Final answer:
The most effective strategy to manage a higher mortgage payment is to pay off existing high-interest debt, such as credit card balances. This approach saves money on interest and can contribute to better financial standing when applying for a mortgage. Consolidating debts or delaying the home purchase are also potential strategies, but utilizing savings is less advisable.
Step-by-step explanation:
The client is currently paying $2,050 in rent and is considering strategies to manage a potentially higher mortgage payment. One effective financial strategy is to pay off existing debt to free up more money for the mortgage payment. Paying off high-interest debt, such as credit card balances, makes rational financial sense; for example, if one has a $1,000 savings account but also $1,000 in debt, the net worth is effectively zero. However, that person would still be better off if they paid the debt because they would save on the interest they would otherwise pay on their credit card debt.
Options such as withdrawing retirement account funds to pay down debt (A) can be costly due to possible taxes and penalties. Delaying the home purchase until the car loan is paid off (B) can be a sound strategy if the client can efficiently eliminate high-interest debts quickly, thus potentially qualifying for a better mortgage rate later. Consolidating debts (C) could lower the interest rates and monthly payments, making it a possible strategy to consider. Utilizing savings to pay the mortgage (D) is not advisable, as this could deplete an emergency fund that is necessary for financial security.
In conclusion, paying off debt such as credit card and car balances, could be the most effective strategy to manage a higher mortgage payment, as it often saves money on interest, which can add up significantly over time.