Should I buy a house that is $1,375,000, or use the money that I would put towards the down payment to paying off $450,000 of debt?

I have $1,000,000 in the bank. I have $450,000 in debt at 3.6 percent interest rate. I want to buy a house that is $1,375,000. The best rate available for the mortgage is 4.875%. I'm wondering if it's better for me to pay off all or some of my debt, or put that money towards a down payment. I have a family of four and two young kids. Our combined yearly income is $130,000.

Banking, Debt, Real Estate
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March 2018

In general, I recommend to pay off non-mortgage debt prior to purchasing a home.  Doing so in your case would reduce your $1,000,000 in savings to $550,000.  Even if you used 100% of this amount (which I wouldn't recommend unless you had another account with a significant emergency fund), your mortgage would be for $825,000.  Just your principal and interest payment on this amount (over 30 years at the interest rate you specified) would be about 40% of your GROSS monthly income.  This is far too much of your income going toward housing.  Your home mortgage should be no more than 25% of your NET monthly income.

If you put down more on the house to reduce your mortgage payment, you would still be left with all or a portion of your non-mortgage debt.  Your total debt payments in this scenario would still be far too large of a percentage of your income.

Please reconsider purchasing a home that expensive!  Your income can't support it.  Being "house rich" and "cash poor" is no way to live!  It would take only a small hiccup in your income to create significant financial problems.

Thanks for your question and good luck!

 

March 2018
March 2018