Published October 11, 2022
Down Payment or Debt Reduction?
Consumers
need to know how credit scores and interest rates influence their home down
payments.
Consumers
confront many financial questions in homeownership, and whether paying off debt
or building savings is most advantageous in reaching that goal is an important
consideration.
A recent blog
post at credit bureau Experian suggests you review these factors in growing savings
and paying down loans to help determine which is your best option:
When you decide
to pay down debt:
·
Your credit score gets a boost when you lessen
your use of available credit;
·
Your debt-to-income ratio may help you qualify
for a bigger loan with less debt;
·
You may qualify for a better interest rate with
a higher credit score;
·
Closing a credit account could lower your credit
score in the short term when you have no other debt;
·
Your capacity to save is less—and depending on
your loan type, you may need a certain amount to put down;
and
·
Mortgage insurance might be required for
conventional loans falling short of 20% down.
When you choose
to build your savings for a down payment:
·
You may avoid paying mortgage insurance with a
greater down payment;
·
You might own your home more quickly with larger
savings;
·
Lower interest rates are a possibility with larger
down payments;
·
Your debt-to-income ratio might be excessive for
you to qualify for a mortgage;
·
Interest will continue to accrue on existing
debt—and you’ll pay more for it; and
·
Your credit score will not improve with greater
savings.
Consumers should
think about their own circumstances and know how interest rates, credit score,
amount of debt, debt-to-income ratio, and the potential additional costs of
mortgage insurance will influence their choice of saving vs paying down debt--your
financial provider can help you with further information on your situation.
Post
authored by Lora Bray.
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