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An Army Family Leaves the Service

Their emergency fund will help pave the way.

Our Reader: Gary Bartels, 32Occupation: Army CaptainHis Question: How to get his finances ready to buy his first home.

Captain Gary Bartels leaves the Army in June to start a job as a production supervisor at Mitsubishi Caterpillar. He'll be moving his family from Sackets Harbor, N.Y., near Fort Drum, where he's stationed, to Houston, where he and his wife, Regina, intend to buy their first home. The couple have a son, Sammy, who is almost 2.

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When Gary first contacted Kiplinger's, he was earning extra money at Fort Bragg, in Fayetteville, N.C., by training National Guard troops for deployment in Iraq. Gary wondered whether he should use the additional income to pay down $18,000 in credit-card debt or save for a down payment on a house.

Answering his own question, Gary prequalified for a Veterans Administration mortgage loan, which doesn't require a down payment, and attacked that high-interest credit-card debt. He paid off $13,000 in three months by using his tax refund and savings from his paychecks. "We took everything frivolous out of our budget," says Gary.

He also called his credit-card issuers and asked for a low-interest balance transfer. Gary has stellar credit (he's never made a late payment), so Chase offered him 0% interest until November 2008. Now he wonders whether he should continue to pay off the credit card or save for a down payment.

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Neither, says Patrick Beagle, a certified financial planner in Fairfax Station, Va., who works with military families. Instead, Beagle recommends that Gary and Regina build up their emergency fund, in which they have only about $1,000, to pay for moving expenses and closing costs on the new house.

Beagle suggests that Gary and Regina consult a mortgage broker before deciding whether a VA loan is best. He also thinks military families should rent for a while after moving to a new area in order to amass a larger down payment.

That might be a tough choice for the Bartelses, who want to be settled before their second child is born in August. If they do go with a zero-down-payment loan, they risk ending up in the same bind that many homeowners find themselves in now. That is, should home prices fall, they may owe more on their home than they could get by selling it. To avoid that predicament, they should consider a no-down-payment loan only if they plan to live in the house for several years, says Annie McQuilken, a financial planner in Lexington, Mass.

A good start. The Bartelses chose Houston because of family ties and the low cost of living. Still, they're being conservative in their target price. "We could afford to pay $185,000, but we're looking at $145,000 because we want to sock away more in savings," says Gary.

After they move, McQuilken recommends, they should pay off their remaining credit-card debt and rebuild their emergency fund so that it holds three to six months' worth of living expenses. Then they can put extra money toward mortgage principal, retirement savings and college funds. "One thing I learned at West Point," says Gary, "is that when you accomplish small goals, it increases your confidence and momentum.

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