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Dear Scott,
A few months ago, I purchased your books and
started reading your newsletter. It has really helped me to get a grip on paying
off my debt. Thank you!
Now, I have a big question for you. Through the
sale of my previous house, I will soon have just enough money left over
($100,000) to pay off ALL of my loans and credit card debt. I have a good
income and look forward to getting into another home as soon as I can. I don't
have much other savings to tap for a down payment, but don't mind doing 100
percent financing.
Question: Is it a good idea to pay off ALL of
my debt? Or should I, perhaps, keep some on the accounts? Or what? This is my big
chance to get financially secure, and I don't want to blow it. Your advice has
always helped me in the past, so I really wanted to ask you what you think.
Thank you,
Rodney
Rodney,
Glad to hear that my books and newsletter have
helped! Thanks for letting me know!
It's great that you are in a solid financial
position at this time. With $100,000 in cash, you do have wonderful financial
options. The key here is to determine what is best. By best, as you know, I
mean what is going to capture the most money.
No matter what you decide to do, you should first
get that cash in a safe place! Safe, and earning you a good interest rate. I
recommend stashing the cash in an
INGDirect.com Savings Account! The rate is 4.50 percent APY (Annual
Percentage Yield). Nice! Keep it in there earning you money while you figure out
what's best.
Since you will be buying another home, you will
need money for closing fees and a down payment. By putting down at least 20
percent, you will avoid paying PMI
(Private Mortgage Insurance). This will enable you to keep more of your money--money that can go toward paying off
debt or paying down the mortgage more quickly.
What about paying off credit cards?
Well, you do need money for the house, so you will
have to keep some. As far as the cards go, you must look at the interest rates
you're being charged. You're going to be getting 4.50 percent APY from ING and
paying a mortgage at somewhere near that same rate (after taking in tax
considerations). So then, if your credit card rates are very high comparatively,
you should allocate money to pay off, at a minimum, the highest rate credit
cards.
Of course, you should transfer as much money as
possible from your high interest rates cards to another with a lower rate. This is not a good time to
open
new lines of credit, however, because you're going to be applying for a mortgage.
Now, if you do hang on to the credit card debt,
you can look at getting new, lower rate cards (http://www.debtsmart.com/cards/)
after you get the new home.
The bottom line: Do the math for all your
options. Look at the rates, look at your tax bracket and calculate your total
payments (credit cards and mortgage) for all scenarios. There is a lot to think
about, so the first move is to put that money in the ING Savings Account and
start earning money while you're working on the plan!
Best,
Scott
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