English Deutsch Français Italiano Español Português 繁體中文 Bahasa Indonesia Tiếng Việt ภาษาไทย
All categories

Here's my dilemma. I have about 10k in the bank. I could either use that money to pay off most of my debt (eg. car note, school loan) or hang on to that money for the upfront cash required when buying a home.

The APR on my debt is approx. 5% which is probably going to be better than the mortgage APR I'd be getting. Should I pay off the debt so that I can better qualify for a mortgage loan or should I use that money for the upfront costs?

I heard that some lenders would be willing to up the loan to roll in the closing costs, etc. If I do this, then I can pay off my personal debt to better qualify for the mortgage.

What would you do?

Thanks

2007-02-08 03:08:50 · 6 answers · asked by Anonymous in Business & Finance Personal Finance

I just wanted to add that the reason why I don't have time to save up another 10k is because the houses I'm looking at are a new construction. I want to get first dibs on the particular one I want.

2007-02-08 06:35:45 · update #1

6 answers

I am usually a great advocate of paying off debt. However if the APR on your debt is only ~5 percent, I wouldn't be in a hurry to pay it off. I would save the 10K for a down payment. Put it in a money market at Vanguard at 5.1%. The interest rate on the mortgage will most certainly be greater than 5%, so you want to borrow as little as possible on the house. You will also get a better mortgage rate with a larger down payment.

Many of the people above are just knee jerk saying pay off the debt. It doesn't make sense at that low an APR.

2007-02-08 03:43:09 · answer #1 · answered by Anonymous · 0 0

Any way you dice it, the money you have available to pay is going to affect your home purchase.

If you use this money as part of the down payment on your house, this will reduce the principle on your loan and could quite possibly save you thousands over the course of a 30 year mortgage.

I am not so concerned with the APR because the largest factor in determining which decision will cost you less is largely based upon how your mortgage is structured. Whether it is a 15, 20, or 30 year loan makes a big difference.

The next question is will paying down 10k in debt actually raise your credit score and make the mortgage rate better? There is no true answer to this available to you because the credit reporting firms do not publish how your scores are exactly calculated.

It is estimated that having a relatively low debt (say, 15k) to debt availability (say, 45k example) in this case of 33% is good to retain a good credit score. If your debt owed to debt availability ratio is much higher, this will reduce your credit score.

Yet another question is how affordable is the mortgage if you continue to carry the other debt over from month to month.

Consider paying an estimated mortgage payment to your savings account right now and don't tap into it for anything. That will tell you how affordable the payment is to you right now, while still carrying the debt.

You need to do the math on this with your best estimates (perhaps help from a financial planner at fpanet.net) to determine which choice makes more sense.

Good luck!

2007-02-08 06:58:04 · answer #2 · answered by Ethan 3 · 0 0

Is your school loan a "student loan" from the gov.? If so then that interest should be a very low. Leave that but pay off your car note. Then with the money you use to pay on the car not, put it directly back into the savings account to build that back up for the house. Going into a loan with no debt is very good in the bankers eyes, as long as you are working and bringing in money to handle the NEW debt of a home.

Keep paying off your student loan and add more to your payment when ever possible. OR choose to stay home an extra night of the week so you can send in $50 to $300 extra a month.

Never cut yourself short on emergency money... always have something like $5000 in savings or a mutual fund so you can get at it fairly quickly due to repairs and emergencies with home ownership.

2007-02-08 03:57:41 · answer #3 · answered by Kitty 6 · 1 0

How long until you have to buy the house? If it's a few years, I'd say pay off the debt and then save up some more for the mortgage downpayment. If it's soon, that won't work, unless you took out a loan for the downpayment.

Try going to a bank and telling them your situation and asking what they'd suggest. They can probably run a couple scenarios through their computers and tell you what your mortgage rate would be in each circumstance.

2007-02-08 03:15:49 · answer #4 · answered by zandyandi 4 · 0 0

the right answer is pay it all off with the cash

you will save it so much faster because you will have no bills, think about the end of the month and only writing out your mortage!

then what you do it take a credit card, one with a low rate, and charge up stuff you would pay cash for, and then let it roll a little bit, but not too long, and pay it off huge chucks of it, this will make your credit rating go crazy

Then buy your house

2007-02-08 03:15:26 · answer #5 · answered by bkbarile 5 · 0 1

First of all!

WAY TO GO FOR THINKING SMART AND ASKING THIS QUESTION!!!!! :)

Ditto what everyone else said...pay off the debt with your savings and you will be saving so much more without having those payments holding you back. You will be SHOCKED at how fast your $10k is back in the bank!

2007-02-08 03:28:50 · answer #6 · answered by Anonymous · 0 1

Pay off your debt and then save up another 10k for a house.

2007-02-08 03:15:38 · answer #7 · answered by Phoenix, Wise Guru 7 · 0 1

fedest.com, questions and answers