First-Time Home Buyers | Save for Bigger Down Payment or Pay Off Credit Cards?

Find out whether to save for a larger down payment or pay down credit card debt

First time home buyers should make every effort to save as much money as possible before closing on a new home. At the same time, many home buyers have credit card debt and wonder if it makes better financial sense to pay down those cards before trying to buy a house.

As is usually the case for financial advice, the answer depends on your specific situation.

Why would I build a bigger downpayment over paying off credit cards?

There are valid reasons for building up a down payment instead of paying down credit cards first. Probably the most important reason is that the era of no down payment loans is essentially over, so home buyers will need a down payment of at least 3% to 5% to buy a home. Buyers will also need closing costs and payment reserves.

Why would I pay off credit cards over building a bigger downpayment?

Once a home buyer gets to the minimum required down payment level, the next target would be to accumulate a down payment of 20% to be able to obtain a loan without mortgage insurance. Savings on mortgage insurance payments could save hundreds of dollars per month, so there is a direct financial incentive to get to a 20% down payment if at all possible.

On the other hand, there are also valid reasons for paying down credit card debt. The first reason is that credit cards come with extremely high rates and the interest is not tax deductible. For example, if you have a choice between paying off $20,000 in credit card debt or using that same $20,000 to increase your down payment and lower your mortgage, you will probably find it makes more financial sense to pay down your credit cards:

Payment	Paying Credit Cards	Bigger Down Payment
Total Funds:	$20,000	$0
Monthly Credit Card Payment:	$0	$400
New Mortgage Loan Amount:	$200,000	$180,000
New Mortgage Payment:	$1,200	$1,080

As you can see from the above example, paying down the credit cards results in new total debt payments including the mortgage o f $1,200 per month, all of which is tax deductible. That compares with a total debt payment of $1,480 per month ($1,080+$400), only $1,080 of which is tax deductible.

Combined with the fact that credit card companies have been raising interest rates even for borrowers with a perfect credit history, these compelling cash flow numbers are a substantial incentive to go with a lower down payment and a less credit card debt.

Additional Incentives for paying down credit card debt

There is an additional incentive for paying down credit card debt: higher debt loads results in lower credit scores. With mortgage loan programs requiring higher and higher credit scores, paying down that credit card debt could help boost your credit score to a range that will result in a lower mortgage interest rate or lower monthly mortgage insurance cost. Borrowers should be aware that it will take at least 30 days for a mortgage credit reporting agency to update credit card balance records and plan their mortgage application for at least 30 days after paying down cards.

Assuming you keep your credit cards open after paying them down, those credit cards will also be available in case of any emergency home repairs. On the other hand, today's mortgage market offers few home equity line options for borrowers with less than 20% equity in their home.

For a free mortgage pre-approval and an exact rate quote from an experienced mortgage loan officer, please email us or call us at 1-877-868-2503.

To see the current mortgage rates, visit our Current Mortgage Rates page.

For a free mortgage pre-approval and an exact rate quote to help you purchase your next home, please email us or call us at 1-877-868-2503.

Our visitors also found the following articles relevent to this topic:

• Mortgage Refinancing FAQs
• Refinance Mortgage Loan
• Four Common Types of Refinance Mortgages