 Can
I afford a new car?
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 Dear
Dr. Don,
Can I afford to buy a car by putting down $10,000
and financing about $20,000? I currently have a 30-year mortgage
for $320,000 at 5.5 percent plus taxes equals $2,050/month; a 30-year
home equity loan for $60,000 at 6.6 percent for $452/month; a HELOC
for 20 years for $35,000 at prime minus a quarter for $200/month
if I'm just paying interest; a school loan of $5,000 at 4 percent
until 2009 paying $150/month; and a balance transferred credit card
of $6,000 at zero percent till June 2007 for $130/month. We bought
the house in 2005 for $400,000 eight months ago, but six months
ago the same house down the street sold for $420,000.
I want a minivan for the family but feel as
if I'm piling up the debt. My husband and I live in Staten Island,
N.Y., and our gross income is $130,000 per year and we have four
kids. Our cars are old and keep breaking down. We would like to
be able to have a nice Honda Odyssey and be able to start going
on family trips instead of our local Blockbuster for entertainment.
Thank you.
-- Iliana Inquires
 Dear
Iliana,
There comes a point in every car's life where
you have to decide whether to keep it or move on. I owned a 1975
BMW 2002 in the early 90s that was in the shop so much my 2-year-old
daughter called the shop owner "Uncle Larry" and his counterperson
"Aunt Patsy." The Bankrate feature, "We
ask the experts: Is this car worth saving?" asks some automotive
experts to weigh in on when it's time to sell or scrap the family
auto.
Don't rule out buying a used car as a replacement.
Cars depreciate rapidly in the first few years of ownership but
can still have many years of dependable service ahead of them. Cars
with a good track record in the dependability department, like the
Honda you're considering, don't depreciate quite as rapidly as other
makes and models, but Edmunds estimates that a 2006 Honda Odyssey
EX with leather and entertainment costing about $33,687 will depreciate
by approximately $9,000 after two years. A similarly equipped (no
leather) 2004 EX certified pre-owned model with less than 10,000
miles on the odometer is selling in your market for $24,000.
Can you afford replacing a vehicle? You did a great
job in listing your outstanding debts and remembering to clue me
in on the income side of the equation. With four children you might
have some education and grocery bills that have a big impact on
the monthly budget that aren't considered here. I've put together
what you've told me and combined it with a $23,500 car loan in the
following table:
 |
Can you afford to replace a vehicle? |
|
|
| |
|
Interest
rates |
Monthly
payments |
|
| Home's appraised value |
| First mortgage |
| Home equity loan |
| Home equity line of credit |
| Total mortgage debt |
| School loan |
| Credit card |
| Total debt |
| Car loan of $23,500 @
7.6% |
| Total debt w/car loan
$23,500 |
| Monthly pretax income |
| Front ratio |
| Back ratio |
|
You have a back ratio, which is housing plus other
loan expenses, that represents roughly 33 percent of your monthly
income. It's well within what mortgage underwriters look for in
underwriting a new mortgage loan. While I know that's not the standard
here, my rule of thumb for consumers with your income level is to
assume that roughly one-third of their money is going toward taxes,
one-third toward housing, auto and miscellaneous debt payments and
the remaining one-third toward current consumption and investment
goals.
Put $10,000 down on the used minivan, borrow $15,000
instead of $23,500 and the monthly payment falls from $569 to $363.
I've got some concerns here, like why eight
months after you buy a house for $400,000 you have $415,000 in mortgage
debt, how you're doing with investing for your retirement and your
children's education, and what the rest of the monthly budget looks
like -- but can you afford to replace one of your vehicles? The
answer is yes.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
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