Payoff Debt vs. Buying a Single Family Home

4 Replies

My wife and I currently own a two family home and live in the first floor apartment. The second apartment is rented. The basement is completely renovated brand new. Our goal is to move out and buy a single family home and rent out the apartment with access to the basement. However, I feel that our DTI is too high and we need to get rid of some debt first. However, how much debt do we get rid of? My initial plan is to get rid of one car loan ($6,500)(since the other one is a lease), and get rid of two credit card balances ($20,000 total). Our two family house has quite a bit of equity. My initial goal is to pay off the debt mentioned above, refinance the house and use the cash from the refinance to put down on the single family home. Not sure if this is a good idea or not. We are currently tackling debt aggressively and not focused on saving. Looking for advice. Thank you.

1.  How long have you lived in the current house as a primary residence?  If 2 of the last 5 years; talk with your tax accountant about no Capital gains.  Sell the house.  Buy your next house.  No need to do a 1031 exchange.

Make sure you have a place to live during the transition.  You don't have to sell your house first.  You could buy your new house and then sell.  You just have to have lived 2 years in the last 5 years at your first house as a primary.

Commissions would be your only negative.  Compare that to no capital gain taxes.

2.  What is your current interest rate?  How much debt do you have?  Say you only have $100,000 in debt and your interest rate is 2.5%.  Your new house interest rate will be 2.8%.  Basically provide the actual info, to make a financial decision.  Understand why you would pay down debt, if your turning around and adding the debt back. 

3. You should be able to show before and after DTI, showing you rented the unit out. Compare the two DTI figures.

4. Feel your DTI is too high? Pull your figures together and ask your banker.

5.  Pay down debt.  Would pay the Cards off first.  Understand why you have those balances though.

6.  Questions 2 thru 5.  Ask yourself, why you didn't ask yourself those questions.  Address this before you make your next investment.  Take some classes.  Join investment groups.  Read more posts or watch more youtubes.  Start accumulating other peoples experiences and questions.

Most importantly, great job on your current investment. If you don't have kids or they are very young, ask yourself why you don't do this project all over again, but with a 4 plex next time. Start scaling if you want to do REI. A Nice SFH house for yourself is a dead weight if your starting to scale and just the two of you.

What is the interest rate on the credit card debt? $20K is a lot to have on a credit card. Find out what your loan officer at the bank thinks about your DTI ratio. You will have a good idea of what your debt levels are. You have income coming in from the apartment which is great-where does that money go? Towards paying your mortgage, paying down other debt or savings?

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Thank you both for your responses and advice. Definitely is helping me think. The credit card debt is at 0%apr for one year for $15,000 and 0% apr for two years for $5,000. I used these credit cards to renovate my basement. The rent helps pay my mortgage which in the end helps pay other bills as well because it allows me to use other money for bills. Since these credit cards have 0 interest for a certain time should I focus on paying it off then refinance and buy a new house? I want to keep this house for passive income. I’m just not sure if I should refinance and pay off all this debt and save up a down payment or pay off this debt and refinance and use money from the equity to put down on a new house? That is where I am stuck. 

As it is a low (no) interest rate, aside from eventually paying it, my only concern would be how much it affects your borrowing power.  Talk to your banker and find out how much you can borrow and what that number is with and without the credit cards and car loan paid off.

Your main question is whether to use the equity in your house or save for a down payment.  Find out how much refinancing costs are and what the difference in interest rates are for your current mortgage vs the new one along with payments.  Are there costs associated with pulling out equity on your home, extra payments?  Then ask yourself how long it would take you to save for a down payment and which option is better for you.