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

[Irin997]

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.

 

[superme80]

Honestly I would pay off all your debt then save for a down payment. Since your payments will go up in 2 years it is better to have the debt gone and then be ready to start buying a house. Good luck with your decision.

 

[AmandaRG]

I agree with PP. If I had had a clue when we bought our house, we would have done things very differently. We have paid off a good bit of debt since we bought our home, but had we not had all that we did, we would have very comfortably bought a home that we would want to still be in, versus having one that I cannot wait to get out of (but cannot because we are STILL underwater even though we had a down payment, and over a year made large extra principal payments).

Purchasing a home with no other debt frees up money to furnish it and decorate it the way you want to and make improvements/repairs without stressing over it.

 

[libraryfreak]

My vote is for paying off the debt first too.

 

[scrapquitler]

Depending on the ratios of your debt/earnings/potential mortgage, the bank may make the decision for you and make a mortgage approval contingent on you paying down your debts before they give you the mortgage.

I know that my brother had to pay off his credit card debt before his mortgage was approved. I don't know if that is always the case or not, but I think for the type of loan program he was using it was a requirement.

 

[QuickRewardsBecky]

Those student loans with the graduated payments really concern me, too. If you get into a mortgage and then the student loans start increasing, you may find the budget way too tight. I remember reading up on those student loans and I think you end up paying significantly more in interest over time with the graduated payment option. I would ditch those before getting into more debt. The happiest day of my life was when I paid off Sallie Mae! It freed up a nice chunk of change that we added to our house down payment fund every month.

Regarding the car note, I'd factor into any monthly budget the $400 or so a month that a car note would cost. When you pay off your car, and you don't have a car note, sock away that $400 a month into savings so that when your current car needs replacing, you can make a larger down payment or even pay cash for it!

 

[tweedlemom]

Pay off the debt!

 

[Sagginit]

hi OP im in a similar position. in the past 6 months i have weighed saving for a down payment, putting more into my 401K, or continue to pay off extra on the loans in place of more savings. i came to the conclusion that the only thing certain in the three scenarios is that i will eventually have to pay the loans. my brother and his fiance paid off all loans before buying thier place and it was a good decision. their condo was about 500,000 but at the last minute they found out that the building did not have the money required and they had to put additional money down. they had to dip into ER savings and save the money back up over a few months. they also have been slowly decorating b/c the cost of things is more than they thought. ex. need blinds but they have to be custom b/c of the sizes of windows. if you are on a tight budget then you might get stuck.

i would do this. calculate what your mortgage would be and how much the loans would be when they go up. then take the extra money you would need to live on that budget vs what you need now and stash in savings for a few months without touching it. that will give you a good feel of what it will be like if you should decided to buy. i just did that for a few months b/c i was weighing increasing my 401K contributions. i discovered i could easily live w/o the extra money but realized i will pay more in interest on the loans than i will make in the next year or so with the money invested. so i will continue to hack away at those good old student loans.

 

[bettymae1121]

I'd pay off the debt first. A $400k house needs an $80K down payment if you're going for 20% down, that will be easier to get to with the monthly debt payments off your back. Leave your $20K in savings as an emergency fund and concentrate on paying off those debts by 2014 (which is less than 2.5 years away, not that long in the scheme of things). Once you're debt free you'll be able to save the down payment much quicker, plus without any debt you may qualify for loans that don't require the full 20% down.

Plus remember, home ownership is more than the mortgage and taxes. It's repairs, maintenance, new/more furniture, and decorating too. That will all be easier to handle with no other debt.

 

[DawnM]

Pay off debt!

 

[windycitymom]

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.

 

[Evi]

I'd try to pay off at least 30k first. I'd also look at refinancing your loans for non graduating payments.

Once your debt is under 10k then you can start to save for house. You could always wrap that remaining debt into your mortgage payment. I'd also consider buying at least a 2 family so that the rental income will be in addition to your income to help pay off remainder of debt and mortgage. You can then rebuild a nest egg and when you find yourself in a better financial situation you can either sell and then buy a single or rent the two family out and buy a single family home.

We purchased a single family in the city as a first home and though I love it I think that purchasing a two or three family in the city would have been a better financial investment and by now we would have been able to afford a single anyways.

 

[Irin997]

Thanks for all the replies! My husband is under the impression that our student loan debt is "good" debt and I don't agree. Our current debt payments are only 6% of our gross income so we easily qualify for a mortgage now and can actually qualify for what we want to buy, but not for the payment we want. It's just way too high.

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. My husband and I plan on having more children in the future and would like me to stay home with them but with all of the debt over our heads, I'm skeptical that we'll be able to afford it.

Also, we've both consolidated our student loans so I don't think we can do anything else right now. We're able to change the payment structure back to a fixed amount but the length of time will stay the same. At max, my student loan by the end of the term will be $260 per month and we'll have paid somewhere around $15,000 in interest, which is killing me!!

Ugh, I just don't know what to do!

ETA my car payment is relatively cheap, only $260 per month. The graduated loan payments will go up about $15-$25 every 2 years, depending on how far along the loan is.

ETA again - both my husband and I are contributing significantly to our 401k plans. I'm at 8% with an 8% match and my husband is at 10% with I think a 3% match. I'm 30 and he is almost 29.

 

[bettymae1121]

Thanks for all the replies! My husband is under the impression that our student loan debt is "good" debt and I don't agree. Our current debt payments are only 6% of our gross income so we easily qualify for a mortgage now and can actually qualify for what we want to buy, but not for the payment we want. It's just way too high.

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. My husband and I plan on having more children in the future and would like me to stay home with them but with all of the debt over our heads, I'm skeptical that we'll be able to afford it.

Also, we've both consolidated our student loans so I don't think we can do anything else right now. We're able to change the payment structure back to a fixed amount but the length of time will stay the same. At max, my student loan by the end of the term will be $260 per month and we'll have paid somewhere around $15,000 in interest, which is killing me!!

Ugh, I just don't know what to do!

ETA my car payment is relatively cheap, only $260 per month. The graduated loan payments will go up about $15-$25 every 2 years, depending on how far along the loan is.

ETA again - both my husband and I are contributing significantly to our 401k plans. I'm at 8% with an 8% match and my husband is at 10% with I think a 3% match. I'm 30 and he is almost 29.

Can you rent a place in the better school district? With the housing market the way it is, you may even be able to rent a single family home rather than an apartment. You'd get the best of both worlds, a house in a good area and enough money in your budget to pay down your debt.

 

[disneyfav4ever]

I would completely pay off the car, and the smaller student loan, and then work on paying off the other two loans before even thinking about saving for a house. I just would not want to add to debt.

 

[Irin997]

Can you rent a place in the better school district? With the housing market the way it is, you may even be able to rent a single family home rather than an apartment. You'd get the best of both worlds, a house in a good area and enough money in your budget to pay down your debt.

Unfortunately I don't think that's an option as we'd be paying close to a mortgage in our desired neighborhood/town. Occasionally there are less expensive apartments available from private owners but nothing compared to what we pay now in rent.

 

[timmac]

I'm going to go against what seems to be the consensus here just a bit. For the graduated loan where your payments are likely to go up, I can see why it's appealing to be a bit aggressive about attacking it, but at most I'd only split the difference between savings and paying it down. Several reasons:
1) If stuff hits the fan, cash in the bank can help you for a long period of time, while a paid-off loan can't. (And if you're out of work, for instance, it's not as though you have the ability to take out new credit to help you)
2) With even a moderate investing scheme, you can earn a rate of return better than the rates you're paying on the loans. Of course this isn't guaranteed, and not everyone is comfortable doing so, but keeping the loans as long as possible allows you to essentially build your own wealth with OPM.
3) Student loans especially are about the most forgiving loans there are, and if hard times hit, there are typically a lot of options at your disposal for deferral and the like.

In a similar line of thinking, I'm not a huge fan of "buy a house with a shorter loan" or "pay off the mortgage asap". Emotionally it's a good decision, but mathematically, on average, it's a sub-optimal course of action.

Ultimately, you need to do whatever makes you feel the most comfortable, of course. But for the sake of the discussion, I wanted to at least provide a different perspective. I know the thought process behind the decision may not be the same for everyone.

 

[timmac]

At max, my student loan by the end of the term will be $260 per month and we'll have paid somewhere around $15,000 in interest, which is killing me!!

To quantify my alternative viewpoint just a bit, if you keep your $20k you currently have in savings, in a moderate-return investment over the next 14 years, and get an average rate of return of only 6% (which is quite moderate and conservative), it will grow to about $45k... a gain of $25k.

 

[platamama]

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.

 

[Sheaboys]

I would say pay your debt off first, especially your car payment, just get that done with.

I will say, I do not have nor have had any student loans so I have no clue how they work.

But I am a stay at home mom. When we bought our house (1996), we were both working and no car payments or cc debt of any kind. When we began having children (1998) I still worked, I worked full time, then decreased to part-time once we had 2 kids (2000), when I was ready to deliver our 3rd (2002), I quit to stay home.
When we had our first, we thought we would never be able to do it on 1 income. Well, almost 15rs later and a total of 5 boys, we do it on one income. You become accustomed to a certain income, the more you make the more you spend. While Dh's income has increased it is still not more than we made together. Yet, we have a mortgage and a van payment and little cc debt (under $1,000).

A house is an investment for sure, just make sure you have a mortgage you can afford, something that will give you wiggle room for emergency expenses, you want to live in your house not for your house. Check out first time home buyers information, we took a class and we were able to get a loan with no money down. But again, we bought a house that we knew was going to be a "fixer upper", we did renovations only when we could pay cash, so yes it took time. It was worth more than we paid and now worth over double then what we owe. So do your research too.

Good luck!