Buy House vs. Pay Down debt

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I've learned a lot from this forum over the years, least of which is that one answer doesn't fit all situations. So I give you mine and ask your advice.
We are considering purchasing a home in the next 6 months. We havent decided if we want to build new or buy pre-existing but that is a different topic. We also have a large amount of student debt. We have saved enough for a 20% downpayment on a house. My question is, should we:
a) Pay down student loans, forget the house
b) Buy the house with 20% down, apply bonuses and future raises to the student debt
c) Buy house with 5-10% down, pay PMI for 2-3 years, and put extra money towards student loans

Specifics:
We are currently a single-income family with 2 young kids, 2.5 and 6 months. I could go back to work but choose not to at this time.
We are currently leasing and plan to keep our future house payment close to our current monthly lease.
Pre-approved for a home rate of 3.5 on a 30 year fixed but I think we can do better when we shop around. Credit scores were around 780, 775, and 735.
We owe approx 130k in student loans combined. Approximately 50k of the student loans are at 1.6% fixed, 15k is at 5% fixed, and the remainder is at 6.8% variable.
We have about 85k saved in various savings and investment accounts, not in 401ks or IRAs.

Am I forgetting anything? Thanks in advance for any and all advice.

ETA:We are looking at homes under 400k, trying to stay near 350k or 375k.
Income is about 160k/yr gross.

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Good insights, and definitely some things to consider. Staying put another year or two wont kill us and we would be in a... (more)

Keribeth (Dec. 21, 2012 @ 8:43p) |

1. Payoff those 15k @ 5% fixed, and the 6.8% variable first. Those 1.6% just pay the min each month.
2. If you are still ... (more)

bbmak (Dec. 21, 2012 @ 10:35p) |

You don't really start building much equity until like 5 years in anyway.

As for the mortgage rates, isn't the Fed purpos... (more)

harruin (Dec. 21, 2012 @ 11:38p) |

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What's your income level? If it's too high student loan interest and/or PMI might not be tax deductible.
How much is the house?

Leasing doesn't include all total home ownership costs (maintenance, upgrades, emergency repairs, and expect at least one or all of the following to go up every year: HOA, Taxes, Insurance)

Consider how much job security your husband has since you are a single-income household with 2 kids. Beef up your emergency savings (is that what the 85K is or is that your down payment money?)

If this is your first house be ready to spend a boatload more than you expect in the first year between furniture and home improvement stores (lawn equipment, ladders, various house crap)

I wouldn't worry about the 50k fixed at 1.6%, cant get any better than that. Having 65k variable at 6.8% is a little concerning. You can probably expect that to stay low for several more years but after that you may be in for a surprise.

Wont offer a yes/no on should you do it but at least think long and hard about the above

Im making sure taxes, insurance and HOA are factored in the monthly payment. It will probably end up being more than we pay now (2100/mo). We are looking at homes under 400k, trying to stay near 350k or 375k.
Income is about 160k/yr gross.
Job security is not an issue.
The 85k includes emergency savings.
Not our first house so we have most of the tools and furniture we need.
The variable rate loan is the biggest concern for us too and is why we are swinging back and forth on this.

I would pay down the student loan debt. 6.8% is a high hurdle to overcome. You need to deal with that debt like it's an emergency(which it is) and live frugal until it is paid off.

If you need a house, then rent one. A big mistake Americans make is to buy a "starter" house, live in it a few years, and then try to sell it and buy a house they want. They end up losing money usually because all of the transactional costs such as realtor fees and closing costs. It is best to wait until you can afford a home you want to live in a LONG time... say 10-15 years. That's when home ownership really makes a lot of sense.

I really don't see any advantage in not getting rid of your 6.8% before anything else. It will delay a bit your home purchase, but holding a debt with a rate much higher than you could currently borrow at means losing money...

depends on your location, I would buy house first because the price is going up, then save up to pay the student loan

I can appreciate the no-debt mentality. But what about the $$ Im handing to my landlord every month vs. building equity in a home I own? I would think it outweighs the 6.8% interest on 65k. But, that is where the 5% and 10% down options come into play.

Further, isnt there a value to having your own place? We have been leasing for the past 5 years and frankly, I never feel settled in someone else's home. Not to mention the inconveniences...appliances that stink, layouts that arent working, commuting hassles, etc. We are in a hot rental market where there arent a ton of options for single family homes.

Keribeth said:   I can appreciate the no-debt mentality. But what about the $$ Im handing to my landlord every month vs. building equity in a home I own? I would think it outweighs the 6.8% interest on 65k. But, that is where the 5% and 10% down options come into play.

Further, isnt there a value to having your own place? We have been leasing for the past 5 years and frankly, I never feel settled in someone else's home. Not to mention the inconveniences...appliances that stink, layouts that arent working, commuting hassles, etc. We are in a hot rental market where there arent a ton of options for single family homes.
you aren't just throwing away money by renting, though (this is a common misconception). building a little bit of equity in a home sooner definitely does not outweigh the 65k you owe with 6.8% interest. if you pay off the 65k that is a GUARANTEED 6.8% return right there (well, assuming the variable rate doesnt change in a year or so). you can't get a guaranteed return like that anywhere right now. putting that into a house will get you 3-3.5% on the mortgage.

the only value gained in feeling settled is intrinsic. all the inconveniences you list can happen when you own, too.

Keribeth said:   I can appreciate the no-debt mentality.

You can't shrug-off suggestions to pay off the 6.8% as "no-debt mentality" when we never said anything about paying off the 50k low-rate debt.

Keribeth said:   I can appreciate the no-debt mentality. But what about the $$ Im handing to my landlord every month vs. building equity in a home I own? I would think it outweighs the 6.8% interest on 65k. But, that is where the 5% and 10% down options come into play.

Further, isnt there a value to having your own place? We have been leasing for the past 5 years and frankly, I never feel settled in someone else's home. Not to mention the inconveniences...appliances that stink, layouts that arent working, commuting hassles, etc. We are in a hot rental market where there arent a ton of options for single family homes.


I do think that's a legitimate concern. From a purely financial point of view, you should probably pay off the 6.5% loan first, but from a pragmatic standpoint, if the bolded things are worth more than a few % points in interest to you and you think the job/income is stable, etc, I think putting 20% down and using the rest for an EF is definitely a good plan.

Im not shrugging it off. Sorry if that's how it comes across. Im asking for advice and appreciate the different perspectives.

I have no intention of paying off the 50k at 1.6. The 6.8% may go up in the next 3-4 years, but then, the mortgage rate might too. While I could have a mortgage for 30 years, I expect to pay off the 65k in the next 5 years, at most, probably closer to 3 years. Does it make no sense to lock in the longer term debt now at a lower rate? Maybe Im making this more complicated than it should be...

I didn't read all the replies to this thread. I just noticed your subject line and felt the need to give a point of view.

If you buy a house you may also need to invest money in the house (paint rooms, carpeting, appliance or two, curtains, furniture, and the list goes on and on).

If on the other hand you paid down your debt you would no longer have that ball-and-chain around your leg.

Without a doubt I'd get rid of the debt and THEN go after the house. See the problem is when a person tries to do too may things (pay down student loan debt, credit cards, mortgage, car, etc, etc) nothing gets done as good as if you go gazelle intense and just focus on one at a time.

With 3 kids and the expenses associated with have children imho you don't need a house on your back along with the other things you listed in our OP.

Just my 2-cents.

Renting makes far more sense financially than buying, at least it always did when I ran the numbers. The only time that becomes questionable is if you're in the house for at least 10-15 years or so before selling.

Transactional costs are huge. Realtor fees at 5% or 6%, transfer taxes are usually a few percent, other various fees. That sounds like nothing but if transaction costs to sell are 10% on a $400k house then you're looking at $40,000, just to do the transaction. That's 6 years of payments worth of equity right there. Plus when you buy the house you will spend a lot of money making it livable, and every year you will "throw away" lots of money on house maintenance and real estate taxes. Taxes vary widely and in the worst cases will knock out most of the equity advantage all by themselves so make sure you know how much taxes are. And it's a lot of time to maintain a house.

Clearly you want a house for reasons that aren't financial at all, which is completely valid, but just realize you're paying for those things, not the other way around.

As for the 10% down and student loans paid down or 20% down question, that's pretty easy to run the numbers. I suspect it'll be better just to put the 20% down now that PMI isn't deductible anymore. Figure out what your loan will be both ways (sometimes you get a better rate with 20% down, and obviously you'll have a lower principal) and add the PMI to the difference, and compare that to how much interest you pay on the student loan. Look at it both on a per month basis as well as a lifetime basis of how much you'll pay cumulatively. How much interest (in $) do you pay each month for the high rate student loan, and how much longer do you have payments? And have you gotten a PMI quote with 10% down?

The only other factor is the uncertainty of whether the 6.8% student loan will go up - is there a cap on the interest rate?

One more vote for paying down the 65k student loan at 6.8% before buying the house.

Homeowners throw their time and money away on interest, renovations, repairs, home owners associations, property tax, lawn maintenance, and insurance. You will also be throwing money away from the lost opportunity cost of your down payment. You will also experience an opportunity cost because you'll lose the flexibility of easily relocating for better job opportunities. There is value in the convenience in being able to call your landlord when a problem happens.

Most of the costs of being a homeowner is thrown away. The only difference is that homeowners build a small amount of equity compared to a renter. But often the real estate agents and mortgage companies consume all of that equity and the homeowner would have been better off renting.

You mentioned low interest rates as being a reason to buy. I would argue that is a reason not to buy... the low interest rates are keeping home prices artificially high by allowing individuals to pay more than would otherwise be the case. People buy homes based on the monthly payment, and if the interest rate increases that means the price will have to come down otherwise people won't be able to afford the payments based on their income. Low interest rates help sellers, not buyers.

Can you look into refi the student loan debt for lower? If not then use 65K to pay down the debt.This leaves you with 20K which is good. Your kids are small and not yet in school. Wait about 2 years. Save up the 20% again You will be in a much better position and you will be better able to afford the place and also at the point in your life where it makes sense to start buying into a nice schools neighborhood. So wait 2-3 years save up and in the mean time pay off the 65K student loans.

Keribeth said:   The 6.8% may go up in the next 3-4 years, but then, the mortgage rate might too.Rising mortgage rates will put a downward pressure on the housing prices.

In the meantime, the loan (65K at 6.8%) will cost you ~$14000 in interest, assuming a 5 year pay-off with equal monthly payments. More if the rate goes up. So you have to weigh this known cost against the unknowns and your desire to own a home.

Are those student loans federally subsidized? If so, just enroll in community college part time, apply for a in school deferral, delay paying them, and repeat until inflation wipes them out.

Pay off the student loans.

This question is an anomoly for FWF because it sounds like you can actually afford to buy the house. Does that mean its the best use of your cash? In this case, it sounds like it isn't. However, if you really need to buy a house to feel settled, then go for it. Forget about trying to justify it financially though.

Keribeth said:   I can appreciate the no-debt mentality. But what about the $$ Im handing to my landlord every month vs. building equity in a home I own? I would think it outweighs the 6.8% interest on 65k. But, that is where the 5% and 10% down options come into play.

Further, isnt there a value to having your own place? We have been leasing for the past 5 years and frankly, I never feel settled in someone else's home. Not to mention the inconveniences...appliances that stink, layouts that arent working, commuting hassles, etc. We are in a hot rental market where there arent a ton of options for single family homes.


Those who bought in the last few years are still underwater. There is no guarantee that home value will go up.

Good insights, and definitely some things to consider. Staying put another year or two wont kill us and we would be in a better position financially.

1. Payoff those 15k @ 5% fixed, and the 6.8% variable first. Those 1.6% just pay the min each month.
2. If you are still able to buy a house with the reminder money, with borrowing from 3.5% @ 30 years fixed, buy a house. See if you can get a loan from your parents, if you do, it is better to borrow money from them.
3. Get a parttime job, if you don't want to work full time. Don't put all the financial burden on one person.

Keribeth said:   I can appreciate the no-debt mentality. But what about the $$ Im handing to my landlord every month vs. building equity in a home I own? I would think it outweighs the 6.8% interest on 65k. But, that is where the 5% and 10% down options come into play.

Further, isnt there a value to having your own place? We have been leasing for the past 5 years and frankly, I never feel settled in someone else's home. Not to mention the inconveniences...appliances that stink, layouts that arent working, commuting hassles, etc. We are in a hot rental market where there arent a ton of options for single family homes.

You don't really start building much equity until like 5 years in anyway.

As for the mortgage rates, isn't the Fed purposely making the rates low since if they jump up the housing market would pretty much crash again?



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