Use house sale settlement to erase CC debt or keep for new down payment

[Ashyukun]

After nearly 11 months on the market, my house is finally closed on and off my hands and the rather nice-sized settlement check from the sale deposited into my savings account.  That's the good news... the bad news? After maintaining two households for those 11 months (have been living with my soon-to-be-wife so the house was staged and could be shown any time and my cats weren't there) I've racked up a LOT on my main credit card (to be fair, a once-in-a-lifetime vacation with some friends to Europe and our coming honeymoon cruise are part of that too...).

For the time being, my expenses have been reduced considerably as we look for a new home- we're comfortable where we are, but we are going to be buying another house before entirely too long. The one we're renting is decent but too small for our combined households and has no garage for my automotive hobby. I max my Roth IRA contributions per month and exceed my employer's rather generous match on the 401k, and none of those will be impacted by any of this- likely I'll start putting away MORE as we integrate our finances and I start getting her retirement savings back up again (they were wiped out in a previous marriage).

So, I'm left with weighing what to do with the nice chunk of change from the house settlement and that CC debt, balancing the probable need for a down payment on a new house sometime in the near future (likely a few months down the line).

As I see it there are three options:

1. Erase the CC debt immediately and build back up to the down payment we'll likely need (could take 6 months or so)

2. Don't use any of the settlement on the CC debt until we're in a house and the associated expenses with it are taken care of and put the money I'm no longer spending on the old house toward paying down the CC faster

3. Set aside enough of the settlement to cover the higher end of the down payment we'd likely need and use the rest to knock as much off the CC balance as possible and put the money no longer needed to pay for the old house toward the CC balance each month

I'd honestly like to do #1- but it does severely handicap us in finding a new home for some time (if my budget estimation is remotely accurate, until at least the beginning of June- but likely later into the summer...), meaning if we come across the ideal house in the intervening time we stand to lose out on it. #3 is what I'm leaning most heavily toward- it would likely mean knocking half the balance off (and halving the evil finance charges on) the CC while retaining our ability to jump at the right house if a bargain presents itself.

Am I missing something, or does this make good sense (or is at least reasonably defensible...)?

[Dicey]

How much credit card debt and what is the interest rate?
Also, a potential lender is going to look long and hard at that cc debt, so your utilization rate is probably important to know too.

[seattlecyclone]

If your credit card interest is much more than 5% or so, I wouldn't hesitate to pick option 1. It sounds like you don't need to buy another house right away, and six months is not that long to save for a down payment.

[Joel]

I would pay off the credit card debt, getting a guaranteed return equal to the interest rate, and then save as much money as possible for the next down payment.

[madmax]

What is the interest rate like on the card? How much is a "LOT" and how long would it take you to pay it off with a mortgage? Also take into account that mortgage rates are likely to rise in the coming few months and weigh that against the interest you are saving by paying the card off.

[Truckman]

After having been in a nearly exact situation and doing it wrong (for us), my recommendation is to pay off the CC, stay renting until  you save up 20% for a down payment and enough to cover closing costs. And don't look at houses until you have the $$ saved.

[Cromacster]

If the CC debt is so considerable where it is comparable to a down payment on a house.........pay off the CC.

It's really a no brainer.

[tariskat]

If your CC is at 20% interest, but a smaller down payment would mean a 'higher' home loan of 6%, just for example, then you should probably pay off the higher interest debt.  If you've been living off the plastic for almost a year it's probably a 5 digit CC balance, yes?  The interest from the card(s) is probably going to cost more in the long run than the interest from a house loan, assuming you put extra on the mortgage as possible in the first few months.

On the other hand, if your CC is 0% interest for another year and having a bigger down payment would get you 3% or something, you could be saving more by keeping for the house.

Since you say "evil" charges I'm guessing your situation is the first one.  I would kill the plastic.

[Weedy Acres]

I agree with the throngs saying pay off the CCs.  Buying a larger house isn't an emergency.  Credit card debt is. 

But I'm also going to offer an unsolicited face punch.  You say that you ran up the CCs because you were "maintaining two households" which usually implies that you bought another house before you sold the first one.  But your 2nd household was your fiancee's, which presumably she was maintaining before you came into the picture.  How did your expenses skyrocket to the point of so much CC debt?

I worry that you might have some spending habits you need to make sure you overcome before you dive into a bunch more debt buying a house. 

[plainjane]

I like the language you used at the very end of your post.  "Defensible".

No, actually, holding onto cc debt because you decided a trip to Europe is "once in a lifetime", _and_ you "needed" to do your honeymoon cruise immediately, _and_ you "need" to get a more comfortable house with space for your automotive hobby is not actually defensible.

Which you know. Which is why you're feeling defensive about it. 

Personally I'm wondering if you were doing one of those "since we're already in cc debt because I'm trying to sell the second house, I might as well..."  similar to a dieter who decides to have a second slice of cake because they've already had a cookie and the day is "blown" instead of actually trying to keep this number as low as possible.

[Ashyukun]

I had typed up a relatively short novel on what had happened with selling the house and my finances over the last year or so- but frankly in the end most of it isn't really that crucial for everyone to know. Being reasonably conservative in my numbers, were I to pay off the CC entirely right away and then save up until I had enough for 20% down on a house it would be around a year before we'd be able to save that much. Right now my household and tools/auto stuff is split between 2 storage units- which alone would cost nearly $4000 to keep renting for another year. That's more than the finance charge on my CC and the PMI on a mortgage over the same period of time combined.  Using the same basic numbers if I keep enough for a 5% down payment for the max amount we're looking at house-wise plus closing costs I can still knock nearly 2/3 (a bit under $10k) off of the CC I'm paying interest on. Putting all of what I was paying on the old house's mortgage & utilities toward paying the CC down, the balance will be erased by mid-summer- sooner if we do buy a place but get one less than that maximum (which is quite possible) and I'm no longer paying for the storage units. From a financial standpoint the advantages of being able to buy the house sooner make it worthwhile to not knock the balance out completely- and that's not taking into account the non-financial aspects.

[Prairie Stash]

Pay off CC. If you really have made up your mind to buy another house then get a cash advance on the CC. Or do a balance transfer to another 0% card. Either way, get out of the interest payments.
I'm not a fan of cash advance, but it's your life and i don't have all the details.

[Ashyukun]

Pay off CC. If you really have made up your mind to buy another house then get a cash advance on the CC. Or do a balance transfer to another 0% card. Either way, get out of the interest payments.
I'm not a fan of cash advance, but it's your life and i don't have all the details.

Unfortunately I'm pretty certain that the Cash Advances on the cards are charged at least the interest rate of actual purchases (if not worse...) so that wouldn't be of any help. I do have a backup card that when I've let sit for a little while without any balance will send me 0%convenience checks- the existing balance on that from the last transfer will be paid off next month, so if I still have anything on the card I'm getting finance charges on I will hopefully get the chance to transfer it to the other one at 0% so I can pay it off without the few extra hundred dollars of interest charges.

[Joel]

It sounds like you are pretty set on not paying off the credit cards. Why ask for anyone else's opinion? Especially when you know the recommendation will be to pay off the credit cards first and then save for a house?

[gobius]

It sounds like you are pretty set on not paying off the credit cards. Why ask for anyone else's opinion? Especially when you know the recommendation will be to pay off the credit cards first and then save for a house?

+1

[gobius]

Why don't you postpone your Roth contributions?  That could go toward the CC debt.  To me it doesn't make sense to put retirement money away if you're paying 20% interest on something.  If you have $14-15K of CC debt then that could start going toward it.

I guess if it were me, I would pay off the CC debt ASAP with the money from the sale, then defer Roth and possibly other retirement contributions until I saved enough for a house (assuming you can't get a 0% balance transfer on the CC).  However, you and I obviously have different views on finances, as the things that got you in this situation are probably not things I would have done, so my advice will likely fall on deaf ears.

[Ashyukun]

It sounds like you are pretty set on not paying off the credit cards. Why ask for anyone else's opinion? Especially when you know the recommendation will be to pay off the credit cards first and then save for a house?

Because I've always been of the mind that more eyes and views on a problem are better because I know there will almost always be something that I'll overlook. I fully expected the overwhelming response to be, "Pay off the CCs NOW!" with a healthy side of criticism for ending up in the situation in the first place but had hoped that I'd get some ideas on how to handle it better within what we want to do. I'd also somewhat contest that I'm 'set on not paying off the credit cards'- I'm just not willing to do so at the expense of being able to move on buying a new (relatively speaking- it won't be a newly constructed one for certain) house. I do want to erase the CC debt ASAP- but want to make sure the down payment stays available.

And it certainly hasn't been completely without possibilities I'd not considered...

Why don't you postpone your Roth contributions?  That could go toward the CC debt.  To me it doesn't make sense to put retirement money away if you're paying 20% interest on something.  If you have $14-15K of CC debt then that could start going toward it.

This is something I'd not really thought about in depth, but has a lot of merit to it now that I consider it more thoroughly. I put in a set amount each month at the moment that is automatically transferred, but it doesn't really HAVE to be that way- I could drop the monthy contributions and use that money to go toward the CC debt until it is paid off- and would then likely have more than enough to be able to make up for the lost contributions for those months later in the year so that I could still put in the max for the year and only really lose out on any appreciation/interest for those few months.  Thanks for the idea!

[Dicey]

Unfortunately I'm pretty certain that the Cash Advances on the cards are charged at least the interest rate of actual purchases (if not worse...) so that wouldn't be of any help. I do have a backup card that when I've let sit for a little while without any balance will send me 0%convenience checks- the existing balance on that from the last transfer will be paid off next month, so if I still have anything on the card I'm getting finance charges on I will hopefully get the chance to transfer it to the other one at 0% so I can pay it off without the few extra hundred dollars of interest charges.

Virtually all cash advance/convenience checks carry an up-front fee for use, generally 2-3%. I recommend reading the fine print thoroughly before going that route.

Regarding postponing your Roth contributions, I notice that you contribute more than your company matches into your 401k. Since you can't "make up" missed Roth contributions once the tax year is over, could you reduce your 401k to the amount that gets the full match and leave the Roth as is?

[TomTX]

So, how much were these vacation costs, total? Europe + cruise, including all the "extras" like eating out, hotels, excursions, et cetera.

Using credit cards to go on vacation is a facepunch.

[gobius]

Unfortunately I'm pretty certain that the Cash Advances on the cards are charged at least the interest rate of actual purchases (if not worse...) so that wouldn't be of any help. I do have a backup card that when I've let sit for a little while without any balance will send me 0%convenience checks- the existing balance on that from the last transfer will be paid off next month, so if I still have anything on the card I'm getting finance charges on I will hopefully get the chance to transfer it to the other one at 0% so I can pay it off without the few extra hundred dollars of interest charges.

Virtually all cash advance/convenience checks carry an up-front fee for use, generally 2-3%. I recommend reading the fine print thoroughly before going that route.

Regarding postponing your Roth contributions, I notice that you contribute more than your company matches into your 401k. Since you can't "make up" missed Roth contributions once the tax year is over, could you reduce your 401k to the amount that gets the full match and leave the Roth as is?

You can contribute to a Roth the next year (he could contribute to his 2014 Roth until April 2015; I recently put money toward my 2013 Roth limit).  As far as I know, you can't do that with a 401k.

[fixer-upper]

The high CC balance will lower your credit score, which will mean higher interest on the house.  Pay it off.

[Cpa Cat]

The high CC balance will lower your credit score, which will mean higher interest on the house.  Pay it off.

I want to second this.

The smart money is on paying off the credit cards now - it takes a little bit of time for your credit score to improve. Postpone all retirement contributions (except for 401k up to the match) and roll that, plus the money that was previously going toward the CC monthly payment into your savings for your new downpayment.

If you want to speed things up, maybe look around and see what expenses you can cut short-term and do some "spring cleaning." Do an inventory of the stuff you have in storage and really put your own feet to the fire on a hobby that takes up TWO storage units. Also see if there's anything in your current place that you can be rid of in order to make more storage space there. At least try to get that down to one storage unit.

Also - in regards to storage - think about what kind of house you're even going to buy. Something with a two-car garage? Are you really going to start your marriage off by filling your garage with so much stuff that there's no room for your wife's car in there? Or were you planning on having you both commute so you could live rural with an outbuilding, because your automotive hobby takes up so much space?

[Thegoblinchief]

Hard to offer advice without amounts and rates, so I'll hit this: two storage units?

I'm not a hardcore minimalist but damn, get rid of that stuff, except any tools you will use on a weekly basis and/or to generate actual income. Use Craigslist to store your stuff.

http://www.mrmoneymustache.com/2011/08/11/get-rich-with-craigslist/

[Ashyukun]

So, since I'm still getting responses to this, I figured an update was in order.

There was a house that I'd seen a few months back when they had an open house that I'd really liked but had not been able to do anything about since mine hadn't sold. With mine sold, my fiancee, our realtor, and I finally went over and looked at it. And then went back again to check a few things and confirm that we both thought it was as close to perfect as we were going to find before putting an offer in- which after some back and forth was accepted with a closing date of April 30. Am getting a 15 year mortgage on it at 3.375%- my realtor did some good shopping around and then my bank agreed to match the best rate we found- the monthly payment will be within $100 or so of what I was putting into my old house (which included several hundred extra toward the principal) on a 30-year loan. Only putting 5% down, but as I said earlier- the cost of the storage units would be more than the PMI over the time to save up the 20%, and once the remainder of the CCs are paid off we'll be switching over to putting the extra money into hitting 20% equity to lose the PMI ASAP.

Knowing what the amount due at closing will be and keeping a decent amount aside for an emergency fund plus the previously unaccounted for balance of the escrow account that arrived over the weekend I knocked off 2/3 of the balance on the card I'm getting charged interest on. Since I won't have a mortgage to pay next month (and the following if I remember how it works, the new house's won't start up until June) that puts the balance at a level that it can be eliminated in 2 months- and the ones that are at 0% interest will be paid off almost simultaneously alongside it.

We have been paring things down via Craigslist for a while now, but will be doing so on a much larger scale when we make the moves from our current place to the new house and move everything out of storage. Now that we know exactly what we'll be needing and have space for it will be much easier to make decisions on what to get rid of. Unfortunately (in terms of being able to pull things to sell- fortunately in terms of getting my money's worth for the unit...) the main one is packed so full it's just not possible to get to the things that we would want to sell- but we'll be moving it in not much more than a month anyway.

Not the most mustachian approach, I know- but it's one that strikes a good balance and still will have me back to no carried CC balances and dumping as much as possible into my retirement accounts within just a few months.

[SunshineGirl]

Glad it's working out, and good on ya for going with a 15-year mortgage.

[Ashyukun]

Glad it's working out, and good on ya for going with a 15-year mortgage.

Thanks! My fiancee was a bit surprised when I ran the numbers down for her and the fact that at worst (making only the payments as the bank says you have to and not the additional money toward principal I'll be doing shortly) we would have the house paid off before any children we have would even be in High School- and likely even sooner.