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.
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!
Well I am thoroughly confused on this one. I am not sure I would recommend anyone making $130,000 in income purchase a home that is worth $1,375,000. Also Kudos to you for accumulating $1,000,000 in the bank somehow based off of that level of earnings as it is extremely rare to see. I can't in good faith tell you buying that house without a ton more information would make any sense what-so-ever. I can tell you that with that windfall in your bank account and 2 young kids and $450,000 in debt there is seemingly a LOT of better uses of those funds I can think of. In no particular order... College fund, pay down debt, boost retirement savings etc. Also not sure what the current $450k of debt is even tied to to be honest. That all said seemingly always better to pay higher debt than lower debt. Sorry I can't be of more help just this is a situation I've never come across in almost 20 years in business. Happy to chat further if you'd like to shed some more clarity.
This is a very odd mix of circumstances. Did you typo either the amount you have in the bank or your household income?
Unless you're a lottery winner or inherited a large sum, I can't reconcile the difference between having $1 million saved while raising a family of 4 on $130,000 and having $450,000 in debt.
Also, how did you intend to pay the mortgage on this home? Even if you put the entire $1million down on the house, you're still looking at a $375,000 mortgage while paying down $450,000 in other debt.
To have $825,000 in remaining debt with a household income of $130,000 is putting you in a financial situation I can NEVER advise a client to do.
Best of luck to you!