Young Couple in Need of Financial Advice!

[FirstThingsFirst]

Hello there, I've been on SA on and off for about three years now, but have been absent for about 6 months as work has just about literally gotten the best of me. The short bio here is that my husband and I are 25, married 2 years, no kids, one spoiled rotten dog.

We are at a point in our lives where we are facing some decisions that are pretty much making us want to pull our hair out. We have talked and talked, and asked our families for advice, but it seems like everyone has a different opinion, and we are so afraid of making a mistake! So I'll lay out our situation here, in the hopes that I can get some kind of consensus on the correct next step for us.

Our financial situation is that we have quite a bit of debt, although we have steadily been paying it off since a few months before we got married. The debt originated from some living expenses in college (I put myself through school with the help of an academic scholarship)moving expenses, and medical bills.

Most of the debt is sitting on my three credit cards, around $20,000 now. My husband's student loans are down to about $1,000. Other than that, we have no other loans.

As far as assets go, we have two vehicles that are paid off. I have about $6,000 in my 401k account, and he has about $2,000 in his. We have a $1,000 emergency fund savings account, and about $1,200 in our checking account right now.

The main decision we are trying to make right now is about housing. For the past 3 years, we have moved several times with my job, and so of course we were renting homes. For one year, we paid $850 in a state where housing was incredibly expensive overall, and since we have moved back to our home area, we have been paying $860 for two years in our current home.

We are both in retail, and while I was in training, I knew that I was not going to be in a location longer than 6 months or a year, so buying was never an option. When we signed the lease here, we thought we'd be gone in a year or so, so we chose a place in a decent neighborhood with a yard for our dog. It's by no means extravagant, but not cheap.

Now, for almost a year I have been in a position where I am theoretically going to stay for the foreseeable future (done with training). My husband changed jobs about 4 months ago, so that he is working 15 minutes from me, but we are both about 45 minutes from our home.

Houses in our area are reasonable, a 3 bedroom ranch in good condition can easily be found for $100,000. So, is it smarter to buy a home now, assuming we can get approved? Should we try for an FHA loan, or not? I know we should have a down payment, but it's hard to save for a downpayment when you are getting charged 29.99% interest on $20,000 in debt! I have tried to get a debt consolidation loan from local banks so that I could pay down the balance faster, but can't get approved (even though my credit score is 730-745) because of my high debt-to-limit percentage. I've even tried qualifying for a balance-transfer card to get 0% interest for 18 months, but couldn't get approved for the same reason.

Realistically, we could move to a cheaper place, but the housing closer to our work is very rural, there are no apartments or townhomes. It is either a trailer (I'm talking trailer-trash trailer) or buy your own home. If we scoured the area, we might be able to find a house for rent for $750, realistically.

Thoughts?

[MonkeyMama]

Without 20% down, I would absolutely rent. There is no reason to jump the gun.

From my perspective, the rent sounds like a steal!

If it's hard saving for a down payment, then it is going to be hard face all the costs of home ownership. Period. That's really all it comes down to.

I would also hit the credit card debt hard. Work 2nd, 3rd jobs - whatever it takes to get that knocked down, so you can move forward and stop paying all that interest.

Good Luck, whatever you decide.

[FirstThingsFirst]

I guess our income situation might have helped to know, lol.

Our gross monthly income together is about $5,500 plus my bonus structure, which averages about $300 per month, and extra at the year's end if my store meets or exceeds performance goals. For the first half of the year, I have about $4,500 banked towards my end of the year bonus.

[FirstThingsFirst]

Without 20% down, I would absolutely rent. There is no reason to jump the gun.

From my perspective, the rent sounds like a steal!

If it's hard saving for a down payment, then it is going to be hard face all the costs of home ownership. Period. That's really all it comes down to.

I would also hit the credit card debt hard. Work 2nd, 3rd jobs - whatever it takes to get that knocked down, so you can move forward and stop paying all that interest.

Good Luck, whatever you decide.

Thanks for your reply! Do you say to wait because the 20% downpayment would save us so much in the long run? I just feel torn between using our extra income every month to pay down high-interest debt or save a downpayment. I would like to stop throwing $860 at a landlord, when the mortgage payment on a home larger than what we have now (and actually ours) would be substantially less. But, if I save for a downpayment, that dastardly interest is racking up against us.

[kork13]

With $20k in credit card debt at high interest rates, I wouldn't even consider buying a home. The last thing you want to do is take on even more debt, buy a home with little (to zero) down payment, and risk being underwater from day one. Foreclosure would be too high of a risk, and I guarantee that if you're pulling your hair out now, you'd might as well consider yourself bald if you take on a home right now.

Home ownership has more costs than renting (taxes, insurance, repairs/maintenance, initial furnishing costs, etc), even if the mortgage payment itself would be lower. What you need to be doing right now is cutting your expenses as much as physically possible. As mentioned, you'll want to save a downpayment. However, don't mess with that until the debt is taken care of.

Interesting point is the "spoiled rotten dog." I guarantee you could cut back on however you're spoiling the pup and he'll be just fine. You should take a hard look at your expenses and really look at how you can trim them down.

Have you called your credit card companies requesting lower rates? You never know, sometimes all you have to do is ask. Others here may have some strategies to actually help make that happen. In this case, getting a personal loan through a local credit union (they are normally more willing to make consolidation loans) may be a better option for you. Rates for those tend to be around 9%-14%.

Bottom line: eliminate your credit card debt FIRST before taking on even more debt that you may not be able to handle. Meet your obligations, contribute to your 401k's to whatever match you may get, then send everything else possible to paying off your debt.

[kork13]

Thanks for your reply! Do you say to wait because the 20% downpayment would save us so much in the long run? I just feel torn between using our extra income every month to pay down high-interest debt or save a downpayment. I would like to stop throwing $860 at a landlord, when the mortgage payment on a home larger than what we have now (and actually ours) would be substantially less. But, if I save for a downpayment, that dastardly interest is racking up against us.

The biggest thing that a 20% downpayment buys you is SECURITY. It helps to ensure that you're not going to have too little equity in your home. Also, if you make a 20% DP, you won't be charged mortgage insurance, which basically insures against you going bankrupt (read: lower cost mortgage). Plus, by making a 20% DP, you're only financing 80% of the loan, so your mortgage payment (and the interest you get charged) will be lower.

As I already said in my first post, eliminate the debt. Then worry about saving for and buying a house. You can't get ahead if you keep going further into debt. That's like driving backwards hoping you'll somehow arrive at your destination.

[FirstThingsFirst]

With $20k in credit card debt at high interest rates, I wouldn't even consider buying a home. The last thing you want to do is take on even more debt, buy a home with little (to zero) down payment, and risk being underwater from day one. Foreclosure would be too high of a risk, and I guarantee that if you're pulling your hair out now, you'd might as well consider yourself bald if you take on a home right now.

Home ownership has more costs than renting (taxes, insurance, repairs/maintenance, initial furnishing costs, etc), even if the mortgage payment itself would be lower. What you need to be doing right now is cutting your expenses as much as physically possible. As mentioned, you'll want to save a downpayment. However, don't mess with that until the debt is taken care of.

Interesting point is the "spoiled rotten dog." I guarantee you could cut back on however you're spoiling the pup and he'll be just fine. You should take a hard look at your expenses and really look at how you can trim them down.

Have you called your credit card companies requesting lower rates? You never know, sometimes all you have to do is ask. Others here may have some strategies to actually help make that happen. In this case, getting a personal loan through a local credit union (they are normally more willing to make consolidation loans) may be a better option for you. Rates for those tend to be around 9%-14%.

Bottom line: eliminate your credit card debt FIRST before taking on even more debt that you may not be able to handle. Meet your obligations, contribute to your 401k's to whatever match you may get, then send everything else possible to paying off your debt.

Thanks, kork13. I have called the credit card companies, and they were unwilling to waver on the interest, even though I have never been late or missed a payment. It does feel good to see the amounts going down, but it is just so slow!

As for the dog, he is spoiled, but more in the way of just getting away with alot than actually getting alot. I'd say if we cut him down to no treats or toys, we could save $15/month. I guess he is spoiled compared to the dogs we always had growing up (farm dogs that seemed self sufficient!)...

I get what you're saying on the credit cards, and I had thought about the credit union option before. It seems like around here you have to be a member of a specific group to be eligible, is that true for the most case? I am going to do some more research and see if I can't find one that I can apply with. Even 14% interest sounds like a dream right now!

[kork13]

Thanks, kork13. I have called the credit card companies, and they were unwilling to waver on the interest, even though I have never been late or missed a payment. It does feel good to see the amounts going down, but it is just so slow!

As for the dog, he is spoiled, but more in the way of just getting away with alot than actually getting alot. I'd say if we cut him down to no treats or toys, we could save $15/month. I guess he is spoiled compared to the dogs we always had growing up (farm dogs that seemed self sufficient!)...

I get what you're saying on the credit cards, and I had thought about the credit union option before. It seems like around here you have to be a member of a specific group to be eligible, is that true for the most case? I am going to do some more research and see if I can't find one that I can apply with. Even 14% interest sounds like a dream right now!

I didn't mean to highlight ONLY expenses for your dog, I meant ALL of your monthly expenditures. You need to spend a month or three tracking where every penny is spent during the month, then sit down and figure out what you can stop spending money on. That can be an enlightening exercise, and extremely effective in trimming down your bills.

As for credit unions... You're right, many credit unions do require participation in certain things, like a specific career field (such as educator's credit unions). However, many of those "requirements" are simply living within a certain city or state or region. Also, many will allow you to become a member of the credit union by "buying" membership with a one-time fee or donation to an affiliated organization.

As an example, I use Pentagon Federal Credit Union, which is designed for military members, who automatically qualify for membership. However, someone can make a $20 donation to the National Military Family Association and receive PFCU membership and access to all of their products and services....such as consolidation loans at a (relatively) fantastic rate of 9%, or credit cards with 5% balance transfer rates for 2 years (going to 14% after that). This is why I'm pointing you to a credit union--they tend to offer great loan and credit card terms. (just as a disclaimer, I'm not trying to advocate PenFed for you or anyone else... I just know/use them, so they serve as a good example for what I'm talking about.) Look around both around town and also on the internet (here's the Nat'l Credit Union Assn's FCU finder) for a good Federal Credit Union. It's not a guarantee, but it's definitely a better option than sitting back and accepting a 30% interest rate.

[uRabbit]

Keep renting. Until you're financially stable, I would just keep renting. You never know when a pipe might break loose in your new shiny home that you just bought, and you'll have nothing to cover that!

[MonkeyMama]

I have the second the point that it is usually pretty easy to join a credit union. Most of them you can join based on where you live or work.

[MonkeyMama]

Thanks for your reply! Do you say to wait because the 20% downpayment would save us so much in the long run?

No - I say it because if you can not afford to save a decent down payment - you likely can not afford home ownership.

In addition, gives you a little insurance since home prices do not always go up. Putting 20% - 25% down (& never borrowing against our home) has put us well above water in a region that is rife with foreclosures and short sales. OF course, having a lower mortgage payment is nice, too. & also decreases the odds of defaulting on our home loan.

[Frugal]

We got our new home right after we were married, and although we had saved for a downpayment for years (and I had saved personally for years before getting married), it sure wipes you out the first year. It is really tough, and renting is no comparison. Unless you are completely prepared financially, and by that I mean getting out of debt as quickly as possible and pratical in your situation, you **may not** be ready for home ownership. You can never maybe be 100% prepared for anything in life, but there should never be a rush to buy a house. I WISH WE had waited to buy. We rushed it. I really, truly wish we had rented for one more year or so after being married. Kept renting, despite rent for a tiny APARTMENT (NOT a house, like you described) being $835 a month, and rising in a few months from when we left. Our apartment was not a tenable place to live due to constant partying by the college kids above us keeping my spouse from getting to work at 6 am, and mgmt. doing nothing about it.

Yes, apartments can be horrible. HOWEVER...a house is not going to always solve all the problems of an apartment. A house is a huge financial commitment, and can really shackle you to the debt of a mortgage and an area, when you could sometimes find better jobs in other areas. Remember, there is no guarantee of ever getting all the money back you paid for a house.

That being said, a house for 100 k like that is amazing! I wonder if you live in the South. Houses are still expensive here, despite the bad economy. We could never get a house for anywhere near that much, new or old. We had to pay a lot more.

I also have student loans like you, and I wish we had waited until they were paid off to buy a house. I owe about 60-65% of what you said you owe, and let me tell you it is really rough trying to pay it off on top of a mortgage. I cut everything wherever I can, and I still have trouble paying it down.

You probably need to talk to people more of a financial expert than me, however. I know there are people that do that for a living, and i would not make a decision based upon what I heard in a Forum.

[Like2Plan]

FirstThingsFirst,
You need to put things in perspective.
You are paying $860 a month for housing--and you don't have to pay for repairs or upkeep or property taxes. It is currently adequate for your needs. You want to buy a house which will require a downpayment and closing costs--With that and all the costs associated with the house do you expect to "save"?
On the other hand you have 20,000 in debt at 29% interest. What are you paying in debt service each month? (I'm thinking that you are probably paying interest in excess of $450/month?)
Here is a link to calculator that will help you to model payoff scenarios:
bankrate interest calculator
It would make much more sense to throw everything you have at the CC debt to retire the outrageous interest rate as soon as possible. Also, if you could knock it down to a lower balance it may put you in range of a 0% offer or getting a personal loan from a credit union.

[ActYourWage]

This situation sounds as if you may have "house fever". Please assess all the options and know that purchasing a house is a big commitment, especially when you are $20,000 in cc debt. When buing a house, you need to remember there are taxes, insurance, costing cost, etc. However, I like the idea you are looking at a reasonable priced house. That is a good sign that you will do what's best for your family's situation.