To Pay Off Debt… Or Not

Plumbing Repairs

The last couple of weeks have been very emotionally exhausting.

Let me tell you why…

First of all, the house we’re renting had a kitchen faucet leak for a couple months. We hired a plumber to fix it in June. The fix only last for two weeks. Then the leak returned.

We’re not talking an annoying “oh, I’m losing water” leak. We’re talking about a “clear out everything under the sink and mop up the half-bucket of water” leak.

It was frustrating to say the least.

The trouble is my landlord is really a homeowner who rented out his home. Since he lives in another state, it’s difficult to get things fixed. He usually asks me if I’ll do the fix myself.

In this case, I finally did.

I bought a new faucet from The Home Depot, got some new plumbing tools, and asked my brother to come over to help.

A couple hours later, we had pulled out the old faucet and put in the new one.

Fortunately, colder weather is setting in. Because a couple of the sprinkler heads aren’t functioning properly either. And I don’t really want to mess with it.

The point: Logically, it makes sense to continue renting; emotionally, I’m ready to be a homeowner again.

So my wife and I have been seriously looking at buying a home.

We found one last Friday and made an offer on it. We’ve gone back and forth a few times, but haven’t agreed on price yet.

Who knows. We may walk away from the deal and see what happens.

Anyway, as I talked with my wife yesterday (our 9th Anniversary!), I mentioned why it might make sense for us to use our funds to pay off debt and continue renting until 2009.

1. If we pay off debt, our credit score will rise, hopefully giving us a lower interest rate on our mortgage.

2. By paying off debt, we could increase our monthly cash flow by $500 to $750 a month by 2009. (Which makes buying a home easier on the pocketbook.)

3. Since I’m self-employed, I will have a new tax return I can use to get qualified for a mortgage. Since my income is up this year, we will be able to extend our home search to homes that are slightly more expensive. (Right now, I’m qualified for a mortgage based on my 2007 tax return.)

4. By waiting until January to buy a home, I’ll be able to pay my 2008 taxes without worrying about a larger home payment. (I have to pay taxes by January 15; usually about $12,000 or more.)

So that’s the story.

I really want to move out and buy a home. I’d love to be in a place where I knew I wasn’t going to have to move in a few months. A place that actually feels like home. (My current house doesn’t feel like home; it feels like my landlord’s home.)

On the other hand, there are some clear benefits of waiting. Possibly better selection and lower prices. (November and December of 2007 saw some of the biggest drops in home prices and sales volume.)

If you were in my shoes, what would you do?

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11 thoughts on “To Pay Off Debt… Or Not”

  1. Did I read that correctly? You are trying to decide if you should wait until 2009, which is only MONTHS away?! I’d choose to not be impatient and wait: The benefits as itemized far outweigh what really is a minimal wait.

    Just my 2 cents, but after all we are discussing money and all those 2 cents add up.

  2. Mare – Yep, you read that correctly.

    I guess I was looking for perspective… and you’ve given me a reality check!

    So thank you. I really appreciate your input.

    Ryan

  3. Hi Ryan,

    I AM in your shoes.. and I’ve just decided to wait.

    A rental is great motivation to be a smarter business person, keep the 80/20 rule in over-drive and make money as fast as possible.

    I just know I’ll enjoy a home a lot more when I know that the mortgage is my only form of debt.

    But, hey, that’s just me.

    My wife would have something different to say…

  4. What would I do? Wait! No question about it, as I’m waiting right now. I truly do believe the housing market will drop more in 1-2 years. The government can only juggle so many problems before they’re finally gonna have to say “sorry, you lose your house.” That’ll be my cue to swoop in with a hefty down payment, fantastic score and great credit history.

  5. A few points to consider:

    1. If it has been more than 3 years since you last owned a home, you might qualify for the $7500 new home-owner tax credit. (Which isn’t really a creadit, It’s more of an interest free loan as I understand it, but still a good deal.) If you do qualify, that should put a large dent into your self employment taxes.

    2. What is you housing market like? Here we are starting to recover. Prices are rising but slowly. We expect to still have some great deals through the winter, but once the snow melts prices are likely to rise again.

    3. Are you going to pay more in taxes if you can’t itemize? Being able to claim your interest and taxes is very helpful. You can’t do that with rent.

    4. Interest rates just dropped to 5.5% fixed. Do you qualify?

    5. What are you thinking???? The goal here is to get out of debt and one of your arguments for waiting is so you can afford a bigger house? You should buy what you need. Why do you need a more expensive house if your debt is less?

    6. Are you willing to buy a less expensive fixer/forcloser/short sale to save money?

    The problem with giving you an answer is that for different parts of the country we have different marketing conditions. Here I’d say buy, but other places are better for renting.

  6. Hey Becky,

    Great insights.

    In our current price range, it’s difficult to find what we need. We have three kids… and I work from home full-time, so I need a dedicated work space. That’s why we’ve considered looking in a slightly higher price range if possible.

    I am willing to buy a short sale. The trick: Banks are overwhelmed right now, and they’re taking 3-4 months to respond to offers on short sales. You might close in 5-6 months… if you’re lucky.

    Some deals fall through at the closing table because the bank demands more money at the last second. So short sales are very unpredictable.

    In our housing market, prices are fairly stable. Maybe dropping slightly. It’s curious because there’s a large supply of homes that simply aren’t selling. I believe prices will drop during the next six months.

    Ryan

  7. I’d say continue renting til ’09.

    The reasons you outlined in the post make perfect sense to hold on.

    Renting has its advantages but they usually all relate to having a good hands on landlord who is around to fix any problems. When you are forced to fix the problems yourself it can take away from the benefits of renting.

  8. You wrote: “When you are forced to fix the problems yourself it can take away from the benefits of renting.”

    YES!

    Since this describes my current position, I completely agree.

    I’ll post an update soon.

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