Should my fiancee and I pay off our credit card debt before we purchase a new home?

My fiancee and I have approximately $30,000 in credit card debt (mostly his). He thinks that we should pay off all that debt and put a smaller down payment down on a home, rather than using all our money for the down payment. I argued that we should not worry TOO much about the credit card debt and take care of it another way, such as re-financing our mortgage in several years and using that cash to pay off the credit card debt (since the interest rate would be much lower). Any suggestions?

Should my fiancee and I pay off our credit card debt before we purchase a new home?
I'm going to make a guess here....





You are being offered a mortgage with a fairly decent interest rate....and in "several" years, they are going to increase your mortgage interest rate, right? But that's OK, because at that time the interest rates will drop big time, and you simply refinance the mortgage and save tons of money?





Is that what you were told? Did that tell you this was called a "balloon" mortgage?





I'm gonna give you a big warning..... be careful. What happens in "several" years when you try to get refinanced, and they don't give it to you? Did you know that thousands of people ran into trouble with these loans? They ended up filing for bankruptcy.....and now the large mortgage companies are getting wiped out from the people filing for foreclosures.





I know several people who fell for this trap. The original loan came with so many fees and closing costs that it pushed the loan to well over the value of the home. After several years of paying only interest, no lender would even discuss a refinance with them!





As for now, all you have to do is use some common sense. You are paying (probably) 15% on $30k in credit card debt. If you used that money as a down payment for the mortgage, you are saving 5%. You are losing bigtime on this deal!
Reply:I think that $30,000 credit card debt is going to hurt you especially now. Mortgages are getting hard to get and there are a lot of foreclosures out there. You may want to talk to a mortgage lender. They don't like big debts and they really like paying jobs plus nice bank accounts.
Reply:Yea, he would. . . . . If you already have 20% down, then I'd focus on paying the remainder of your debt to below 1/2 of the credit limits. Don't EVER refinance to pay off your credit card debt or auto loans. That is dumb. Just pay it off and stop using your credit cards. Plus if you do pay off the cards don't close them. That will hurt you. The down is MORE important to get a good FIXED rate now. Do that.
Reply:By paying them down to below 30% of the limits, or paying them off you increase your FICO score in two ways, first you do not owe that much, second you reduce your credit to debt ration, the higher FICO score will save you in interest rates for the term of the loan. STOP thinking about refinancing, or home equity loans that is why so many people are facing foreclosure right now, build up equity in your home, and keep building it in the event of an emergency.
Reply:By several years down the road, you will probably have paid a small fortune in interest on that much credit card debt. I'd agree that paying down the credit cards would be a good idea. Having that much credit card debt will affect your chances of even getting a mortgage, and if you can, will affect the terms.
Reply:I think your fiance is correct. Paying off what you have would put you in a better financial condition for purchasing your home. Paying off your cards, saving for the down payment plus what you need to furnish it would be much wiser choice. Then you'll also possibly have money to stick in savings for when something needs fixing or replacing.


Refinancing your home in a few years to pay off credit cards would only lengthen the time you owe on the cards - turning short term debt into long term debt. I never recommend doing that. It may be a lower rate but when you stretch it out to 30 years, it doesn't save you money - especially when you add in another set of closing costs adding thousands of dollars to what you repay. And if rates increase on your entire balance, that you repay is even more.


I'd have to side with your fiance to repay the credit cards first, as fast as you can, and be better off in the long run by doing so.


Also some unsolicited advice (lol) - when you do purchase your home, don't go for the most expensive you can buy or you could end up "house broke". You want to have some money left over for a rainy day (and not having so much credit card debt also falls into this category). Live to be comfortable and not from paycheck to paycheck and you'll be much, much more happy all the way around.
Reply:I personally would pay off the cards and put down less money if you have the credit to qualify for 100% financing.





To avoid paying mortgage insurance, you can do two mortgages- an "80/20" where your first is 80% of the sales price, and the 20% 2nd mortgage covers the rest. The rate you can get on that 20% 2nd is going to much better than the credit card rates, I'm sure. Plus, you can deduct the mortgage interest when you file your taxes!





Also, paying off those cards will make your debt to income go way down, which looks much better to mortgage companies.





Good luck!