Car Loan or Mortgage First? What a 1.25-Point Rate Gap Actually Costs Over 5 Years

A household has a $350,000 mortgage balance at today's going rate and a $28,000 car loan, and $300 a month they could put toward either one. The instinct for a lot of people is to attack the car loan first — it's the smaller balance, it feels winnable, and being "debt-free" on the car sooner has an obvious appeal. The math says something different, and the gap between the intuitive answer and the correct one is worth walking through with real numbers, because the size of that gap depends entirely on the interest rates involved — and in this specific case, it's smaller than you'd expect.

A car dealership lot (file photo, illustration only — not the household or vehicle described in this article). Photo: Harrison Keely, Wikimedia Commons, original file page, CC BY 4.0

The two loans, at today's actual rates

Freddie Mac's Primary Mortgage Market Survey put the national average 30-year fixed rate at 7.40% as of October 15, 2026. Assume our household's mortgage is a 30-year fixed at that rate, with $350,000 remaining and a standard minimum payment of roughly $2,423 a month in principal and interest. Experian's Q2 2026 State of the Automotive Finance Market report put the average new-car loan APR for prime borrowers (a 661-780 credit score) at 6.15%. Assume the $28,000 auto loan balance has 36 months left on a 6.15% APR loan, with a minimum payment of roughly $854 a month. The rate gap between the two loans is 1.25 percentage points — the mortgage is the more expensive debt, even though it's the much bigger balance.

Running both strategies for 5 years

Strategy A sends the extra $300 a month to the auto loan until it's paid off, then redirects that freed-up money (minimum plus extra) to the mortgage. Strategy B sends the $300 straight to the mortgage every month from day one, while the auto loan keeps getting its own minimum payment. Both strategies commit exactly the same total cash each month — $3,577 — so the comparison isolates the effect of which loan gets the extra dollars first, not how much is being paid overall.

Outcome after 5 years (60 months)	Strategy A: extra to auto loan first	Strategy B: extra to mortgage first
Auto loan payoff month	Month 26	Pays off on its own schedule around month 36
Combined remaining balance (mortgage + auto)	$287,313	$287,119
Combined interest paid over 5 years	$123,936	$123,741

Strategy B — extra to the mortgage first — leaves the household about $195 better off after 5 years, and that gap widens only to roughly $282 by year 10 under the same $300-a-month extra payment, because the two strategies converge once the auto loan is paid off either way and every dollar after that flows to the mortgage regardless of which strategy was chosen. For this household, the "textbook correct" answer and the "intuitive" answer are separated by less than the cost of a nice dinner out — not the thousands of dollars a debt-payoff calculator headline might imply.

Why the gap is this small — and when it wouldn't be

The reason the dollar difference is modest is that the rate gap itself is modest: 7.40% versus 6.15% is only 1.25 points. Re-running the identical household with a subprime new-car APR instead — Experian's Q2 2026 figure for deep subprime borrowers was 16.11%, and even near-prime (601-660) averaged 9.71% — changes the conclusion's magnitude sharply. Swap in Experian's subprime new-car average of 13.52% for the same $28,000 balance, and paying the auto loan first over the mortgage now wins by roughly $1,012 over the same 5 years, because the car loan has become the clearly more expensive debt. The rule that actually holds in both cases is the same one: send extra dollars to whichever loan charges the higher rate. What changes is how much that rule is worth in dollars, and that depends entirely on how far apart the two rates are for a specific household's specific loans.

What the interest math leaves out

A handful of factors can reasonably override a $195-to-$282 interest advantage, and a household should weigh them rather than treat this as a closed case. First, mortgage interest is only tax-advantaged for the roughly one in ten filers who itemize deductions rather than take the standard deduction, which was $29,200 for a married couple filing jointly for the 2025 tax year; for the majority who don't itemize, the mortgage carries no offsetting tax benefit, so the comparison above is already apples-to-apples. Second, paying off the auto loan first fully frees up its $854-a-month minimum payment sooner, which lowers the household's monthly debt-to-income ratio and could matter for a near-term refinance or new loan application — a real cash-flow benefit the interest-only math doesn't capture. Third, if the car will be sold or traded in before the loan term ends, paying it down faster reduces the risk of being underwater on the trade. None of these turn the interest math wrong; they're reasons a household might rationally choose Strategy A anyway, with eyes open about the roughly $195-to-$282 cost of doing so.

The PMI wrinkle that can tip the math back toward the mortgage

There's one more factor specific to mortgages that the comparison above doesn't yet include: private mortgage insurance. If this household's $350,000 mortgage represents more than 80% of the home's value, they are likely paying PMI, typically 0.5% to 1.5% of the loan balance per year, added on top of the note rate. Federal law requires the lender to automatically cancel PMI once the loan balance falls to 78% of the home's original value through normal amortization, and a borrower can request cancellation once it reaches 80%, under the Homeowners Protection Act. Extra payments that are directed at the mortgage count toward reaching that 80% threshold faster; extra payments sent to the auto loan do not. If dropping PMI even six months earlier would save $150 to $300 a month on its own, that alone can be worth more than the entire interest-rate advantage calculated above, and it only accrues to the mortgage-first strategy. A household in this position should check their current loan-to-value ratio against their original purchase price before deciding, since PMI removal can be the single largest lever in this whole decision.

What changes if the extra payment is bigger

The $300-a-month example above was deliberately modest. Running the same two loans with $500 a month in extra payments instead produces a similar pattern: the mortgage-first strategy still wins, and the advantage over 5 years grows roughly in proportion to the extra amount committed, landing in the low hundreds of dollars rather than the low thousands, because the underlying constraint is still the narrow 1.25-point rate gap, not the size of the monthly payment. A bigger extra payment accelerates both strategies' timelines — the auto loan would be paid off a few months sooner under Strategy A — but it does not change which strategy is mathematically ahead, because the ranking is set by the relative interest rates, not by how aggressively either loan is being attacked.

How to run this for your own two loans

The two numbers that matter are each loan's actual current interest rate — not an average, not what the rate was at origination if it's an adjustable product, and not an estimate. A mortgage's rate is on the most recent statement or in the original note; an auto loan's rate is on the loan agreement or the servicer's online account page. Once both rates are in hand, the loan with the higher rate is the one that should receive extra payments first, full stop, regardless of which balance is larger or which one feels more urgent to be rid of. The dollar stakes of getting this right scale with three things: how far apart the two rates are, how large the balances are, and how long the extra payments continue — which is exactly why this household's 1.25-point gap on a relatively small $28,000 auto balance produces a result measured in hundreds of dollars, while a household with a subprime auto loan or a much larger balance would see a result measured in thousands.

For a rate gap this narrow, the interest-minimizing answer (pay the mortgage first) is correct but not decisive on its own — the dollar amount at stake is too small to be the deciding factor by itself, which is exactly why the PMI threshold and the debt-to-income effect discussed above end up mattering more than the raw interest-rate comparison for a lot of households in this specific 1-point range. The gap becomes decisive on its own once the two rates diverge past roughly 3 to 4 percentage points, which is common whenever an auto loan carries a near-prime or subprime rate against a prime-era mortgage rate.

A mistake worth naming: re-deciding only once

The comparison above is a snapshot of today's two rates, and it's worth re-running whenever either one changes — if the auto loan gets refinanced to a lower rate, if the mortgage is refinanced down the road, or if the household's loan-to-value ratio crosses the PMI cancellation threshold mid-stream. Treating this as a single, permanent decision made once at loan origination is the more common mistake than picking the wrong loan in the first place; a rate comparison that was close five years ago can tip clearly one way or the other once either loan's terms shift.

Related reading

• Extra Mortgage Payments or a Maxed-Out Roth IRA First? The Real 10-Year Math
• Mortgage Recast vs. Refinance After a $50,000 Windfall: The Real 10-Year Cost
• Switch to Biweekly Mortgage Payments, or Invest the Difference? One $380,000 Loan, Run Both Ways

Tip: If you want to run the amortization for your own two loans rather than take the example on faith, a financial calculator handles the payoff math directly, and a budget planner is where you confirm the extra payment can actually come out of each month. (These are Amazon Associate links — we may earn a small commission on qualifying purchases.)

Sources and disclaimer

Mortgage rate: Freddie Mac Primary Mortgage Market Survey, 30-year fixed average as of October 15, 2026 (7.40%). Auto loan rates by credit tier: Experian, State of the Automotive Finance Market, Q2 2026. Standard deduction figure: IRS, 2025 tax year. All loan figures are illustrative examples using a hypothetical household's balances and these published average rates; an individual's actual loan terms, remaining amortization schedule, and tax situation will differ. This article is general financial information, not individualized financial or tax advice; a licensed financial advisor or tax professional can evaluate a specific household's numbers before a payoff decision is made.