Pay Off Card/Save for Down Payment

[Mark Smith]

My fiance and I are planning to spend the time between now and next spring saving money to buy a house.  Over the last several months I have been putting my extra cash toward paying down credit card debt to free up some month cash flow, which has been going great.  I have three thoughts going on in my head, and I'm not sure which way to go, so I am here seeking the opinion of everyone!

- I owe $1,800 on a Capital One card that has an APR of 20.8%. I have the cash to pay that off right now if I wanted to. I am paying $100/month on this card, so if I pay it off that frees up $100/month.

- If you assume that I would be putting 15% down on a house, $1,800 would buy you $12,000 more house (1,800/.15).  So maybe I should hold onto that cash.

- One of many student loans that I have has a balance of only $900, and this has a $50/month payment.  I could pay this off after the Capital one card to free up that $50/month, so I could potentially free up $150/month by paying $2,700 ($1,800 Capital One, $900 student loan), but $2,700 cash would by me $18,000 more house at 15% down.

What are your thoughts on this?  The finance-smart side of me says pay off AT LEAST the Capital One card first.

[Adam Petterson]

Mark Smith

Mark, I would worry first and foremost about the credit card debt. You will want to pay that off as soon as you can due to such a high interest rate. Once you have paid off the card I would start saving for the down payment. It sounds like you can qualify for a property without paying off the student loan, and I would recommend saving up an "emergency fund" of approximately 2-5k along with your down payment fund. You never know when your car will break down or your air conditioner will break. It is always nice to have a reserve of money that can get you out of a jam (since you paid off the card you always have that credit for emergencies as well, but 20% won't feel good on few thousand dollar balance)
Best of luck.