Buy a house or pay down debt?

[blackbirdfly123]

Hello -

I'm hoping to get some advice on my current situation. I don't want to give all of the details, but here are the basics. My husband and I make around $110-$120,000 a year in income. We've completely over extended ourselves though. Car loans, credit cards, and school loans total $90,000. We were planning on paying just our credit card debt off (totaling about $8000 of the total debt) before buying a house - but now that I think about it - I need advice to see if we should pay off all debt before buying a house. The car loans total about $40,000 and the school loans take up the remaining $42,000. Although our income is pretty high, we have so many bills a month, and work expenses (my husband is an independent contractor) - that we have not been able to save much up to this point. Within a year, we'll be able to save around $30,000-$40,000 based on a budget I just did that includes paying off our credit cards.

I'm mostly worried that interest rates will go up by the time we have our debt paid and I don't want to miss out on that with the housing market the way it currently is.

Any advice is much appreciated. Thank you.

[snafu]

Welcome to this site where we try to give helpful suggestions or another viewpoint to ponder. I'm guessing that the figures are gross income. There are so many unknown important factors given the level of debt acknowledged. What interest rates for CCs, auto loans, SL? What age? Are you in a high COLA? Is the desire to buy a house mostly predicated on current interest rates? What is your current budget - categories & sums? What are you willing to give up short term to facilitate your house wish? Do you have an Emergency Fund? Have you established a retirement plan?

I realize this sounds intrusive but it all adds up to avoiding a bad outcome. The government insists they will continue to pour money in to keep interest rates low, inflation at bay and hopes with QE employers will hire and bring down the huge unemployment/underemployment problem. Please understand that buying a house is far more expensive than just mortgage payments, municipal taxes and utilities. It's impossible to know what will go wrong but you can bet Murphy's Law is in full force. Worse yet - whatever can go wrong will always go wrong at the most inopportune time.

[Wino]

Although our income is pretty high, we have so many bills a month, and work expenses (my husband is an independent contractor) - that we have not been able to save much up to this point. Within a year, we'll be able to save around $30,000-$40,000 based on a budget I just did that includes paying off our credit cards.

You should use the budget for a few months to make sure you can live on the budget and that the savings amount are not pie-in-the-sky. If you can live on that budget, then in a year, when you have no CC debt and a good chunk for closing costs, I suggest that buying a house is a valid investment, but as forewarned, there are a lot of things that can go wrong with a house so you need to be careful.

Just as an example, I have a plumbing upgrade on my house I'm going to be doing that is going to cost me $10,000. It is necessary, but not urgent. If I don't do it, it will become urgent. There is no landlord to call to take care of this. I must pay for it out of my own pocket.

[~bs]

I don't think the potential for higher interest rates & housing prices in the future (both unknown) really offsets against your high debt levels (known). That's like worrying about the monkey in the room, when there's an elephant standing right next to him. Many banks probably wouldn't even extend a home loan to you anyways with that debt to income level

And is that $110-120k/year each or combined? Because if it's combined, it's just normal middle class income, and unless you have a lot of savings on the side, not advisable to purchase a house IMO. If you commit yourself to saving and paying down debt, you may be ready in 3 years or so. But like they say, there are many good things that don't come easy.

[Esozh]

You need to do a few things before you purchase a house.

1 - Pay off all of your personal debt; Credit cards, Car Loans, and Student Loans.

2 - Consider selling your cars, and buying cheaper ones. If you look, I imagine you can trade both of yours in and get good cheap cars ($5,000 each), and knock off probably $25,000 of your debt right there. Yeah, you'll lose some value on the cars - but depreciation is going to knock off a lot of value anyway.

3 - Consider your savings, retirement, and future financial goals. How old are you? What do you have in savings/retirement? Those are very important factors. A Roth IRA for each of you is going to cost just over $5,500 a year. Traditional IRA's are also an option, and they lower your tax liability. The growth is tax deferred.

If I were in your shoes... I would trade down cars TODAY. Then I would pay off the credit cards over the next few months. Then, start knocking out student loans. Trading down cars puts your debt at $65K instead of $90K. Which means you can pay everything off, student loans included, in about 20 months.

After that, when you're debt free, the banks are going to give you a much better interest rate. Banks look at your debt to income ratio as a measure of your interest rate. A high debt to income is a high interest rate and vice versa. Right now, what you might save in interest rates because the rates are low, you're going to lose because your debt is so high in comparison to your income. Even if rates go up, your likely to get close to the same rate 2 years from now that you would today. If rates stay low, you buy a house debt free with a significantly lower interest rate.

Banks WILL NOT allow you to have more than ~$3,700 a month in payments on your income. It just isn't going to happen. That includes your taxes and insurance on your mortgage. Figure out what you have right now, and how much debt you can still get and be below ~$3,700 - and then figure out what your property taxes and insurance would be, subtract it, and that's what you can "afford" according the the banks.That only leaves you about $3,100 a month or so after all of your payments. That's plenty to live the average middle income life on - but you'll have a hard time getting ahead. Debt is financial cancer - get rid of it.

[feh]

I don't think the potential for higher interest rates & housing prices in the future (both unknown) really offsets against your high debt levels (known). That's like worrying about the monkey in the room, when there's an elephant standing right next to him.

I agree. The OP needs to get their debt under control before considering taking on a mortgage.

[Jerry91]

It is true that the interest rates haven’t increased yet and for many people this is the right time to buy a house. But as you have so much of debts in your name, I personally don’t think this is the right time for you to buy the house. Your debt to income ratio will be high when you apply for a mortgage in such a situation. It is good that you’re planning to pay off the credit cards. It will be better if you could make some extra payments toward the car loan and lower it. You can contact a financial planner and he will help you in budgeting and guide you so that you may be able to look out for loans by the year end.

[dojo]

1. BUDGET - you have excellent incomes both of you, if you spend less you could throw even more money to your debt payment.
2. PAY OFF DEBT - there's quite some big numbers you're sporting. Best to have it all paid off and then you'll have more better options.
3. SAVE - you need to have an emergency fund to kick in if you really need it.
4. STAY OFF DEBT - don't go into more car/credit card debt. With the debt already paid and some good savings you should never have to deal with this again.
5. after you're all set up you can think about a mortgage. I wouldn't risk it now. If anything happens to one of you and you have this on top of your debt you'll get into a pretty nasty position.

[TheKayla]

I don't think the potential for higher interest rates & housing prices in the future (both unknown) really offsets against your high debt levels (known).

Agreed. Get at least a huge chunk of debt paid off before thinking about buying a house. Perhaps you can put some aside each month for a larger downpayment, so you don't have to take out as big of a mortgage when the time does come, this should help offset the cost of any small interest rate hike on a mortgage. You're likely paying far more in debt though and you'll mathematically be far better off tackling the debt as much as possible.

[asdf]

I'm new to the forum, but so far I've been doing a good job of noting when old threads get bumped for spammy reasons.

[TheKayla]

I'm new to the forum, but so far I've been doing a good job of noting when old threads get bumped for spammy reasons.

Oh snap, you're right -- 2006!

[SmartSpender]

Good Debt vs. Bad

Hey Blackbird - I realize I'm pretty new to this forum but I've been in the industry for almost a decade now - Pay off the credit card asap - then the cars - keep the student loans but make sure they're consolodated (shop around, you can find some really great consolodation rates, just make sure theyre legit) the student loans are tax deductable, and maliable. You can defer them almost anytime without much penalty if need be and with your income take anything you can to lower your AGI (Adjusted Gross Income) which student loans can do. Stay on the budget you are on but see if you can lower some of your other expenses - i.e. cellphone, cable bill,. use less electric if you pay it, etc. After a year you should be close to out of the woods - and paying minimum payments on the student loans - a year later you'll have enough to put down on a house and you'll feel much more liberated doing so - theres you're two year financial plan..

Kindly,

Smart Spender