needs.