Profile picture for sparkleroxy86

Pay off some debt or use all for our new house down payment?

Hi all, we are currently in the process of selling our first home- hopefully after all is said and done we will walk away with about 85k. My question is should we use all of it towards a new home ( we are looking at about the 470k range) or should we take about 20k of it to pay off one of our cars and all if our cc debt which is about 7000$. Not sure about it all and we will obv have to pay pmi longer but will save about 5-600 a month not having to pay one car payment and the credit cards. Thanks!
  • January 05 2014 - San Diego
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Answers (14)

Without seeing all the detailed figures it is hard to say but I would generally advise to pay down credit cards (but don't close them) but not the cars as they are generally lower interest loans, and save the rest for down payment/reserves.

This will most likely help with monthly cashflow, your credit scores should increase by having lower revolving debt utilization ratios, and it should help you qualify/possibly get better terms on your new mortgage by doing this. Raising your credit score may make it possible to obtain the aforementioned 80/10/10 loan scenario if you are interested in that when your current credit score may preclude you from being able to get into one right now.

Paying off auto loans can actually HURT your credit scores as it will remove a payment history on an installment loan, and paying installment loans every month is an important part of a healthy credit score. I have seen it happen many times. Same goes with closing a revolving account that was recently paid off. Paying them off is great but it is generally a bad idea, at least when considering the effect on one's credit score, to close the account once you do.

If you would like a complete analysis and to put together a comprehensive and holistic plan on how to proceed with the funds and how to best structure your new home financing I would love to help. It is so much more important to look at the big picture, including both short and long term pros/cons and tax implication, than just rate/payment/mortgage insurance.

Sincerely,
Greg

P.S. I also strongly agree with Ray Blindauer on only putting down 10% if you can and never putting down more than 20% if you don't have to (except for in very rare circumstances).
  • January 06 2014
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Profile picture for CA Direct Lending
You are welcome, sunnyview!
  • January 06 2014
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With your credit score, you may find it difficult to get a loan with mortgage insurance or a piggyback loan as suggested below. 20% down may be your best option in that case.

The key to finding out what will work is to have a trusted lender review your entire credit report. If the score is low due to your credit card balances, that's a different scenario than if it's low due to recent late payments or collections.

You should also take into account how long you plan to be in this new home, as the gain on sale may or may not be there when you need to tap into the equity for a downpayment on the next home or other life choices.

Good luck on your search!
  • January 06 2014
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Profile picture for sunnyview
Thanks for explaining Ray. I appreciate it.
  • January 06 2014
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Hi SparkleRoxy,
I agree with some of my colleagues below. Your best bet is to lay out both strategies with one or more lenders to see where the cost-benefit will be. If you are getting rid or $500-$600 in debt, but trading that in for $400 in PMI (which isn't purchasing anything tangible), then I don't think I would go that route. I would be happy to recommend a lender to you if you need it, but that is my two cents! :)

Good Luck!!
  • January 06 2014
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Profile picture for CA Direct Lending
I do recommend a loan with 10% down to avoid PMI since it is available in this case. In general, I don't recommend putting any more than 20% down even if it's available. If we look at a home as an investment and use the same criteria we use to evaluate other investments, a home is not very safe, liquid or produces a very good rate of return.
  • January 06 2014
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Profile picture for sunnyview
"I have and always will recommend purchasing a home with as little down payment possible..."

With the increase in fees, does that still hold? I thought that you could not deduct it on your taxes so it was something that you should avoid since fees/PMI really increases the "rate" that you pay over the base mortgage amount. Is that true?
  • January 06 2014
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Profile picture for CA Direct Lending
I have and always will recommend purchasing a home with as little down payment possible and putting the remaining cash to work for you. As Mike mentioned, your new loan can be structured with just 10% down to avoid paying mortgage insurance. I do recommend paying off any high-interest debt.
  • January 06 2014
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I think every home owner should have an accountant, and here's a good reason to have one - you should be discussing this with them.

Off the cuff, I'd think you should pay off the credit card and cars, but it depends on the interest rate and the effect on your credit score - so talk to a pro!

All the best,
  • January 05 2014
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Profile picture for SoCal Engr
a consumer perspective...

It sounds like you are considering this decision "in isolation". Think about working out a basic financial plan (i.e. goals, objectives, "how to"s, etc.), and then see how either approach fits in and furthers your objectives.

In my personal experience, knowing "where I want to go" helps to clarify "what to do here-and-now".
  • January 05 2014
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I think your best bet would be to talk to a couple of lenders. They can give you your options for both using some of your proceeds to pay off some debt and for using it all towards a new home. If your debt affects your qualification amount or increases your interest rate more, at least you'll have some cash to use. You may not have the lowest interest rate to begin with, so a lender would be the best person to talk with.They can take all the variables into consideration. I can send you the contact information for a few direct lenders and brokers if you'd like, just let me know off forum, and I'll be happy to send them to you.

Warm Regards,

Cory La Scala, REALTOR
Independence Realty
Lic # 01443391

  • January 05 2014
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Thank you for the reply. My credit score is currently 649 so I am not sure if I qualify for the piggyback loan
  • January 05 2014
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Profile picture for gator70

If I were you, I use the cash from sale for a multi-unit real estate purchase. You can live in one unit and use the rent (after mortgage payment) from the other units to pay off the debt. Of course you should do all the correct due diligence before such a purchase.

  • January 05 2014
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I'd suggest paying the debt off, you won't need to pay MI, if you do an 80/10/10. Meaning you have a first mortgage for 80% financing! then finance the other 10% with a HELOC. The catch with a HELOC will be the interest rates are adjustable; so when the Fed begins to raise interest rates, then your rate on the HELOC with adjust accordingly. But you won't have to pay monthly MI.
  • January 05 2014
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