Ask The Money Coach

The following is a transcript: Click here to listen to the audio answer.

There’s a question here from a reader who wanted to know about paying off debt or saving.  Which one to do first?  Very straightforward question and I’ve got a very straightforward answer for this individual.

She said, “I’m $14,000 in debt and yet I’m growing out of my home.  I’ve got an expanding family.  Should I pay off the debt first or save for a second home down payment?”

Easy answer here.  Go ahead and knock out that debt.  The reason is that, and I assume when you say second home, you meant trading up to a second home because you already have an existing home.  I assumed that your didn’t mean a second home as in a vacation home or your retirement home or an additional home to keep along with your principal residence.

But the reason that you might as well go ahead now and knock out that debt is that, of course, the credit card debt, which I assumed this is, the consumer debt as opposed to mortgage debt is higher rate debt.  You’re paying interest on that and not getting any tax benefits from it like you would from your mortgage interest of course.

But the fact is, because we are in the credit crunch, to qualify, when you try to go ahead and get a second home, a bigger home as you say you want, presumably, it’s going to be a more expensive house.  And so lenders are going to be looking very closely at the debt levels that you’re carrying.  They’re scrutinizing people’s debt to income ratio and in a way that’s far more intense than had been done in years past.

So, if you can go into a new home, your second home, your upgraded bigger home, with zero debt showing in terms of your credit cards and consumer balances, that will make you so much more qualified for that mortgage.  And you’ll have the peace of mind that comes with knowing, “I got rid of this monkey that’s been on my back once and for all.”

So trust me, before you think about expanding, going into a second home, getting something bigger which will mean more taxes, bigger mortgage, probably higher maintenance cost and upkeep and so forth and so on, not to mention the cost that comes along with moving and perhaps, getting new furnishings, etc.  Do yourself a favor.  Knock out that other consumer debt first.

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