Use Equity in Sale of home to pay down debt?

onlygirlsmomNovember 30, 2006

My DH and I looking to sell and build within the next year or so. I hope to have our credit cards debt down to about $6-$8k by the time we sell this house. I'm thinking we use some of the cash from selling to pay off the debt, that way we when we move into the house, we may have a slightly larger mortgage but no credit card debt. Does this sound right or should we use all money in the sale of the house for a down payment?

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just a girl's Mom,

Two questions:

What rate of interest are your credit card owners charging you on the debt?

If it's low and about to to rise soon, what will the rate then be?

What rate do you anticipate that your mortgage lender may charge?

Generally speaking, I dislike credit card debt intensely, for most regular carriers charge 15 - 18% annual rate.

But that's not the worst of it - most store-issued cards rates run 25 - 28%.

And, since most of the stuff that many of us buy isn't income tax deductible, if you're in 25% marginal rate of tax, you must earn $37. per $100. debt, then pay $9. tax, leaving you with $28. to pay the credit card carrier.

No wonder the isssuers of those cards smile!

You would, too, if you were able to issue such cards.

I'm in favour of using the funds to pay off the debt on the credit cards.

With one heavy-duty proviso, however.

You most likely used the cards to buy things that'll be used up over a short term, i.e. consumer items. That is, you lived in the past above what you were able to buy with earnings during that period.

I want you to make an iron-clad agreement with yourself that, rather than letting that portion of your mortgage run over the full period of the mortgage, you work really hard to pay down that portion of the principal over a year or two, three at the outside.

Otherwise, you'll still be paying in 15, 20 or 25 years for the carrots you ate, gas you used in your car, or Christmas gifts for your sister that were part of your living last year/today (two or three years ago, maybe?).

Try really hard not to carry credit card debt - defer the purchase and put that interest into your own pocket.

By the way - do you have some extra funds on hand so that if your car blows an engine, tranny, or whatever, or you need a root canal, or you suffer a prolonged layoff ... you'd still be operating comfortably with no income in the meantime ... three months (or, preferably six months or a year) from now?

A cushion like that results in a good deal less chewing of fingernails for many people when faced with an emergency.

Good wishes for skillful management of your money.

ole joyful

    Bookmark   November 30, 2006 at 12:56PM
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