I recently received an e-mail from a reader named Steve. For background, he’s 30 years old and has only recently started getting his financial house in order. Over the past six months, he’s built up a $2k emergency fund at ING Direct, and he’s been working to reduce his debt. That being said, he still has a decent chunk of credit card debt (around $14k) plus student loans ($9k) and a car loan ($9k).
Here’s his quandary:
My question is whether I should buy a house right now, or wait until I get married in a year or so. My thoughts revolve around two scenarios:
1. Continue saving, so I can buy the ring, pay off some credit card debt (I have about $10k), be prepared to pay for the wedding, and hopefully have enough for a down payment for house after the wedding.
2. Exhaust my savings and buy the house, which puts me basically on a month-to-month budget until I get married. This month-to-month still includes paying down my credit card debt at the same rate I’m doing it now.
My concern is that by next year, interest rates will be back up, and that if I wait until then, I’ll have lost money in the long term due to $200k on 6% versus 7%. But, if go that route, then I’ll probably end up financing a ring, a wedding, and a honeymoon — something which sounds quite bittersweet.
If I were in this position, I’d focus on debt reduction (check out NCN’s e-book on the topic) as well as building up some additional savings rather than rushing into the housing market. What better gift can you give to your future bride than a clean financial slate with a sizable buffer?
Not only would buying the house wipe out his financial cushion but, by his own admission, it would force him to take on even more debt down the road. To me, this has penny wise and pound foolish written all over it. And what’s going to happen when the air conditioning breaks down or the roof needs to be replaced? Mr. Murphy has a habit of visiting at the most inopportune times.
As for the direction of interest rates, who knows? In fact, a similar (albeit opposite) argument could be made about the direction of the housing market. Who’s to say that prices won’t continue to slide over the next year? Here again, your guess is as good as mine.
Why not focus, at least initially, on things that you can control? Things like debt reduction, building up that emergency fund, and/or saving up for a down payment. The interest rate concerns really boil down to a fear of the unknown and, while such concerns are understandable, it seems that the decision to buy a house should be based on far more than this.
What do you guys think?