Should You Save for a Down Payment, or Pay Off Debt?

saving_picThese days, debt free is the end game for a significant chunk of the population.

But if you’re still not quite there yet and you’re itching to start building equity in a new house, you may be wondering where exactly your priorities (and your savings) should lie: in an account marked “future down payment” or in your creditors’ pockets.

The quick answer? It depends.

If your debt is high interest, then pay it off as fast as possible. That generally means any debt with an interest rate over 7%, like most credit card debt. The logic behind this is pretty simple—at the moment, interest rates on mortgages are still on the low side, and low-interest debt is generally preferable to high-interest debt.

If you’re if you’re investing your savings or keeping them in a high-interest account, then go ahead. keep on saving. So long as your savings are growing at a faster rate than your debt, there’s no problem with it.

If you’re concerned about how much loan you can qualify for, then paying down your debt may help. This is because lenders take into account your debt-to-income (or DTI) ratio when calculating the size of the loan they’re willing to offer you, and your interest rate.

The Third Option

Of course, if you’re still on the fence, you could always wait a little longer until you’ve both saved up enough for a down payment and paid down your debt.

For many, this may actually be the ideal path. Most financial experts advise that you have enough liquid assets to cover 3-6 months of living expenses in the event of job troubles or emergencies. Without that cushion, you may find yourself strapped for cash if your new home suddenly needs a new septic tank.

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