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Should I Pay Off Debt or Save for a Downpayment?

Nov 29th, 2021 • Damian Dunn

I recently sold my house. Not to get out of debt but because the neighborhood is running down. The house sold so fast I didn’t have to advertise! I’ll be living in an apartment until I figure out if I want to build or buy my next place. 

I have 20,000.00 in credit card debt which I can have paid off in 12 months. My credit is good and I’m not concerned about it. Should I leave profit from the house in the bank or use $20,000.00 of it to pay off debt. Thank you for your advice.


Congratulations on the sale of your house! As you found out, houses are moving very quickly in your part of the country. We’ve heard many stories about people listing their homes and having multiple offers within the first few days. That’s a great thing. 

The downside to this scenario, however, is that you’re going to be facing a tough time buying your next house. Real estate inventory is low and prices are very high. The stars need to line up right for a person/family to identify a house that is the right size, in the right location, at the right price and get an offer submitted before it’s bought right now. As tempting as it may be for someone to sell their house at the peak of the market, they need to remember they’ll be buying at the peak, too. 

Unless…

As you said, you’ve made the decision to rent for a while, and I personally think it’s the best choice if it’s a reasonable option for someone. Renting allows you to sell your home to get the best price you can, but hits pause on the buy-side of the transaction. This should allow the markets to cool down a bit, bringing prices more in line with, well… reason. This will come into play in a few paragraphs. 

Your question, however, wasn’t about if you should sell your house, rather, should you use some of the proceeds to pay off some credit card debt? You also note that you think you’d be able to pay off the debt with cash flow over the next 12 months. This fact should bring you great amounts of comfort. Here’s how I would go through the decision making process. 

  • Do you have an emergency fund established? If not, carve out 3-6 months worth of expenses from the proceeds of the sale of the house. Do this regardless of the decision you make with the debt. 
  • If you’re committed to renting for a while (and it sounds like you might be), pay off the debt and replace the $20,000 over the next 12 months with cash flow. This option will free you of debt and give you some added flexibility as you start to plan for your next housing change. The key, however, will be keeping yourself accountable and paying yourself back over the next year. Don’t cheat yourself. Automate the transfer to happen each month if you need to. If you can be debt free, have cash on hand equal to the proceeds you received from the recent sale of your house, and let the real estate market come back to earth a bit you could be in an enviable position 12 months from now.  
  • If you think you may only rent for a short period of time, determine the amount of money you’ll need to provide a 20% down payment for the new mortgage. This will be key to keeping you from paying PMI (private mortgage insurance) on a conventional mortgage and increasing your monthly expenses even more. Once you have that amount established, subtract it from the proceeds you have on hand and use the rest to get a jumpstart on your debt elimination. Then, pay the remainder of the debt off as soon as possible. 

You’ve got a chance to make your financial life dramatically better in the next year. Take advantage of the situation you’re faced with and prioritize your stability by making sure your debt will be eliminated in the timeframe you’ve laid out. If you can do this, you won’t regret your decision. 

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