Student Loans or Home Down-payment

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Topic Author
serocs
Posts: 36
Joined: Tue Feb 07, 2012 1:54 pm

Student Loans or Home Down-payment

Post by serocs »

Should we pay off student loans before buying a house? I know this question has been hashed and rehashed, but I'm still on the fence with what to do and I think that every situation is different. My wife (24) and I (23) are just out of college; I have been working for ~1 year and my wife for ~4 months. We are both in secure jobs in growing fields, and even should we need to find jobs, the area we are in is excellent for both of our careers. We expect to stay in this area for at least 5 years. We both have high credit scores, high 700s last I checked. We would really like to buy a house as soon as is reasonable, though the exact time table is not really part of my question.

The non-financial parts of the equation:
I know that many first-time home buyers are not prepared for the extra responsibility/time required in owning a home, but I don't think I fit the typical mold. I did a bit of design and construction work in college and am well aware of the costs involved. In addition, I really crave the opportunity to do work on a house again; it is something I have really missed for the past two years. Additionally, I despise hearing neighbors in apartments. It is not that they are particularly loud, just that I miss the quiet of the house I grew up in.

Financial Situation:
Yearly Income: ~100k this year, ~150k next year (since wife worked only 4 months this year).
Monthly Income, After tax/401ks/insurance/etc: just over 8k/month
Emergency Fund: 6 months
Debt: 35k (student loans only, already paid off an additional 8k in loans this year)
Retirement: ~20k (I know this is somewhat low, but it is year 1)

Expenses:
$1900/month rent
~$1500/month misc. expenses
~$500/month student loans

Student Loans: (already consolidated as much as possible)
Graduate: $17,200 @ 6.55%
Undergrad: $17,500 @ 4.3%

Regional Median Home Cost: $314k

After looking through the numbers, we could either pay off the student loans in about 9 months or put 20% down on a house in about a year. I know people say they feel weighed down by debt, but I am comfortable with this much debt (at this rate). Our current plan is to save money for a year and consider the market at that time. If rates are still low, we would start looking at houses; otherwise, we would keep our 20% down in the bank and start paying down the loans. Considering the Fed seems likely to keep rates low until that time, this seems like our most likely course of action.

I should also mention that we don't really expect to save money by owning a house as opposed to renting, especially considering taxes and insurance.

I don't mean this post to sound like we have our minds made up, more that we have spent a lot of time considering the options. Thoughts, comments, or suggestions?
robocop
Posts: 255
Joined: Fri Jan 27, 2012 8:44 pm

Re: Student Loans or Home Down-payment

Post by robocop »

If I were you, I would wait. A couple of reasons that would factor into that decision:

1. You only have 9 months of paying the loans to be debt free. That will fly by, and it would be so nice to be debt-free.
2. The Feds have said they expect to keep rates very low until at least mid-2015. While not everyone considers these things in their analysis, you said you did.
3. Thus, you could pay off the debt completely and still have 2 years to save a down payment before mid-2015.
4. The interest rates on your student loans are pretty high in the present environment. (personal note- I am paying off all of mine until I get to the sub-3% loans).
5. Your employment history is limited. You may decide you hate your line of work, want to go back to school, want to work at a different company across the country because they treat their employees so much better, etc. You never know. I always treat my first 2 years of a job as still in the honeymoon phase, because even if you love doing something and love the people you work with, two years can really add some perspective to whether your line of work is truly the right career for you long-term. Being relatively new at work also may limit your mortgage options, as lenders look to your past 2 years of employment history in determining what they will lend you.
6. I would never buy a home without a 12 month EF.
7. I would never buy a home without maxing out my retirement (i.e. if you have 401k, 17k each, + 5k in Roth IRA).

Of course, some of these are personal preferences. You will probably be fine either way given your circumstances, but I would caution you to take your time on this decision. I considered purchasing right out of school, and I am so grateful 3 years later that I didn't.

A tip for living in quieter places while renting- seek out condos for rent on Craigslist or on the local MLS. The difference in noise levels between the apartment I rented, and the condo I am now renting, is unbelievable. You can't hear anything through the walls of the condo complex.
Topic Author
serocs
Posts: 36
Joined: Tue Feb 07, 2012 1:54 pm

Re: Student Loans or Home Down-payment

Post by serocs »

Let's see:
4. I agree the rates are pretty high; it is the main reason we are on the fence.
5. Great points that I hadn't thought about. In my case it is very unlikely that my wife will be changing careers in the next few years, though a satisfactory explanation of this is well beyond the scope of this post. I would definitely consider myself still in the honeymoon phase of employment, so it would be completely possibly for me to change paths in the next several years. This being said, I am going to say, for the sake of this conversation, that we will be staying in the area for the next 5 years at least because of my confidence in my wife's job and career choice; admittedly this is without any support.
6. You say this (12 EF) as though the home itself is the reason for the 12 month figure. If that is so, why a different amount when owning a home?
7. This is true. We won't meet that this year since my wife just started working, but it is very likely that we will next year. Again, this isn't intended as an investment post, so I won't go into the specifics here.

I like your tip for renting condos instead of apartments. The issue is that in my area (Boston), "condo" really means old house that is rented out by floor. In the few "condos" that I have been in, sound has always been very noticeable. As for condo complexes, they are almost non-existent for a price range of ~2k. The other issue with the area is that there are very few home rentals.

Thanks for your comments, they give me more to think about.
robocop
Posts: 255
Joined: Fri Jan 27, 2012 8:44 pm

Re: Student Loans or Home Down-payment

Post by robocop »

I do think a higher EF is necessary if you own a home, because you are responsible for maintenance and upkeep, and those can be very high charges. Example: roof, furnace, windows. I don't have to pay for any of those things since I rent, but I would have to plan for the possibility of paying for those things if I purchased. Some of these things can be VERY expensive, hence the need for a decent cushion when you own.

As for the rest of the points- I think that, if you are on the fence, it is still wiser to delay the purchase instead of buying something and then regretting it later. The housing market has been in the crapshoot for years now, and the only people that want you to think that you must buy now in order to get in on the deals are real estate agents (for obvious reasons). The chance that the situation is going to change so drastically that a year will make a huge difference is very unlikely, but that is all it would take for you to pay off your debt before saving. Think of how great it would be in terms of cash flow and ability to live comfortably if you could pay off all that debt before you owned a home.

I know for me, it is also a matter of what I would buy vs. what I would own. If you are planning on staying for 5 years or later, you are likely considering having children (or doggies or kitties) in that home. For me, that would mean I would have to buy a 2 or 3 BR, as opposed to the 1 BR that I rent now. That translates into a lot of money saved every year that I can delay moving into a 2 or 3 BR.

Also, even if you expect to stay in the area (which I would caution against, because you are in the honeymoon phase), preferences about where you want to live in terms of proximity to work, entertainment, etc. can change quite a bit as you are in your early 20s vs. later 20s.

The bottom line is that when you are in your 20s, things change very rapidly- jobs, whether you want to have kids, where you want to live, etc. I think a lot of people get stuck in houses in their 20s because they can afford to purchase the home when they buy, but they only realize later how much that limits their mobility. I have plenty of friends in that very situation, stuck in a house that they don't want to be in anymore, but have no friends complaining that they wish they would have bought earlier.
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JupiterJones
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Joined: Tue Aug 24, 2010 3:25 pm
Location: Nashville, TN

Re: Student Loans or Home Down-payment

Post by JupiterJones »

Nothing wrong with waiting and renting.

I didn't buy my first house (a condo, actually) until I was around 30. I had no student loan debt (or car debt either). Worked out well for me.

JJ
"Stay on target! Stay on target!"
crowd79
Posts: 640
Joined: Sun Nov 18, 2012 9:37 pm

Re: Student Loans or Home Down-payment

Post by crowd79 »

Home ownership is overrated. I'd prefer to have someone else worry about replacing something if something broke or needed replacing. More responsibility=more stress. I'd rather take that extra money I am saving from possible repairs, property taxes, mortgage interest and everything else that comes with homeownership (yard supplies, furniture, etc) and plow it into my retirement 401k and IRA, and I could still come out as well as homeowners do over the long-haul, and I have more freedom to do other things (pick up and move, change jobs, and travel, etc) without stress or being tied down on house upkeep or trying to sell.
Topic Author
serocs
Posts: 36
Joined: Tue Feb 07, 2012 1:54 pm

Re: Student Loans or Home Down-payment

Post by serocs »

Thanks robocop, your comments have been very helpful. I was hoping for more comments, but I suppose I'll take what I can get.

I think what we will probably do at this point is save the money at this point and reconsider our options in a year. I can see the need for a larger EF, which is now a goal of ours for the future.

I don't feel pressured by anyone to buy, I just have a strong desire to do so. But I do see your point in making certain we're ready.
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