Q: I’m 43, single, have about $12,000 credit card debt which I’m seriously paying down as quickly as I can. (The interest rate on the card is only 4 percent.) I have excellent credit, I am enrolled in a 401(k), I am putting $50 per month in a Roth IRA, and I have about $6,000 in the bank.

I’m thinking of buying a home this fall when my lease is up. But here’s my dilemma: I’m only paying $650 per month rent. I doubt my rent will increase when my lease is up and I love where I live.

Since there’s no way I can get a mortgage for $650 per month should I bite the bullet and buy the home with so little down or wait another year, get more money saved and risk higher home loan interest rates?

I can afford up to $1,000 for everything associated with buying a house, including the mortgage, taxes and insurance, so maybe it’s time to be a grown up and buy. The downside is I don’t quite trust myself to seriously save for another year.

A: First, I don’t understand why you have $6,000 in the bank earning 1 percent (on which you pay taxes) and $12,000 in credit card interest at even the low rate of 4 percent. You’re losing almost 3.5 percent on your money, and while that doesn’t seem like a lot, it could get in the way when you go to buy a home.

I’d rather see you take at least $4,000 of that cash and pay down your credit card bill, so each month you’re paying that chunk off faster and faster.

As far as buying a property is concerned, sometimes it is better to rent. But if you’re right and the difference between owning and renting is $350 per month, you have to decide (1) if you can really save that amount each month, (2) what effect it would have on your taxes to be an owner instead of a renter because you might get that back and more, and (3) what would happen to your net worth if you factor in possible home appreciation.

Let’s look at that for a moment. If you purchase a property worth $100,000 and put down $5,000, or 5 percent, your mortgage is for $95,000. If the property goes up in value 3 percent per year, the next year, your property would be worth $103,000. The following year it would be worth $106,900, and so on. Because you’re actually paying some equity (even $20 per month) with every interest check on a conventional loan, you’ve got forced savings plus the building up of your equity.

On the one hand, you’ve got your super-low rental rate where you can save $350 per month or $4,200 per year. Or, you have the potential of earning $3,000-$4,000 per year in home equity plus the savings you’re accumulating and potential tax advantages.

Right now, those two options look fairly similar. However, I’m guessing that as time goes on, you’ll be a lot happier that you took the plunge and bought a home. If you wind up meeting someone and forming a committed relationship and your new home is too small or not located in the right place, you can always sell it or rent it down the line.

The bottom line is I think you are really ready to buy a home and just need a little push. So, go for it!

July 9, 2004