How Auto Loans Impact Your Mortgage Refinance Eligibility

Auto loans and mortgages are two of the biggest debts most Americans carry. If you’re looking to refinance your mortgage, it’s important to understand how your current car payment could affect your eligibility — and your bottom line.

Here’s how your car loan factors into mortgage refinance decisions, how to evaluate whether paying it off first makes sense, and what alternatives are available.

How a Car Loan Affects Your Mortgage Eligibility

According to the Experian State of the Automotive Finance Market Report, the average new car payment reached $742 per month in Q4 2024. A payment that size could reduce your mortgage borrowing power by roughly $116,000.

Home refinances come with debt-to-income (DTI) ratio requirements that ensure you can realistically afford the new loan. For conventional and FHA loans, your total monthly debts — including the new mortgage payment — must generally stay within 43–50% of your gross income. A car payment eats directly into that allowance.

Here’s how different car payment amounts reduce your maximum home price, assuming a $75,000 annual income with $500/month in other debts:

Annual Gross Income	Other Debt Payments	Car Payment	Max Home Payment*	Max Home Price*
$75,000	$500	$0	$2,300	$315,000
$75,000	$500	$300	$2,000	$270,000
$75,000	$500	$500	$1,800	$240,000
$75,000	$500	$750	$1,550	$200,000
$75,000	$500	$1,000	$1,300	$160,000
$75,000	$500	$1,250	$1,050	$120,000

*Assumes FHA loan at 3.5% down, 6% interest rate, 45% back-end DTI, $200/month property taxes, and $50/month insurance. Your actual rate and costs will vary.

Using the assumptions above, every $100 in car payment reduces your home buying power by approximately $15,400.

Should You Pay Off Your Car Before Refinancing?

The answer depends on your current DTI, available savings, and financial goals. Here’s a breakdown of the key considerations.

Pros of Paying Off Your Car Loan First

• Improves your DTI ratio. Eliminating a $500/month car payment could increase your potential mortgage approval amount by $77,000–$85,000 depending on lender guidelines. Note that lenders typically exclude debts with 10 or fewer payments remaining — if you’re close to paying off the car anyway, there may be no benefit to accelerating.
• May help you qualify for a better rate. A lower DTI signals financial stability. Some lenders offer better terms to borrowers with less overall debt, which can save thousands over the life of a mortgage.
• Can improve your credit score. Paying off an installment loan can improve your credit mix and overall profile. However, closing an account also shortens your average account age, which could temporarily lower your score slightly.
• Frees up monthly cash flow. Without a car payment, you’ll have more room in your budget for mortgage payments, home maintenance, and savings.

Cons of Paying Off Your Car Loan Before Refinancing

• May deplete your reserves. Lenders prefer borrowers to have three to six months of mortgage payments in savings. Using a large chunk of cash to pay off the car could leave you short on reserves, which may actually hurt your application.
• May not be necessary. If your DTI is already within an acceptable range (under 43–45%), paying off the car won’t make a meaningful difference. In that case, you may be better off applying extra payments to high-interest debt like credit cards.
• Could be a poor use of capital. If your car loan carries a low interest rate (2–4%), paying it off early may not be the smartest financial move. The same cash invested elsewhere — in a retirement account or home improvements — could yield a better return.
• Could delay your refinance. Timing matters when refinancing. Waiting to pay off your car could mean missing a favorable rate window. See our guide to when to refinance for more context on timing decisions.

How we source rates and rate trends

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Rate data in the charts and tables above comes from RateUpdate.com. The displayed rates come from multiple providers and represent market averages. Your mortgage rate will differ based on individual factors like your credit score as well as differing loan types and terms offered by lenders.

Alternative Option: Rolling Your Car Loan Into a Cash-Out Refinance

A cash-out refinance lets you tap your home’s equity to pay off your car loan at closing. This can simplify your finances and potentially lower your interest rate if your car loan rate is higher than your mortgage rate.

The tradeoff: you’re converting short-term auto debt into a long-term mortgage — meaning you could technically still be paying off your car in 30 years, long after the vehicle has worn out. Compare the total interest cost carefully before going this route.

Next Steps

• Use our Mortgage Refinance Calculator to see how your current debts affect your borrowing power.
• Calculate your current DTI and see whether paying off your car would change your eligibility.
• Review your options for debt consolidation through a cash-out refinance to determine if it makes financial sense for your situation.
• Talk to a lender to get a personalized assessment based on your credit, income, and goals.

Ready to take the next step? Start your refinance application with Refi.com today.