Should I Buy a Car or House First? How to Decide

By Adam Bakonis and the Mercury Team

Buying a car or a house is a big step. Both are major financial commitments that affect your credit, monthly budget, and long-term plans. With today’s rising interest rates, high inflation, and stricter credit requirements, it’s more important than ever to make the right choice for your situation.

This guide will help you weigh your options, understand the pros and cons of each choice, and figure out the smartest decision for your needs.

Should I Buy a Car or House First?

It depends on your personal situation, but there are a few things to consider when deciding which big purchase should come first.

If your current car is unreliable or you need a vehicle to get to work, buying a car might be the bigger priority. Car loans are usually quicker to get approved and don’t require as much upfront cash, but they also depreciate quickly and can impact your debt load.

Buying a home is a long-term investment that can build equity and provide stability. However, it involves a higher upfront cost, stricter credit requirements, and a longer approval process. On top of that, changes in mortgage rates or housing demand can influence your timing.

One important factor to consider is how credit usage impacts both purchases. Taking out a car loan increases your debt-to-income (DTI) ratio and lowers your available credit, which could make it harder to qualify for a mortgage later. If homeownership is your top priority, you may want to delay a car purchase until after securing your mortgage.

Should I Buy a House?

Buying a home is a big financial commitment, but it can also be a smart long-term move. Before diving in, ask yourself a few key questions:

Is your job stable? Lenders typically want at least two years of steady income history.
Are you ready to stay put? Experts suggest buying makes sense if you’ll live in the home for five years or more.
Do you have enough saved? While 20% down helps avoid private mortgage insurance (PMI), the average down payment for first-time buyers is 8%. You’ll also need 2-5% of the purchase price for closing costs.

The benefits of buying? You build equity with each mortgage payment and gain long-term financial stability, especially with a fixed-rate loan. You’re protected from rising rent, free to make home improvements, and may qualify for tax deductions on mortgage interest and property taxes. Plus, you can bundle home and auto insurance with Mercury and save even more.

Should I Buy a Car?

If your daily commute depends on driving or your current vehicle is unreliable, purchasing a car may be the right first step.

Unlike buying a house, purchasing a car is typically faster and requires less upfront cost. Car loans are usually approved within a day or two, and down payments can be as low as 10% or even $0 with some lenders.

However, cars depreciate quickly. According to Kelley Blue Book, new cars lose 30% of their value over the first two years and continue to depreciate about 8% to 12% each year. Also, cars don’t build equity like homes do.

Car Loan vs. Mortgage

Car loans and mortgages are both ways to borrow money for larger purchases, but they work differently, and each has its own impact on your finances.

Let’s take a look at the key differences:

Loan terms: Car loans typically range from 36 to 72 months (3-6 years), while mortgages usually span 15 to 30 years.
Down payments: Mortgages usually require larger down payments—often 5-20%—while car buyers may qualify for loans with 0-10% down.
Interest rates: Auto loans usually have higher interest rates due to shorter terms and faster depreciation. According to the Federal Reserve, the average interest rate for a 60-month new car loan is 8.04% as of Q1 2025, while the average rate for a 30-year fixed mortgage ranges from 6.5% to 7.5% (rates vary by credit score and market conditions).
Asset value: Homes generally appreciate over time, while cars depreciate, losing about 30% value in the first few years.

When it comes to the impact on credit, both loans affect your credit score and debt-to-income ratio (DTI). A mortgage can actually help your credit over time by improving your credit mix and length of credit history. Car loans are smaller and shorter but still important, especially if you make payments on time.

Feature	Car loan	Mortgage
Loan term	3-6 years	15-30 years
Down payment	0%-10%	5%-20% (or more)
Average interest rate	8.04% (60-month loan, Q1 2025)	6.5%-7.5% (30-year fixed)
Asset value over time	Depreciates (30% in first few years)	Appreciates over time, builds equity
Approval speed	Typically within a day or two	Several days to weeks
Credit score impact	Short-term impact	Long-term credit benefits (if managed well)

What is a Debt-to-Income Ratio (DTI)?

Your debt-to-income ratio (DTI) is a number that helps lenders understand whether you can manage monthly payments and repay borrowed money. It compares how much you owe each month to how much you earn. A lower DTI suggests you have a good balance between debt and income, making you less risky to lenders.

For mortgages, most lenders prefer a DTI under 36%, with no more than 28% going to your mortgage payment.
For car loans, the guidelines are a bit more flexible, but staying under 40% is a good rule of thumb.

DTI Example

Let’s say you pay:

$1,000 in rent
$300 in student loans
$200 in credit card payments

Your total monthly debt = $1,500

Now, say you earn $5,000 a month before taxes.

Your DTI = $1,500 ÷ $5,000 = 30%

That 30% DTI would generally be considered healthy for both car and home loan applications.

Insurance Implications

When you’re deciding whether to buy a car or a house first, think about how each choice will affect your insurance costs because they can add up fast.

Homeowners insurance costs $3,308 per year on average, according to the Consumer Federation of America. However, this can vary based on where you live, the size of your home, and your coverage choices. Premiums tend to be higher in areas prone to natural disasters or theft.
Car insurance averages about $2,068 per year for full coverage, according to U.S. News & World Report, but your rate depends on factors like your driving history, vehicle type, location, and coverage levels.

So, if you buy a home first, you could have a bigger upfront insurance bill (and monthly escrow payments if it’s rolled into your mortgage). If you buy a car first, you may pay less overall, but your rates could spike if you’re a new driver, have recent accidents, or choose a pricey vehicle.

That being said, you can save money by bundling your home and auto insurance policies with the same company, like Mercury Insurance.

“At Mercury Insurance, you can get up to 14.7% off your homeowners insurance premium when you bundle it with your auto policy. Also, keeping your policies under one provider just simplifies your insurance management, from paying bills to filing a claim,” says Adam Bakonis, Senior Product Manager, State.

Conclusion

So, what’s the best decision? If you urgently need reliable transportation to keep your job or take care of your family, buying a car first could make the most sense. But if you’re ready to settle down, build equity, and lock in a stable place to live, purchasing a home first might be the smarter move.

Whatever you choose, don’t forget about insurance. Mercury offers cheap car insurance and cheap home insurance that can help you protect your investment without breaking the bank.

Making the Decision: Frequently Asked Questions

How high of a mortgage can I afford?

A general guideline is to keep your total housing costs—e.g., your mortgage, property taxes, insurance, and any HOA fees—under 28% of your gross monthly income. Ideally, your total monthly debt payments should stay under 36% of your income. Many lenders and real estate sites offer affordability calculators if you want to crunch the numbers based on your situation.

What is my credit score for a mortgage?

For most conventional loans, you’ll need a score of at least 620. FHA loans may go as low as 580, but you’ll likely need to put more down. The better your credit, the more options and savings you’ll likely have.

Is now a good time to buy based on local housing market trends?

It depends on your local housing market, interest rates, and personal finances. Tools from sites like Zillow or Redfin can give insight into price trends, inventory, and competition in your area.

When is it not worth repairing a car?

If your repair costs are more than half the car’s value, or if breakdowns are becoming frequent and costly, it might be time to move on, even if it means taking on a car loan.

Am I buying a car out of necessity or convenience?

Ask yourself: Is my current vehicle unsafe or unreliable? Do I rely on driving for work or family obligations? If the answer is yes, then buying a car should be a priority. But if you’re mostly tempted by newer features or style upgrades, it might be better to hold off, especially if you’re also planning a major purchase like a home.

Adam Bakonis

Senior Product Manager at Mercury Insurance

Adam Bakonis is a Senior Product Manager for Mercury Insurance, overseeing homeowners and landlord products for California. Bakonis originally joined Mercury as a casualty adjuster and has worked in multiple roles, including claims examiner, property field adjuster, claims project and analytics manager.