Reducing Debt Saving Money

by Home Buyer

Ask Kate: Reducing Debt versus Saving Money - Is it better to pay off my debt or maintain the current balance in my savings account? Kate, Right now, I have about $13,000 in credit card debt and $16,000 in school loans. I want to buy a home next year around March or April when I move.



When shopping for mortgage lending, is it better to pay off my debts, thus having less money in my checking and savings? Or is it better to have more in my checking and savings but have higher debt?

For example, I have $13,000 in debt with $10,000 in savings. Would it be better to have $6,000 in debt and $3,000 in savings?

Kate Answers: Reducing Debt versus Saving Money - Is it better to pay off my debt or maintain the current balance in my savings account?

Reducing Debt versus Saving Money - Is it better to pay off my debt or maintain the current balance in my savings account?
Dear Home Buyer,

Opinions, opinions, opinions! Pros and cons of paying off debt vs keeping your savings as a reserve always leads to a healthy debate.

Debt reduction not only increases cash flow, it has a positive affect on credit scores. But on the other hand, cash in the bank rates high and mighty when it comes to getting a mortgage. How do you choose between reducing debt or saving money?

Let's take a look at both, starting with debt reduction. Say you have a $5000 limit on your credit card but maintain a balance no greater than $1000. This improves your available credit to debt ratio and generally increases credit scores. There is also another ratio to consider, your debt to income ratio. It is easier to get approved for a mortgage if you aren't spending a large chunk of your income on credit cards or student loans.

In summary, reducing debt can increase credit scores and lower your debt ratios, both of which lead to stronger mortgage approvals.

But take a look at this! Cash is king when it comes to buying a house. However, once you pay down your credit cards to get out of debt, you've depleted your bank account. What if you locate the house of your dreams, apply for a mortgage only to find out you're required to increase your down payment? What if you're told you need a certain amount of savings in the bank?

If you already paid off the credit cards, you will need to postpone your dream of homeownership until you save more money.

Ask for Mortgage Pre Approval

There are so many factors going into a mortgage approval to answer yes or no to your question. Just one detail to your situation can make a difference.

That's why I strongly recommend getting preapproved before shopping for a home. Since you won't be buying a house until next spring, today is the perfect opportunity.

What's mortgage pre approval, you ask? I explain the ABC's of mortgage pre approval here. Discover why I say getting preapproved takes the fear out of buying a house.

Now let's dive even deeper into the process. Follow the links down below leading to amazing ideas regarding home buying.

You're also going to like Answers by Kate - How To Buy A House where insider secrets are revealed.

Take a moment to save Tips for Reducing Debt and Saving Money in your favorites so you can easily return in the future. I hope you'll come back and visit often.

Best wishes,

Ask Kate how to get the best mortgage rates
Ask Kate

Unique Home Buying Help

Make your home buying a snap with the Home Buying Scorecard.

When traditional mortgage lending fails, look at Seller Financed vs Stated Income Mortgages.

Do you know this about Fixer Upper Houses? Toilets determine the age of a house and other tips.

Private Money Lenders because rural properties need special consideration.

USDA Rural Home Loans with zero down payment required.

Low Down Payment Mortgage - The dilemma of a low down payment.

Start your wealth building by buying a foreclosed home.

First Time Home Buyer Credit could be yours even if you have previously owned a home.

Learn the differences between Residential Construction Loans - Mortgages designed for building homes.

When private mortgage financing originates between family members, these questions arise.

Ask Kate About Home Buying - Go here to ask me a question.

How to Buy a House Questions and Answers II.

How to Buy a House Questions and Answers I.

Tell a Friend

My website depends on word of mouth. So please remember to share Reducing Debt vs Saving Money with your friends on Facebook and Twitter.

Click here to add a comment.

You can also ask Kate about your mortgage at Ask Kate About Buying a House.

Recent Articles

  1. Kate's Mortgage Rate Report August 11: Rates Bouncing Like a Ping Pong Ball

    Aug 11, 16 10:49 AM

    Kate's mortgage rate report for the week ending August 11, 2016: Rates Bouncing Like a Ping Pong Ball
    Mortgage interest rates have been bouncing like a ping pong ball: After last Friday's strong job report began pushing up mortgage rates, the market is now hinting at a reversal, with the 30-year hover…

    Read more

  2. Ask Kate how to avoid unauthorized mortgage rate extension fees

    Aug 11, 16 10:18 AM

    Ask Kate how to avoid unauthorized mortgage rate extension fees
    Ask Kate how to avoid unauthorized mortgage rate extension fees:

    After locking in her rate, the bank sent a Texan homeowner, Laura, notification of several thousand in fees that she must pay in order…

    Read more