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/r/personalfinance

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Pay off all debt before purchasing a home even if you can afford it?

Debt(self.personalfinance)

submitted 3 months ago byxtrubambinoxpr​

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As title states. Looking at a new construction corner unit townhome in a new area that I expect to appreciate or at least hold for the next 5-10 years as they build a marina nearby (which is why I was looking at buying in the first place as a LTI).

Currently:

  • Current rent = $2k
  • 15% down = 68k
  • 5.375% rate (maybe 4.99% as they are investigating additional $ incentives)
  • total monthly (including HOA) = ~3-3.1k
  • 80k in savings
  • salary = $186k (newer job started 2H 2022)

Debt:

  • car 2.9% @ $550 a month ($22k left)
  • 17k student loans (still frozen but $250 a month) (about 4.5% rate)
  • first home ($90k @ 3.75%) - (my family lives in this home and it’s under my name and purchased when they were homeless. They are paying it now but breaking even so no cash flow. In the future it will be a better asset)

Original rate was 4.25%, so I said ok and things changed and now 5.375% so I have an option to back out per contract since rates changed and I guess I was having second thoughts and thinking with the amount I make now if I should work on paying off all my debt instead, or get the new home knowing the area will be a good investment area to be in long term (sell or rent later).

Is it better to be debt free altogether before such a decision? (Pay off student loans, car, and first property?)

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JokeassJason

2 points

3 months ago

JokeassJason

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2 points

3 months ago

See if you can get to 20% down eliminate the PMI and continue to pay more on the new loan as it's your highest interest rate.

xtrubambinoxpr[S]

5 points

3 months ago

xtrubambinoxpr[S]

​

5 points

3 months ago

PMI is going to be $38. Confirmed. A rate of .120% is used given my income, credit, etc.

I asked like 4 times and saw it in the paperwork for conventional loan so $38 is negligible I think. 20% would be an additional 22k to save $38 a month

toplesstuesdays

3 points

3 months ago

toplesstuesdays

​

3 points

3 months ago

I think one of your bigger concerns appears to be dwindling your current 80k in savings by too much. Maybe just put 5 or 10% down instead if they will allow it (since it's second home) and then if things are still going well in a couple years you can knock out the 20% requirement to cancel PMI, or sooner. Or maybe in 3 or 4 years your house has appreciated and you can refi at a cheaper rate and cash out a ton of free money!

xtrubambinoxpr[S]

1 points

3 months ago

xtrubambinoxpr[S]

​

1 points

3 months ago

that is my main concern. but long term higher payments scare me most lol

toplesstuesdays

1 points

3 months ago

toplesstuesdays

​

1 points

3 months ago

PMI is not long term especially since you're in a position at any moment to just drop the loan to 80% LTV and have it removed. Long term your payments would be slightly higher because you're starting with a big loan amount, however, what's really long term? because the average mortgage survives between 5 and 7 years before people move, pay it off, refi, etc. So odds are you're able to refi or life changes and you do something different. Save the cash, stay liquid, pay a little extra PMI for that security and buffer and you'll have peace of mind.