Student loans vs. Home down payment

[xCourxCorex]

Thoughts?

I have 4 separate sallie mae loans totalling ~18.5k for my 4 year degree (graduated last May). Broken down as: 3,423 @ 5.75%; 4,398 @ 5.35%; 5,352 @ 4.25% and 5,364 @ 3.15%.

Currently have 3k in a house down payment account.. right now I'm working on getting my emergency fund to 10k then will be loading up this one.. then I wondered.. would it be better to pay down the loans first?

I currently pay $250/month for the student loans. Estimated to be paid off July 2020, around 7.5 years in repayment total. I also have around $3k in fully matured savings bonds I was planning to use for the house down payment.

 

[sweetdana]

you will get a bunch of great ideas, but here is my opinion.

If you can put 20% down on a home, you will not pay PMI and that will save possibly 5-20% on your monthly payment ( depending on loan size). also you may be able to do conventional instead of FHA ( unless a vet then you get the worlds best loan.. zero down and no PMI VA LOANS).


If the difference of not paying off the student loans, could make you hit 20% down, that is the best option.
If you do not think you will make 20% down, but have at least 5%, I would pay off the student loans. and get that debt free (Assuming you have no credit cards or car payments. )

GOOD LUCK!!!!!!!!!

 

[xCourxCorex]

sweetdana, thanks for your reply!

I guess to add to that.. If I can continue my savings the way I'm planning to (and not paying anything extra towards the loans) I would have $16k by the end of 2013 including the 3k I already have saved, and 3k in savings bonds that have matured. I could take all of that and pay off almost all of the school loans, but then would be starting over at square one with the down payment, obviously setting back when I'd be able to buy. Doing that, no, there's no way I could realistically get 20% for d.p. in a reasonable amount of time. (Looking south of Boston.. a nice home or condo would be around 250-300 easily) so in order to get 20% thats 50-60k starting from 0...

I do have a car loan as well.. $333.15 each month but I round up to $350.. at that rate the car would be paid off a few months early approx August 2017. So even if I did pay off the school loans yes I still have 17k in a car loan too.

...Now I've just confused myself even more!

 

[wannagoback]

I remember reading once to not use a lump sum to pay down student loans because if you have a financial crisis, you have more flexibility requesting alternate payment arrangements for a student loan should you need it. Plus, you get to claim the interest as a deduction on your taxes.

 

[ArmyVet80]

This all comes down to your current bills situation. Rent, utilities, tv/cable, internet, etc and what you are looking to pay for the condo/house monthly. If you are looking for something similar to what you are paying now then I would pay off the student loans first. The reason is because even with the PMI you will be able to put that $250 per month extra towards the payment of the condo/house. Depending on your monthly payments that could be an extra payment or two per year which will reduce the time you would have the PMI. The extra payment or two per year would also reduce the time on the loan. On average if you make 2 extra payments per year on a 30 year loan you will be able to pay that loan off in 18-20 year instead of the 30 years. Make sure that there is no penalty for paying the house off too soon though. Once you hit the 20% towards the purchase price of the home the PMI would drop off and free up the 5-20% which would also give you more money in your pocket.

I would recommend using a mortgage calculator and getting a rough guesstimate of what you could afford though. To me getting rid of extra debt before buying was the key.

 

[bigmamimia]

Have you heard about rural development? It is a federal program that helps first time home buyers. You may have to pay down some of your debt in order to qualify but it sounds as if it might work for you. It does not require a down payment and you won't have to pay PMI. How it helps is essentially subsidizing your interest rate so you can afford a monthly payment. I bought a $207,000 home and my interest rate is 1.5%. If the house is sold or I die the interest that was subsidized will have to be paid back. However, from what I understand it will most likely be a discounted amount. Qualification for the program is based mainly on your income and has some strict guidelines regarding debt to income ratio. I had to pay off my car first even though my credit score was over 750. There is so much more to this program but you should research it yourself. Call your local rural development office and see if you can get prequalified. Be patient because it does take a lot longer than going through a bank but for me as a single mom, single income it was the only way I was ever going to achieve my goal of home ownership.

 

[runwad]

How old are you? I'm thinking early to mid 20's since you said you graduated in May. That may or may not be a right assumption on my part? Now if it were me and not everyone will agree with this but I'd knock those student loans out before I even thought about a house. Sounds like you could have them paid off in a year (if you can have 16k saved in a house fund by end of 2013). Thing is life just keeps getting more expensive as you get older, buy a house, get married, have kids. The less debt you go into all that with, the better for you. But that's me and I'm kinda old school. Good luck!

 

[ariel71]

Age? Monthly expenses? Health insurance or health issues? Job status and stability? Expect to be in the area for 10 years? Do you have kids? Do you expect to get married in the few years? Will you eventually need a graduate degree to further your career? All of this comes into play with decisions like this.

If you are the "typical" 22-ish new grad (which I'm assuming you are), I wouldn't even begin to think of saving for a house as your first priority. Far more important to build up your emergency fund (sorry, but $10k doesn't come close) and start saving for retirement so the compounding effect starts early. Then work on paying down the two loans above 5% (or if any are variable).

For most people, a mortgage is the biggest financial ball and chain they'll ever have. The down payment is only the beginning. Furniture, PMI, property taxes, insurance, maintenance, association dues, major replacements, etc. - you can become "house poor" really quickly.

Unless the stars are perfectly aligned, I would wait until you have a really good sense of how the next few years will shake out.

 

[xCourxCorex]

Thanks for the replies! To answer some of the questions asked above - yes I'm 23, currently no kids, marriage not in the picture for a few more years. Would be looking to stay in the same general area. No further schooling would be needed and is not likely something I'll pursue.

Job status.. I'm a registered nurse.. With another 6-12 months experience I'd say I would feel more comfortable about being able to find a job fairly quickly if something were to happen. (Would not be looking to purchase until early 2015 at best so this it's not like I'm trying to buy today without more job security).

Currently my only expenses are car payment and insurance (~450), the school bills (250) and misc spending including gas, cell phone, eating out, clothing, entertainment etc (~400). I do have health and dental insurance covered by my employer, my cost (~45/week) is taken pre tax.
I live with my parents so there are currently no rent utility or grocery bills. The balance of my checks go towards savings.

re: emergency fund.. 10k for me would be ~4 months of expenses (in reality my expenses are obviously less than that but in an average 4 week month my minimum take home pay would be roughly 2600, so in theory it's basically 4 months of income). I have heard 3-6 is what's typically recommended on e-funds; do you have another suggestion?

Thanks to everyone for your advice! Keep it coming

 

[sweetdana]

sweetdana, thanks for your reply!

I guess to add to that.. If I can continue my savings the way I'm planning to (and not paying anything extra towards the loans) I would have $16k by the end of 2013 including the 3k I already have saved, and 3k in savings bonds that have matured. I could take all of that and pay off almost all of the school loans, but then would be starting over at square one with the down payment, obviously setting back when I'd be able to buy. Doing that, no, there's no way I could realistically get 20% for d.p. in a reasonable amount of time. (Looking south of Boston.. a nice home or condo would be around 250-300 easily) so in order to get 20% thats 50-60k starting from 0...

I do have a car loan as well.. $333.15 each month but I round up to $350.. at that rate the car would be paid off a few months early approx August 2017. So even if I did pay off the school loans yes I still have 17k in a car loan too.

...Now I've just confused myself even more!

so barring 0 % on your car loan.. I would start there. I would save enough for a solid 8% ( covering closing costs if you have to pay them and not seller, and 3.5%- 5% down). the rest I would pay off 1st credit cards with the highest rates.. then the car. ( UNLESS 0 %)

 

[clm10308]

In my early 20's I made some financial decisions that looking back were pretty stupid, so you are already better off than I was at the same age.

Looking at your situation now what I would do is keep the student loans and work to pay off the car loan as quickly as possible. Then the money for the car payments could go into savings for a house in the future. However, if what you really want is to move out of your parents' house, then saving more for a down payment makes sense to me.

 

[sweetdana]

Age? Monthly expenses? Health insurance or health issues? Job status and stability? Expect to be in the area for 10 years? Do you have kids? Do you expect to get married in the few years? Will you eventually need a graduate degree to further your career? All of this comes into play with decisions like this.

If you are the "typical" 22-ish new grad (which I'm assuming you are), I wouldn't even begin to think of saving for a house as your first priority. Far more important to build up your emergency fund (sorry, but $10k doesn't come close) and start saving for retirement so the compounding effect starts early. Then work on paying down the two loans above 5% (or if any are variable).

For most people, a mortgage is the biggest financial ball and chain they'll ever have. The down payment is only the beginning. Furniture, PMI, property taxes, insurance, maintenance, association dues, major replacements, etc. - you can become "house poor" really quickly.

Unless the stars are perfectly aligned, I would wait until you have a really good sense of how the next few years will shake out.

I disagree I bought my 1st house when I was about 22.. cause it was a goal to not rent. My parents never owed, and after a few BKS, and elect shut on/off and being evicted.. I wanted my own piece of the world. IF it is your goal do it.

90% of that you need when you rent anyway. .. if takes or maint. goes up on a home you rent.. guess what the land lord raises? I get the logic, but it is still what most people want. And she does not have to over buy. My 1st home was 68K. and in today's market I think it was foreclosed on at 19K.. there are some incredible starter homes.

I agree with this poster do not over buy. .. but not buying will only bring average rents through the roof for everyone... BUY less than what you need not more.

 

[rigs32]

Just a thought that in some areas it is not worth it to buy unless you plan to stay. My city didn't get hit during the housing bust because there was no boom. When you consider the costs to own, I actually make out better renting and I have someone to call to fix problems for emergencies.

 

[Sagginit]

Just a thought that in some areas it is not worth it to buy unless you plan to stay. My city didn't get hit during the housing bust because there was no boom. When you consider the costs to own, I actually make out better renting and I have someone to call to fix problems for emergencies.

this is it for me. i thought about doing the same thing about 1.5 years ago. i realized a lot of the apt buildings in my area had maintenance fees, taxes could unexpectedly get jacked up, or i could have a major home emergency that i would not be able to cover with a minimal savings, student loans, car loan, since everything would go into my down payment.

i got a roommate and feel good about my decision. i paid off my newer used car last year in 6 months and am back to hacking away at my student loans.

a few things to think about:
-nursing is not as stable as it used to be since some regions are being flooded with nurses (here in NJ colleges have years long wait lists). my friend has worked for years in a hospital system and they paid for her masters. she ended up having to leave as competition for admin positions was so stiff she was stuck on her floor. what happens if you lose your job and you have three major debts with little savings? or if taxes keep going up and they aren't offering you a raise?
-interest is tax deductible, but not like the loans are interest free. for example if you are at a 25% tax rate and pay $100 in interest, at the end of the year you get $25 back, not $100
-they say not to buy a house unless you plan on being there for 5 years, are you 100% sure?
-living at home and moving out without a bridal shower? play the price is right and add up the cost of EVERYTHING you will need. my first year out on my own i was so sick of buying stupid little things that kept adding up. it also hurt i had three bridal showers and i was buying crystal stemware and for myself i was debating the costs of ice trays furniture and everything else may cost you another few thousand.

in my late 20s all of my friends paid down student debt and lived at home/ rented before thinking about buying a house. none of them regret it. i think a house is a great investment but there is more to consider than just numbers.

if you are unsure what i recommend doing is saving the money for a bit and then after a few months if you decide to pay off the loans, send in the check. or another idea is calculate what the mortgage and bills would be each month and put that into savings.

 

[Jenny3]

I would contact a mortgage agent to find out your debt to income ratio. With the 4 loans and a car payment, there is a chance your ratios are high and you wouldn't get approved for a mortgage at this time. An agent will be able to guide you on how to prepare for the future, which loans to pay off, check your credit, discuss a monthly mortgage payment and what you would need out of pocket, etc. This way you get a peek of your financial picture before making any decisions.

Personally, I would do everything I could to pay off the loans - but still save while doing it. It may not be saving as much as you would like, but it's something!

Good luck!

 

[Shelly F - Ohio]

I would look at the total interest you are paying on those loans. Would it be better to shell out all at money on the interest over the life of the loan which is just putting money in someone else pocket. Or would it be better to pay it off and put the money that you paid toward the interest back into your pockets. The money you have in the bank is not make much interest so I say pay off those loans.
Plus when you go to buy a home you won't have the extra debt that a lender will look at when deciding on approving you for a loan.

Pay them off why pay out all that interest for the next 7.5 years. That is A LOT of money back in your pocket over the course of 7.5 years!!!!

I would pay them all off except for one that way you will have a good credit payment history for a lender to consider with lending you money for a house.

You are currently putting money into your savings account so when you pay off the debts you will continue to put that same amount in your savings plus the $250 so you acct can build up again.

 

[fiveofus-la]

I work in the mortgage business and I agree with Bigmamimia, check out the Rural Development loan, which is offered by the USDA. You can apply for that type of loan at most any mortgage company and some banks. Also keep in mind as far as a down payment for a home that $1000 down only knocks off about $6-7 from the monthly payment.

Knowing what nurses make in my area and the debts you disclosed, you should be just fine when you're ready!

Good Luck!

 

[bettymae1121]

I'd get totally debt free first and then save for the down payment. Once you're debt free you can save like mad for the down payment. Run the numbers, if you are debt free and have no payments other than regular monthly bills (and you keep the monthly bills to a minimum) how long would it take you to save 20%? Let say you pay off all your debt by the end of this year (I think that's what you posted?) and now can save $1000 a month towards a down payment. It would take you 5 years to save $60k. Lets say 6 years since you'll also want an emergency fund, 6 years gives you a $60k down payment and a $12k emergency fund. So in 2020 that gets you into a home with 20% down, zero debt (other than your new mortgage) and a decent emergency fund (you'll still need to up it after you buy but $12k is a decent start). And that's saving $1k a month, if you can save more than that, it will happen even faster! If you can bank $1500 a month you can do it in 4 years rather than 6!!! That's only 2018!

Meanwhile, you're either living at home or renting. Either of which gives you great flexability. You can move within your region or relocate all together. Get married? No problem. Have a kid? Don't need to worry about selling that small starter home in the iffy school district only a year or two after buying because you never bought to begin with! You can go straight into looking for a larger home, or one in a better school district, or whatever your needs at the time are.

Right now you don't plan on getting married any time soon. Right now you may not plan on having a kid right away (married or not). Things change, and sometimes faster than you think they will. Don't tie yourself down to a house quite yet.

 

[bigmamimia]

If you applied for rural development and are accepted you can have those loans paid off and be in a new home within a year.

 

[mrsklamc]

I say pay off the debt, live as cheap as possible, and sock away cash for a bit. So many things happen in your early 20s; and even if that emergency fund is fine for your living expenses, it needs to be much bigger for a house.