Question: My husband and I got married two years ago next month, and we’d like to buy a house. We’re not ready to start a family just yet, but it seems like home prices are just going to go higher. My husband thinks now is the time to strike. Plus, we’ve seen ads for some really low mortgage rates.
The problem is this: We have, between us, about $14,000 on eight credit, store, and gas cards. I’m wondering if we should use some of the money we’re saving for a house and pay off some of those cards. But then, home prices might go even higher, and we’ll have missed our chance.
Is there a math formula for figuring this out?
— Hope in Pennsylvania
Howard Dvorkin CPA answers…
Here’s the only math formula that matters: Do you earn enough money to pay both your debts, closing costs, and a monthly mortgage?
The reason this country faced a housing bubble and a terrible recession a decade ago was simple: For many Americans, the answer was “no.”
Four years ago, I wrote a book called Power Up. This part speaks directly to your situation, Hope…
In the past, millions of Americans got themselves into some nasty predicaments because they bought homes they couldn’t afford. They took out exotic mortgages and decided not to analyze the downside to these mortgages, which were costly and have a negative impact on cash flow.They were so enamored of what they thought they could buy (note, I said buy, not afford) that they decided to ignore the fatal risks.
The real question here is, “Do you need a house right now?” Interestingly, Hope, I was just recently reading about a study by the Pennsylvania Association of Realtors that shows, “One in 3 new homeowners are categorized as want to buy customers, while more than 1 in 4 are need to buy customers.”
What’s the difference? Well, think of it like buying a car. When you need a car right now because yours finally died, you’ll overpay. You certainly don’t want to do that with a house.
Bottom, line: Pay off your debts first.
You mentioned math, Hope, so let’s do some. You have around $14,000 in credit card debt. The average credit card interest rate is about 15 percent a month. So you’re being charged nearly $600 a month just in interest.
Imagine that $600 going to toward a monthly mortgage payment!
If you and your husband can pay off your credit cards, you can then take the money that formerly went to debt and put into a savings account for your house.
As for worrying about “missing the market,” let me reassure you: Buying a house before you’re ready, even if it’s for a great price, is likely to end in disaster. You might save $10,000 if you rush into things, but you’ll spend far more than that trying to catch up to a purchase you weren’t prepared to make.
Let me quote myself one more time. In my book, I concluded, “Just use common sense when purchasing anything from a home to a lawnmower.”
I doubt you’d buy a lawnmower you didn’t need just because it was on sale.
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Email your question to email@example.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.
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