Saving for down payment vs. paying off SL & Car debt

[Irin997]

I'm with others - pay off the debt, especially the car first since you've already consolidated the student loans. Your DH is right in a way about "good" debt: you got an education that raised your earning potential over your lifetime so that was a good debt to take on. The interest on the student loans will be tax-deductible (above the line even) once you get a mortgage, so that is "good" too. If you're renting right now, you're probably just taking the standard deduction on your tax return. When you take on that $320-$370K mortgage, you'll benefit from taking itemized deductions since those mortgage interest & property tax amounts will surely exceed the standard deduction. And if paying $15K in interest for student loans makes you feel sick, you need to do the calculations for the mortgage amount you'd be looking at and see how much you'll pay in total interest over the life of the loan and see how your stomach feels about that. Bankrate dot com has the best mortgage amortization calculator.

Middle school is 3 years - do you like the high school that your desired neighborhood feeds into? If not, then trying to buy a home in that area may be short term thinking. You say to rent in that neighborhood it would cost the same as a mortgage payment -- are you including property tax and home insurance in your number, because just those two alone can easily add $300-$500 to a monthly payment depending on where you live.

Homeownership has its perks, but don't be a rush to join the thousands of families who are house rich (or maybe not if they are upside down on their mortgage) and cash poor and wondering how they will make their next house payment.

Oh I know the amortization of a house and how much interest we'll pay. Not that the house is guaranteed to appreciate at all but at least I'm paying toward something physical. We all need a place to live which makes it easier to pay that monthly amount. It's a heck of a lot better than paying rent for nothing. My student loans are so high (the $25k one) because I was a single mother putting myself through college without a dime from anyone else.

We love both the middle and HS in our desired neighborhood. We know the max PITI mortgage payment we would like to have which right now we can't get in that neighborhood because housing is so expensive. Even the fixer uppers sometimes are priced at $400k although they are crazy for asking that much money considering some of the comps in the neighborhood. That's another story though.

 

[timmac]

A house is an investment for sure

At risk of sounding a bit pedantic, I think this phrase is a bit dangerous. A house in which you reside is about as non-liquid an investment as you can get. You can't ever cash out your investment, without being left with the task of then finding a new place to live... which will have increased in cost by roughly the same amount as any gain in value of your current home. It's also worth noting that the average increase in real estate value (over the last 100 or so years) is on par with the average rate of inflation.

 

[Irin997]

At risk of sounding a bit pedantic, I think this phrase is a bit dangerous. A house in which you reside is about as non-liquid an investment as you can get. You can't ever cash out your investment, without being left with the task of then finding a new place to live... which will have increased in cost by roughly the same amount as any gain in value of your current home. It's also worth noting that the average increase in real estate value (over the last 100 or so years) is on par with the average rate of inflation.

I agree with you. One realtor we met at an open house told us that from an investment perspective a single family home is better than a townhouse. I told her right to her face that we are looking at a home to live in for more than 3-5 years. More like 20+ and that we don't consider a home an investment. It's a home plain and simple.

This is the problem we are facing with finding a home. Our #2 neighborhood, nice, a little farther, more home for the money, offers good sized and well priced (affordable now) townhomes but I would rather live in our #1 neighborhood.....which = a lot of money. There was a great house we saw a few times that needed some work but is a short sale and stuck at $350k for just about 2 years. I told DH that we should make a $200k offer and see what they say. He laughed at me.

 

[timmac]

I agree with you. One realtor we met at an open house told us that from an investment perspective a single family home is better than a townhouse. I told her right to her face that we are looking at a home to live in for more than 3-5 years. More like 20+ and that we don't consider a home an investment. It's a home plain and simple.

This is the problem we are facing with finding a home. Our #2 neighborhood, nice, a little farther, more home for the money, offers good sized and well priced (affordable now) townhomes but I would rather live in our #1 neighborhood.....which = a lot of money. There was a great house we saw a few times that needed some work but is a short sale and stuck at $350k for just about 2 years. I told DH that we should make a $200k offer and see what they say. He laughed at me.

Where I live, it's a similar situation... I'm not in a position to buy at the moment, but I'm not in hurry to do so either. House values are through the roof, and I just don't see the "value" at this time.

This isn't to say owning a home is not a good idea, of course... it's yours, you can fix it up as you like, etc, so there's definitely value in that. But I consider it an entry-level luxury purchase.

I wish you the best of luck in your search!

 

[Kitzka]

We bought our house 8 years ago. We went for our #2 neighborhood. Living here we have found that this was the better choice for us. Yes the MS and HS in #1 neighborhood are ranked higher and are a little better regarded but there were other things we did not take into account (#1 is in a predomintly caucasian town. Our one friend, whose DD is the same age as ours, is the only family in the neighborhood of color. Their daughter is the ONLY child of color in her grade of 150 students. #2 where we are is about 50% caucasian and 50% other ethnicities.)

Perhaps neighborhood #2 isn't too bad? And is it worth to start out in a town home and then in 2 or 3 years either rent it out or sell it and move to someplace bigger?

We bought out home before we paid down our debt. we did not make iprovements on the house and were not able to really decorate. It bummed me out but i used that extra money to pay off our debts. Now 8 years later with everything paid off, except for 12 payments on my student loans, i can redo my kitchen with everything i want. if i had done it right away then i would not have been able to get the recycled glass counter tops, top of the line fridge, all new cabinets, the exact flooring i want etc.

Just wanted to share my experience. it's differnt for everyone.

Lara

 

[AllesonWonderland]

One huge factor in our decision is that my daughter is going into middle school next year and while we currently live in an awesome neighborhood renting while she is in elementary, we're not so keen on the middle school. We would prefer her to go to the middle school in the neighborhood we want to move too but renting there is impossible. It's as much as a mortgage would be or pretty darn close to it leaving no room for saving.

I'm still torn on what to do mainly because I want my daughter to go to the best schools in the district.

Is the other school very far from where you are now? You may want to check to see if your school system allows in-district transfers. I know where I live they have that. You're not guaranteed to be approved if there's overcrowding, but it might be worth a shot. (It could at least buy you some time so you don't feel rushed into anything.) Good luck!

 

[thomas998]

Look very carefully at the student loans. I think the typical loan period when you signed up for it was probably 10 years, then after you get out they inundate you with all manner of options to include graduated payment plans.

The problem is some of those graduated payment plans will have you paying less than the interest in the first couple of years so that the amount you owe is growing.... and then for a time you will only be paying the interest only which means you aren't even making a dent in the amount you owe.

I would pay those student loans off as soon as possible because unlike consumer debt, if you fall on to dire times and have to file for bankruptcy the consumer loans would go away the student loans wouldn't they can only be discarded under very specific conditions that rarely apply.

 

[snarlingcoyote]

My advice is to pay off the debt first, and then buy a house with a 15 year loan. Trust me, a 30 year loan drags on forever! It's better to buy a smaller house that can be paid off quicker. That's what I would do if I could go back in time. Paying for both a mortgage and college isn't fun.

In today's market, sometimes it isn't worth it to get a 15 year mortgage. My advice is to get quotes on both a 15 year mortgage and a 30 year mortgage and then use an online calculator to figure out your monthly payments for both and what would happen if you doubled your required payments every month on the 30 year or figure out what would happen if you wanted to pay off a 30 year mortgage in 15 years. It's a weird market out there, and it sometimes happens that you come out better or even with the 30 year that you pay off in 15 years, even though it may look like the 15 year has a slightly better interest rate.

This also gives you a lot of flexibility if a family member is diagnosed with major illness or if a family member is out of work for an extended period of time or something else huge and unexpected happens. I am a huge fan of starting out with lower required payments on things over longer time that I can double or triple, as this means that if something big, horrible and untoward occurs I do not have to worry about stretching my budget to fit.

 

[StitchBuddy]

One word of advice, you do not want to be house poor. Sounds like having a large house payment and all of your other debt would really put you in a bind if one of you lost your job. Then, the school loans would be the least of your worries. I would use half of the money to pay off the car and then take all of your extra money each month and pay off school loans. I would not deplete all of your savings in this economy. Plus, there has been some speculation that the housing market is still declining. Also, there are a lot of hidden expenses in owning a house. Keeping that in mind, you need to spend a lot less than the amount you can qualify for.

 

[kimberlym322]

Just some thought on this from someone that is really not into buying a home at this time, but did have student loans.

You have 20,000.00 in savings, both of you work and have 401K's. To me I would sit down and look at your monthly income, some what "downsize". What I mean by that is use coupons, only buy things that is on sale and you have a coupon for. Because I am with everyone else to pay down/off the debt frist. I will give you a made up thing to think about and so you can see what I am talking about.

First because you do have that money in savings I would take 15,000.00 and pay down some of the debt...you could take 3,750.00 and put on each thing. With doing that you would take the car down to 7250.00, SL #1 would be paid off with an extra 850.00 to put to another SL or keep in savings, SL # 2 would be down to 9,250.00, SL #3 would be down to 21,750.00. Then each month you could do the following. After tax's and 401k each month between both pay checks you together bring home 4,000.00. Your monthly bills are 2,000.00, that gives you a savings of 2,000.00. Take 1,000.00 of that and put 500.00 into one savings account for emergancys, and put the other 500.00 into an account for the down payment. With the other extra 1,000.00 devide that by 4 (3 student loans and the car payment) that is 250.00 more in payments on each thing each month over what your monthly payment is now. So it would help pay off the things faster. When say the care payment is paid off take the care payment and that extra 250.00 a month and split that between the two accounts. When you think about it it will work like this...Your car loan is say 250.00, then you put the extra 250.00 to it each month then you would be paying 500.00 a month on it so it you did what I said about paying some on the car now out of your savings then the car would be paid off in 15 months...so next year this time your car would be paid off. For the student loans if say your payment is 50.00 a month and you did the above, then you would be paying 300.00 a month, that would mean that SL#1 would be paid off, SL#2 would be paid off in in about 30 months and SL#3 would be paid off in about 73 months. Or you could put more on SL#3 and pay like 3 payments a month on the other ones.

That is the basic idea...hopefully it made scents. But the idea is to save for the house, pay off what you have now and live each month. And if you come up with some creative ways to do things then by 2014 you should be getting into your new home.

I would check with AA county to see if you are willing to drive your DD to the school and pick her up if they will let her go to the better school. As long as they are not over full they should let her do it. I know down here in the easteren shore they let my nephews go a school that they were not slated to go to. We did that because Ocean City Elem was 100x better then Showell Elem. But because we drove them to and from they let them go there.

Good Luck hope all works out for you.

 

[vettechick99]

My DH is a loan officer - he does all sorts of loans (small and huge) including home loans. He said they don't care much about SL debt when looking at your report. It doesn't even figure into his decision.

He says continue paying on it, but put more money toward paying down other debts and saving for your home.

 

[Planogirl]

We had little debt when we bought our house so when things went haywire a few years later, we were able to keep up the house payments and survive a very bad financial situation. With debt, it could have been a different story. I would definitely pay down the debt.

 

[Kate and Pete]

Pay off the debt you have, then buy a house!

 

[ScottOKW2K]

Hey guys, I need some input and advice. My husband and I want to buy a house. We currently have around $20k spread out in various forms of savings. In the area we want to buy, the average home prices are $400,000-$450,000 so a hefty down payment is necessary.

However, we currently have student loans and one car loan between us. Here's the situation:

Car Loan: $11,000 @ 4.49%, 4 years left
SL#1: $2,900 @ 5%, graduated payment, not sure how long (DH's)
SL#2: $13,000 @ 1%, graduated payment, 14 years left
SL#3: $25,500 @ 4.275%, graduated payment, 18 years left

I hate having all this debt behind us and knowing that we can afford to have this paid off by March 2014. Plus with the graduated payments, the payment amount will continue to increase every two years.

With interest rates supposedly not going anywhere for the next 2 years, I'm really curious as to whether we should save for a down payment or pay off debt. We'd be paying a lot more in interest than we can ever dream of getting back.

You do not have anywhere near enough money to buy a home now. Given your numbers from above you would need at least $80,000 for a 20% down payment. Financing the balance even for 30 years will leave you with a mortgage payment of at least $1,600 for P&I alone - probably closer to $2K once escrow is added. Since housing costs should be no more that 25% of your monthly take home you would need to have around $8K per month coming home to make your normal monthly budget and still have some for savings. In addition with the present economy one should have a well funded emergency fund - most analysts recommend minimum 6 to 8 months of expenses.

Here's what I would estimate would be a good amount to have in cash before you purchase a home :

Down payment: ------- $80,000
New home expenses --- $10,000
emergency fund ------ $48,000 minumum

total savings needed --- $138,000

One other important fact to take into account - if you get into financial trouble the student loans CANNOT be discharged by bankruptcy. You have $41,400 of debt that can only be removed by paying it off or kicking the proverbial bucket.

Given your situation a good course of action is to increase your savings to make sure you have a good emergency fund based on your current expenses. Then pay off the car and the student loan with the highest interest rate (the $2,900 item). Then work on the $25.5K one since it has the next highest rate and see about getting it paid off. With these three done you debt load is down to about $13K and hopefully the rate on this is still low. At this point save for the down payment and "moving in" expenses and you should be set.

With any luck this will leave you in a home that you will not be upside-down on, and very little other debt that you would have to manage. I wish you luck !