lots of debt, selling home – next step?

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lots of debt, selling home – next step?

I am in the process of selling my home – after commissions and fees I will have just enough money to pay off a significant amount of debt I carry. Is it preferable to pay off the debt and do a lease option which would allow me to save enough for a down payment in 2 years? Or should I put some of the money toward a small down payment, pay down some of the the debt and refinance when my score improves?

Asked on June 19, 2009 under Real Estate Law, Maryland

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 12 years ago | Contributor

You need to weigh the following factors in deciding how much debt to pay down and what else to do with funds:

1) What interest rate is your debt at? If it is credit card debt, for example, you are almost certainly better off paying it down rather than investing in a new home right now. Credit card debt can easily have interest rates of 13% - 18% or higher, if you had ever defaulted; meanwhile, when NOT in real estate bubble, average home appreciation nationally is around 4-  5% annually. And lately, real estate has been depreciating in value.

2) What does you income look like vs. your obligations? If you did not pay down all your debt and so are still carrying some, plus you take on a mortgage, are you in any danger of being unable to meet that burden? If so, again, you're better off paying down all the debt you can to put yourself in the best position.

3) Interest rates for mortages is rising from a historic low. While in some ways, that argues to buy now, before they rise more, it also means that you should not count on being able to refinance later on better terms.

Personally, I am very debt averse, and tend to prioritize eliminating debt over investing in assets that may or not appreciate in value over the time frame I need them to appreciate. For whatever it's worth, a strategy of not carrying debt enabled me to launch my own business--I was in good enough financial shape to do so. So overall, I would tend to counsel getting rid of all the debt, living below your means, and saving towards a down payment.


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