Should I pay down debt before I buy a home?

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Boy, this is a complicated question that requires a detailed analysis of your particular situation to give you a proper answer. And there are a few things you can consider in the meantime to help ensure you’re making the best decision.

First and foremost will be interest rates. Depending on how your debt is structured, paying down debt may not have much impact on your interest rate. If it’s the right debt, it might give you a slightly better rate, but if you’re saving 1/8th of a point but losing a 1/4 of a point by waiting to buy in order to do it, then it doesn’t make a whole lot of sense. And, in most cases, if you have less than a 20% balance on things like credit card debt, paying it off won’t have much of an effect on your interest rate.

Right now, we’re at a 6 month low on interest rates. To give you an idea, in the last 6 weeks, interest rates have dropped a 1/2 point as the bond market prices have gone up. We don’t know exactly when it will head the other direction, but it will go up again. To know what’s best, we’ll need to know how much you’re gaining by paying down your debt and see if waiting might cost you more than what you’d gain.

DTI (Debt to Income ratio) could be another factor to consider. It really depends on how much you’re wanting to qualify for, the payment you’re good to afford, and how high your DTI is currently. Obviously, both paying down debt and making more income (an impending promotion) help this ratio. The question becomes, where do you need it to be to get you what you want.

Which leads me to home prices. As you probably know, home prices will be higher 6 months from now than they are today. A higher purchase price means a higher monthly payment which will affect your DTI for qualifying too. Or, you just get to buy less house.

So, the question becomes – If you could qualify for a home you love now with a great interest rate, lower payment, getting you a great price, and such a good deal to where the seller pays for getting out of your lease, could that make sense? Then the money you save on your monthly payment might be more than enough to pay down the rest of your debt.

 

My team and I are here to walk you through every step of the process making buying a home easy and fun! Give us a call and we can talk about your specific circumstances.

 

 

Conrad Smith
Your Real Estate Consultant
REALTOR®, BOLD, EcoBroker, CNE, CHRE, ILHM, KW Luxury 

Professional Denver Real Estate for the Urban at Heart
www.UrbanProHomes.com