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Old 04-12-2012, 07:26 AM
 
973 posts, read 865,357 times
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Default Buy house or paydown debt?

My husband and I have saved about $16,000. We were thinking of buying a house. To get a decent house were we live we would have to use the entire amount of our savings.

The other option is that we have about $15k total in credit cards, student loans, car loans, and medical bills. All have very low interest rates. But we are thinking of instead paying off all these bills because that would give us like $500 extra per month of money.

However at the same time we are concerned that housing prices may go back up.

What makes the best financial sense?
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Old 04-12-2012, 08:01 AM
 
Location: Censorshipville...
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IMO, I would pay down your debt. Though I would not exhaust your full savings to do it, instead keep some set aside as an emergency fund. The reason I say that is, what if you use up all your money and then you are hit with a major car repair or medical expense? Then you're forced to add it to your credit card bill and you're back to being in debt. If you had an emergency fund, you could just pay if off from those funds and then work to replenish it rather than paying finance charges.

Maybe it's just me, but I don't think I'd be comfortable adding additional debt such as a mortgage, if I were already 15k in debt.
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Old 04-12-2012, 08:12 AM
 
Location: Chicago
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I would probably do neither, unless the APRs on your cards are very high, then I would pay down the debt. You need some loot laying around for a rainy day.
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Old 04-12-2012, 09:34 AM
 
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Here's what I'd do:

- Use 11K to pay down the debt and keep 5K as an emergency fund.
- Set up a strict budget which would allow spending only for necessities for at least a year. So, no expensive vacations, going out to eat, new clothes, manicures, going to the movies, etc. I'd brown bag lunch, cook more, do Netflix, go to free events, do my own hair & nails, etc.
- Pay off the 4K balance of the debt as quickly as possible by making extra payments applied to the principal.
- Once the debt is paid off, establish a savings plan and stick with it until I have enough for a 20% down payment on a house AND savings to cover at least 4-6 months of expenses.

With no debt and minimal spending, you will be able to save very rapidly. Housing prices are going to stay low for quite a while. Even though prices are starting to go up in some areas, the climb will be slow, so you will be buying way cheaper than the real estate market has been in many years.

Owning a house is very expensive--all sorts of unexpected expenses come up regularly. I wouldn't buy one unless I had a very good financial cushion.
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Old 04-12-2012, 10:03 AM
 
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I would focus first on paying down your debt, creating an emergency fund of 6-12 months living expenses, and then saving for your house. Buying a house eats up a lot of money. Not only do you have a mortgage payment, but you'll need some new furniture, decorating, lawn equipment, paint, carpet, etc. And if your house is farther to work than where you currently live, more money in gas.

I'm not sure I'd follow Marie's dire straits budget, but I think you should identify ways to save more money monthly. If you're buying clothes at Saks Fifth Avenue, consider Kohls. If you eat out quite often, perhaps try to cut back by making sandwiches for lunch or eating out at less expensive places. Maybe cut back on your cell phone or cable TV plans or drop your land line if you have one. That could add up to hundreds of dollars a month or more without making major lifestyle changes. I wouldn't look at it is as punishment, but rather helping you towards your goal of home ownership. $400 a month is $4800 a year... over 3-4 years that's $15-20K.
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Old 04-12-2012, 10:09 AM
 
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i have a similar amount in savings and in loans and i dont consider myself anywhere near financially ready to buy a house. it depends on your income and where you're looking to buy, too, though.
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Old 04-12-2012, 10:16 AM
 
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Quote:
Originally Posted by md21722 View Post
I'm not sure I'd follow Marie's dire straits budget
LOL

I'm very goal oriented. So I don't mind a sacrifice if it means reaching my goal sooner.
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Old 04-12-2012, 10:29 AM
 
590 posts, read 973,833 times
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I know where you're coming from, I was just trying to offer a more middle ground approach.

Given the choice between dire straits and living in debt, some people would rather live in debt....

It is true that a lot of people make short term sacrifices for long term gain. When saving for a down payment some people get rid of their newer cars and nice apartment and settle for a clunker and a cheap apartment to get them where they want to be faster. I think this was more common 20-30 years ago than it is today.
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Old 04-12-2012, 10:35 AM
 
3,758 posts, read 4,333,299 times
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Quote:
Originally Posted by Missingatlanta View Post
My husband and I have saved about $16,000. We were thinking of buying a house. To get a decent house were we live we would have to use the entire amount of our savings.

The other option is that we have about $15k total in credit cards, student loans, car loans, and medical bills. All have very low interest rates. But we are thinking of instead paying off all these bills because that would give us like $500 extra per month of money.

However at the same time we are concerned that housing prices may go back up.

What makes the best financial sense?
What is the difference between buying and renting where you live? Take that amount subtract the interest each month(if buying is more advantegous). If the number is more than 0 than it's probably a good idea to buy the house, if not then it's a good idea to pay the cards. This is just a general approach not an exact formula. Remember to take the entire cost of ownership into account and take into account the fact that fact that you will own an asset at the end(don't just take the cashfow). But regardess i would wait till I had enough cash for an "emergency fund" that will tide you over a couple of months in an emergency.
Are these rates fixed? If they are not that's another thing to consider the possibility of a rapid increase in rates.
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Old 04-12-2012, 10:49 AM
 
Location: Oakland CA
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I'd pay off the debt, and seriously crank up savings. Housing prices should stay on the low side for at least another year in most places, and depending on where you are, even longer.
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