A reader recently asked me what he should do with a settlement he is expecting. He expects to get $93,000 but hopes he will be able to get that up to $125,000. He owes about $75,000 in debts. That $75k includes about $50,000 in credit card debts and $25,000 medical debt. He knows he could pay the debts off and then make a nice down payment on a house, but he doesn't want a house payment at all. This in a market where it is hard to find a house under $100,000 and extremely hard to find anything decent under $80,000. So he wants to know what I think.
My first reaction was to pay off all the debt and have those payments to start ranking up the savings to buy the house. However, after hearing that he wanted to buy a house with cash and get completely debt free I begin to think a little harder about it. Here is what I came up with. Perhaps not exactly what he wanted to hear, but something that he needs to hear.
- Taxes - The first thing he needs to think about is taxes. He needs to remember to set aside a portion of that $93,000 to pay for the taxes it come April 15, 2012. He doesn't want to make the mistake I made and not have enough set aside. It took me 8-years to clean up that mess. The back taxes cost me more then if I had paid them when they were originally due. Don't think that you will get by and not owe Uncle Sam until after you have filed your 2011 taxes next year.
- If he does go the route of buying a home with the cash, he needs to be sure to then roll his rent payment into his debt payments so that he can get those debts and high interests paid off quicker
- I would then put the remainder in a high interest savings account, so that it can accrue compounded interest until such time as you can make that house payment.
I personally still think it would be better to get the credit cards and medical debts eliminated, but I also can't begrudge you for wanting to have a place of your own. Especially if you want to do so without incurring any debt in the process. I am completely debt free. I am currently looking at a house built by the city with a grant from the state. I meet in the income guidelines
1 person less then $41,950 2 person less then $47,950 3 person less then $53,900 4 person less then $59,900 5 person less then $64,700 6 person less then $69,500 7 person less then $74,300 8 person less then $77,950
I am attending an 8-hour home buyers class with my wife. At which time we can start the application process. The house a 3-bedroom 2-bath is $110,000 0 down 0% interest. Which the 0 down is a misnomer really, because they do want $500 earnest payment at time of application. So in reality there is something as a down payment. This could be a third option although I know he doesn't want a mortgage either. They don't want any collections over $2500 in your credit report, but they won't look at medical collections. So there are my thoughts. I guess the most important thing which ever option he chooses is to not forget about Uncle Sam's greedy hand and to get rid of those debts ASAP. A life without debt is much better.
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