Readers Ask: Pay Off Debt or Buy House

by Kevin Surbaugh

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.

1. 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.
   


2. 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


3. 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.

If you wish to ask us a question for this column please submit it by clicking here. Be sure to chose "Readers Ask," from the topic list and at least your home country in the address field. Thanks.

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The Prince Answers Emails

I am sending you an email because your blog does not accept comment (I don't have a live ID or anything like that so I am basically left out of the commenting).

Hello. Thank you so much for your email. I would like to try to address each of your concerns and comments. First you say you couldn't comment on the blog because you don't have an ID. I used to allow anonymous comments, but some troll like comments forced my hand. It doesn't take make to create a blogger (gmail) ID for just commenting. However I see your email is a Windows Live ID which supports the openID technology. So therefore you can log-in and comment with the email that you just emailed me from. Making the comments more secure really doesn't leave anyone out of commenting if they wish to. Although it may take a little more effort.

The post about Dreams... Trusting god to provide had me cringe.

To purchase a home you need at least 20% down. You also need to have an emergency fund that will provide for 6 months of living expenses (including mortgage, insurrance etc...). You are very new at your job, if something happen (in this economy you never know) you will be the first one to go. It took you months before finding this job what if you suddenly get unemployed with a mortgage to pay.

According to your own admission you are nowhere near to have the kind of cash needed to buy a house on hand:
Savings Goals
Emergency Fund: $75.00
Goal: $25,000
Car Fund: $0.00
Goal: $50,000
House/Condo Fund: $0.00
Goal: $100,000

Now on to your next point. You said you cringed. I suppose I would to if I were to only go buy what I seen and not know everything. Or were to read to much into the post. It was a post about my hopes and dreams and not a statement of this is what going to be done. As you mentioned their are some financial hurdles to overcome. Lets focus on the numbers that you copied from my site. I freely admit they haven't been updated in months. I also freely admit that I don't have the 20% or even 10% of the down payment. I further admit I am still working on 6-12 months in an emergency fund. The post you are referring to was nothing more then a post about my dreams and my frustration regarding the current situation.

You also have to distinguish between a want and a need. A swimming pool is definately a want. A house is a want. If you appartment is less than desired find another one!

Now in regards to the pool. You are right that is a want and when we get a home of our own their is a good chance we won't have a pool. In fact the only way we might (and that's a big might) is if the new home ends up being a condo. Which given my wife's and I's ages a condo is something we are considering so that we have something as we get more into our retirement years as well. We really don't want to move until we find our own place. That is a lot of cost to move from one apartment to another, which would slow up our home purchase dreams.

Your wife is not working, at this point she simply doesn't need a car. She might want one but she definitely doesn't need one.

Yes you are right the 2nd car would be a want. We know that, but think about it this way to. I am at work. She needs to go the doctor and can't go because she doesn't have a car. Or perhaps to the pharmacy to get her medicine. They are simply things to work out.

If I were in you shoe I would look for a small appartment on the first floor that is at a walking distance (less than 2 miles or so) from my work, save like crazy and when I have the money, and only then, look for a house.

As for moving within 2 miles of the place I work. That would really be nice. However, I can't afford rent out there. Rent for a one bedroom alone in that neighborhood is more then my take home pay. Condo's and houses that don't need serious repairs tend to even be over $200,000. Which would mean the mortgage would be more then my take home as well. Yet that is where I really would like to live considering where I was called to work. So once again, I have to trust God and let him guide me. I don't know if you believe or not, but I do and placing my trust in Him is a big part of my faith. It doesn't mean I am running out and getting myself into financial trouble just because I want something. Rather trusting Him simply means waiting on his timing. Perhaps in the next few months this blog and my other web properties will take off and I will be self-sufficient from them. Only God knows, and I am willing to wait on him.
Thanks again for your email.



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go ahead share your thoughts with me now, my ears are open. I'm always eager to hear what you think.

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Reader Having Difficulting Keeping Up

I would like to resume a feature, that had started once before. That being the Readers ask feature, feel free to email the Prince of Thrift your questions. For now here is one from July 10, 2009.

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Sometimes readers, will write the Prince Of Thrift with questions. Such was the case when Cheryl (not her real name) recently wrote and asked:

My DH and I are thinking of restructuring our debt so we can get out of debt and afford our current payments. Right now it's more than difficult to keep up. Do you have any suggestions about where we should start. There are so many companies, it's hard to know who to trust.
Thanks for any info you can share.
- Cheryl

As I always do in such situations, I am thoughtful of what they are are asking and answer to the best of my ability. Since, I am not a certified financial counselor nor do I have any other licenses, I have to be careful with what I say. I do try to refer them in the right direction. Below, is my answer to Cheryl:

Thanks for the email. Do not mess with any of these debt settlement places that advertise on TV or the net. If you can't get a debt consolidation loan through your bank or credit union, there is only one place to trust in Topeka. Consumer Credit Counseling. They are trustworthy and if I remember correctly the fee is only $20. The only thing is they can't do anything with your secured debts. Only your unsecured debts, will they be able get lower payments (paid through them) for you. It will however, put a ding on your credit report.

As for the debt consolidation, option, Dave Ramsey calls it debt CONsolidation, and for good reason. Most people that go that route, ends up using the freed up money to get more debt and then they are in worse shape then before. If you use debt consolidation, you must give up all other credit. The only debt you should have would be the one debt, that now has a lower payment and should have lower interest to.

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go ahead share your thoughts with me now, my ears are open. I'm always eager to hear what you think.

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Reader Having Difficulting Keeping Up

Sometimes readers, will write the Prince Of Thrift with questions. Such was the case when Cheryl (not her real name) recently wrote and asked:

My DH and I are thinking of restructuring our debt so we can get out of debt and afford our current payments. Right now it's more than difficult to keep up. Do you have any suggestions about where we should start. There are so many companies, it's hard to know who to trust.
Thanks for any info you can share.
- Cheryl

As I always do in such situations, I am thoughtful of what they are are asking and answer to the best of my ability. Since, I am not a certified financial counselor nor do I have any other licenses, I have to be careful with what I say. I do try to refer them in the right direction. Below, is my answer to Cheryl:

Thanks for the email. Do not mess with any of these debt settlement places that advertise on TV or the net. If you can't get a debt consolidation loan through your bank or credit union, there is only one place to trust in Topeka. Consumer Credit Counseling. They are trustworthy and if I remember correctly the fee is only $20. The only thing is they can't do anything with your secured debts. Only your unsecured debts, will they be able get lower payments (paid through them) for you. It will however, put a ding on your credit report.

As for the debt consolidation, option, Dave Ramsey calls it debt CONsolidation, and for good reason. Most people that go that route, ends up using the freed up money to get more debt and then they are in worse shape then before. If you use debt consolidation, you must give up all other credit. The only debt you should have would be the one debt, that now has a lower payment and should have lower interest to.

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go ahead share your thoughts with me now, my ears are open. I'm always eager to hear what you think.
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