Student loans vs. Home down payment

[Jasonkat]

Buying a house is essentially taking on more debt. Yes, people say it's "smart" debt, but how many poor souls who lost their house the past 7 years wish they never took on that "smart" debt? Debt = risk, never forget that.

So you want to save up money for a down payment, while ignoring your student loans, only to fork over everything you've saved and then sign on the dotted line that you're taking on tons more debt?

At that point you'll have no money and a ton of debt. That means you'll have a ton of risk.

I understand the desire to buy a house and start building equity. I understand that interest rates are low and prices are low so now's the time to buy.

But you're just starting out and you have to be smart about this. Here's what I would do (and what I did when I was in my early 20s).

First, save $10,000. That's a nice buffer that should overcome pretty much anything you'll have to deal with. Then at that point start splitting your cash between paying down your student loans and adding to your savings. As you get raises split the raise between your savings and your loans. Be very methodical about all of this.

Five years from now you should have no loans and a pretty decent chunk of change saved up. At that point start looking for a house. I'd be willing to bet they won't be much more expensive then than they are today.

Above all: Don't put yourself in a losing position. Taking on more debt can backfire drastically. You will never regret having a large savings balance, but plenty of people regret buying a house.

 

[xCourxCorex]

Thanks to all for your replies!


In terms of paying down the debt: how should I do this?

I have the four school loans, highest rate 5.75% varying down to 3.15 .. Plus the car is at 3.49

Initial thought was to wipe out the smallest school loan (also has the highest %) but afterwards should I focus on just the remainder of the school loans? Split between some school some car? All car?

I appreciate your input!

 

[Jasonkat]

It depends on what your marginal tax bracket is. If you are in the 15% bracket then your real cost is 85% of the interest rate.

Your loans are really low interest, so they're not that big of a deal. Obviously the 5.75% and the 5% you want to pay off first, as their net interest cost (5.75 X 85%) is going to be more than 4%. The other two are your biggest loans and they have small interest rates so they're not a big worry.

1) savings account - build it up to 10k
2) pay 1/2 to savings and 1/2 to the 5.75% loan
3) pay 1/2 to savings and 1/2 to 5.15% loan
4) pay 1/2 to savings and 1/2 to car loan
5) pay 1/2 to savings and 1/2 to other student loans.

If you get to 20k in savings before steps 2-5 are finished I'd stop saving and put the rest to the loans.

But you want to get in the habit of saving money regularly. If you can force yourself to build this habit now your life will be so much better in the long run.

I bought a house in 2004 and two weeks after we moved in the dishwasher broke and poured water all over the kitchen. The kitchen was fine but we needed a new dishwasher. Unfortunately the dishwasher was sitting on concrete and a wood floor had been installed in front of it, so the only way to get the dishwasher removed was to take off the counter top. And since the kitchen was old and outdated we decided to remodel since we had to go through so much effort already to get the stupid dishwasher out. So we ended up spending $20k on a kitchen remodel within the first year of moving in.

Stuff happens. Expensive stuff. You NEED to have a strong savings account so when things happen to you it doesn't wreck you (mentally, emotionally, etc). You will never regret having "too much" in savings, but you will surely regret having "not enough" in savings.

 

[ZoeBell]

I'd work to pay off loan or car payment first. Starting with the one with the highest interest. Pay off all the loans first. Then worry about buying a house/condo. Even you don't get have a great down payment or get a great rate, it doesn't mean you can't pay more money on the mortgage every month.

IMO I wouldn't stress to much about have a huge down payment for a mortgage.

 

[Sagginit]

i will vote car. the interest is not tax deductible and if anything happens you can not defer the car payments. you also may have to carry extra insurance with the car loan that you can cut back on once its paid off.

once the car is done i would start with the student loan with the highest interest rate. initially it may be slower than tackling a small loan but it will save you the most $ in the long run. also what i found was once i started paying down extra, they reduced my monthly payments. this was an automatic snowball and i chose to put the extra right back towards the highest interest rate loan.

at one point depending on how things are going (if smoothly) you may want to start saving a down payment. i would see how things go for a few months to a year before making that decision.