Continue paying down debt or save more for down payment?

jenc511February 19, 2010

I am going to be moving to Phoenix from Alexandria, VA. I will most likely be keeping my current job/salary, and the home prices are *very* appealing. I also have several pets, and it would be nice not to drop another $500-1000 (on pet *fees*, not deposits) for another short-term living situation. I have been making great headway in paying off debt, and I've got a $5k personal loan and some small credit card balances. I've been paying approximately $1500 extra per month on the highest interest rate balances, and based on my income, the required payments are minimal (from a debt-to-income standpoint). I've also got some money tied up in accounts I'd rather not touch right now, so I'm not sure if I should stop paying so much on my debt and use the extra money for a down payment, or if I should go for a no/low down payment mortgage (I'm also eligible for the first-time homebuyer's credit, which I understand can be applied to your down payment through various programs) and continue to pay off my remaining debt.

I'd like to take advantage of the homebuyer's credit, since I'm already moving to a new place with a much lower cost of living *and* keeping my existing salary. I also don't want to be too eager and make a bad decision. I've gone through the prequalification process with my bank, and they've approved me for way more than I'd ever spend, and my price range puts my mortgage payment (principal, interest, taxes, and insurance) right around my current split of the rent, so I'd still be able to keep dumping money on my debt to pay it off by year's end.

I'm leaning toward the low/no down payment option, since I will still have about the same about of money left over to throw at debt. Sorry for the long post, but I need some reasonable folks to tell me I'm not making a hasty decision based on a desire to own a home with a yard vs. sucking it up, renting, and paying ALL of my debt off before buying a house. That $8,000 sure does look nice, considering the cheapo houses I'm looking at.

For what it's worth, I'm looking at homes under $135k, regardless of what I qualify for.

As for other expenses, like utilities in a desert vs. a temperate climate, my best friend also lives in Phoenix, so I understand where I'll be losing/saving there, as well. It's just hard to pass up buying a $130,000ish single family home when I can barely buy a tiny condo here for less than $300,000.

Can I get some objective bystanders to give me some perspective?


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Pay down your debt! There will always be real estate, at whatever price it is (even if you go in now at a cheap rate, it can go right up again very quickly when your first term is over, and no one knows by how much that will be). You say "regardless of what I qualify at" - well, the lender, whoever it is, may not agree with that, and you will qualify based on reality, e.g. debt load, not pie in the sky. Greed is the way the market got to be what it is now, and if you care about what your credit score will be in future (to pay off seriously important things like emergencies- pets, car, medical, job, etc.- then do the smart thing and wait til you're in a position to handle it all and have saved 6 mos. against those, rather than lug around $8,000. of debt to which you'll add however much a new house costs.

    Bookmark   February 20, 2010 at 5:11AM
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Hi - just realized that you said you prequalified - well that lender is just doing the same thing he probably did 2 yrs ago, the kind of thing that brought the whole world into depression, and that's irresponsible and greedy, and remember, he/she does not care about you or your future, let alone a house they may end up foreclosing on - a quick buck is a quick buck isn't it!

    Bookmark   February 20, 2010 at 5:17AM
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Since you canpay off your debt soon I'd pay off the debt then start looking at houses, moving in about 1 year.
The market will still be low, I'm betting you can still get a good buy and have the peace of mind knowing the debt is done, you can spend more on your house fix up costs and enjoy it more.
Another good thing about waiting and renting now, you will know the area better and know where you want to live, you will have a better feel for the area.
larke, I don't understand how you know such much about the poster, have you read other posts by this person. Why the rant about greed? I'm not reading that in the post?

    Bookmark   February 20, 2010 at 11:52AM
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I believe she's looking to buy lower than the lender qualifies her.

    Bookmark   February 20, 2010 at 12:02PM
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Pay off your debt and always pay the balance of your credit care off every month!

    Bookmark   February 20, 2010 at 2:38PM
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Sorry if I misunderstood - it was very early in the a.m. (just a bad habit) when I answered, so may have not read 100%.

    Bookmark   February 20, 2010 at 5:44PM
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If you have as little debt as you say you do, then pay it off and then put money towards a larger down payment on the house. It is difficult these days to qualify for a no/low down mortgage and you never know if you will find yourself in a negative balance owing more than it is worth.

Pay the debt, save minimum 10% better 20% as a down payment then buy the house. What you are proposing is how everyone got in trouble the first time. The market will still be low in a year or so and you will have many extra expenses once you are a homeowner - AC is one of them.

    Bookmark   February 20, 2010 at 7:20PM
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Welcome to Phoenix!

As a first time home buyer you need to pay off debt and save up down payment and emergency fund no matter where you are. As sparksals said you also need to have a cushion for the new house, home ownership is not cheap no matter where you are.

Phoenix area is huge with different cities and neighborhoods, $135K could buy you a big house with yard or nothing depending on where you want to stay. You do not know if you will like your job or AZ, you need to have at least one year to develop a feel in order to make a long-term decision such as purchasing a house.

You are fortunate to have your best friend in the new location. But it does not mean that your friend will have identical appreciation regarding the job and neighborhoods, you need to do that yourself.

Quite a few people I know after moving back to Phoenix area, they rented and re-learn the area before purchasing their homes. This is a dynamic area that needs to update your GPS every a couple of years. This is a great area that has lots to offer, take your time to enjoy and explore while building up your financial footing.

    Bookmark   February 21, 2010 at 9:06AM
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Thanks for all of the feedback, folks. Renting is still certainly an option, but that $8,000 tax credit keeps whispering to me. I don't need the $8,000 tax credit to make this "work", but it would certainly be nice.

As far as additional expenses that come along with homeownership, I must say that if I stay in this area, I'll be paying approximately $1500/mo + utilities, along with whatever outrageous pet fees and pet rents they will add on. For what it's worth, I've got money in accounts I'd rather not touch right now, but I can access. I also have my debts covered by insurance that kicks in if I'm disabled or unemployed. I've got a sizeable amount of available credit (the balance are small, but the credit limits aren't), in case of a terrible emergency. When it comes down to it, I've got more than enough cash/cheap credit around to tackle any catastrophe worth dealing with on a $130K property.

I'm an insurance freak, so I don't have any debts that won't be paid if something happens to me, and even the pets have veterinary insurance, so a veterinary emergency won't make me choose between paying my bills or paying the vet.

Again, for what it's worth, I'm focusing on houses without pools (don't want the maintenance expense), I'll be working from home (no commute/minimal gas expenses), and I am also focusing on houses new enough that everything won't start to break as soon as I move in.

I've wanted to buy a home for years (but lived in an absurdly high COLA area), and I really feel like I've thought this through as much as I can without making sure I'm getting a reality check from everyone. Short of saving up for years to pay cash for a home, I'm not sure I'm in such a bad position to buy a house.

With that said, I don't want to be the poster who just posts to get everyone to agree with her, regardless of the facts. So, I really appreciate the feedback. In my situation, with the pets, it just seems like I'm throwing away so much money on pet deposits, pet fees (nonrefundable), and absurd rents to continue doing the "sensible" thing and renting until all the moons align and I can pay cash for a huge portion of a home. One of my biggest considerations is the fact that I could take a 50% pay cut and make out. The mortgage/utilities on these houses = still less than I've paid in rent in years (and at much lower salaries). At what point does, "I really really want a yard and a dog" come into play? I get the impression that, for some locations/situations, renting will always be the most "sensible" solution, but then why do people even bother to buy homes?

So, really, when do the scales start to tip in favor of buying a home vs. renting a home?

Thanks, all! I've got a lot to think about.

    Bookmark   February 21, 2010 at 7:51PM
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Honestly, if i were you, i would buy..You have a great handle on what you can afford, and with the 8k tax credit,i think you can easily make it work..Sure, you could wait until you pay down your minor debts, but perhaps interest rates will rise, the 8k credit will be gone by then...Life goes on, and i love the quote from Shawshank Redemption.."Get busy living,or get busy dying"
Best of luck

    Bookmark   February 21, 2010 at 8:00PM
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Thanks for the great quote. Here's another couple:

"I have found that people who can successfully resist temptation invariably lead depressingly stunted lives."

"I'm going to stop pretending my life hasn't started yet. It has. It's twenty percent over. I've drunk the cream."

The first is from C.D. Payne (_Youth in Revolt_), and the second is Stephen King (_Roadwork_).

    Bookmark   February 21, 2010 at 8:33PM
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I say buy.

    Bookmark   February 22, 2010 at 12:01AM
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"I've wanted to buy a home for years "

That may be true, but it doesn't sound like you have been planning to own a home. You've got unsecured debt. You don't have a down payment. You don't have an emergency fund for repairs. You really need cash for these things - not available credit.

Of course, it is your money, so you are free to take as many risks as you want with it. Just don't pretend you aren't taking a risk.

    Bookmark   February 22, 2010 at 10:04AM
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I am a realtor, so perhaps I'd not be considered objective. ;-)

I think that it is a good time to buy if folks are going to stay in the area for a while. What I would be concerned about in your case is that you are just moving to AZ. Are you certain that you will want to stay there for the long haul? Would you still be so anxious to buy if the pets weren't an issue? I have a giant breed dog so can understand the pet housing issue.


    Bookmark   February 22, 2010 at 11:50AM
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