Why you Should Pay Off All Debt and Build an Emergency Fund
If you have been living in a cramped apartment or with your parents, it is awfully tempting to take out a mortgage for a home of your own. However, buying your own home when you have student loans, credit card debt and minimal savings is a bad idea. An indebted homeowner is a single misstep away from foreclosure and financial ruin.
Build an Emergency Fund Before Bidding on a Home
There is no sense taking out a sizable mortgage if this additional debt precludes you from saving for the future. It would certainly be nice to have a lovely home of your own yet expenses will arise in the form of ongoing maintenance, repairs ad insurance costs. If you do not have an emergency fund with at least a few thousand dollars, a major home repair has the potential to put you deeper into debt.
There is also the potential for you to lose your job, become sick or have other significant expenses such as automobile repairs. If you are financially overextended due to a home mortgage, you will not have enough money to cover surprise costs unless you have an emergency fund. Perhaps just as important is the fact that an emergency fund provides peace of mind. You will sleep soundly at night knowing you have enough money to cover unexpected expenses as they arise.
Pay off Your Debt Before Bidding on a Home
If you do not have enough cash to buy a home outright, you will be forced to take out a mortgage to purchase a home. Monthly mortgage payments tacked onto monthly utilities expenses, student loan payments, credit card payments and childcare costs just might lead you down the path of bankruptcy. Even if you can cover all of your expenses including the cost of a home mortgage, you will be on edge, constantly wondering whether an unanticipated expense will pop up out of the blue and compromise your budget.
Even if it takes a decade or two to pay down all of your debt, this waiting period is well worth it. If you are debt-free when you make the transition to a house of your own, you will be able to save money for retirement as well as home repair and improvements. Even if you lose your job, you can still stay afloat in a financial sense as you will have minimal debt but for a home mortgage. Just be sure to put a portion of your earnings into a savings account so you have something to lean on in the event of workplace termination/downsizing.
About Those Interest Rates…
If you are still on the fence as to whether it is prudent to pay down debt before buying a home, look no further than the interest rates between types of debt. Credit card debt interest rates are significantly higher than home mortgage interest rates. You can even deduct the interest paid on your mortgage at tax time. So get rid of that credit card debt, student loan debt and auto loan debt before bidding on a home. Once you are out of debt but for your home mortgage, you will feel truly financially liberated.