Post # 1
Between my FI and I, we have about $40,000 in student loan debt (it makes me sick thinking about it..) We are paying for our own wedding which makes it tougher too. We have some money in savings and had hoped to buy a house in 5 years. Even with our money in savings we still would not have 20% for a down payment. Our money in savings wouldn’t even completely wipe out our student loan debt. Do we take our money and cut down our debt? Or do we save that money for a future home and keep making monthly payments (which are almost $700 a month)?
Any advice is appreciated. Would love to hear from those who have been in similar positions. It’s so sad how loan debt really takes over your life! I envy those who don’t have any! 🙁
Post # 2
DH went to private law school, so I’ll let you imagine about how much student loan debt he has. I also went to a private grad school, so between us, we have a sizeable amount of debt.
During the homebuying process, I thought out student loan debt was going to hurt us badly, but it really didn’t. We were approved for much more than we even wanted. Basically, they look at your monthly income and your debts, and your debt (including a potential mortgage payment) can’t exceed something like 43% a month of your monthly pay…. (I think that’s the number, it seems to change every year).
Each month, we now overpay on my student loans (which are much more manageable and on a shorter repayment plan) while paying our mortgage. I think you and your husband need to sit down and decide what’s more important for you. Paying off a big chunk of your student loans with little left in savings, or saving for a house. We knew our student loans were going to be around for a while, so we just budgeted for them during the homebuying process, because it didn’t make sense for us to put it off indefintiely. (Plus, we live in an area where we were paying over $2,000 just to rent a 1 bedroom apartment, so we were anxious to put that money towards something we actually owned).
Also, as for using all your savings to pay down loans – I never would advise to use all your savings on anything, because emergencies do come up and you need to have money stashed away just in case!
Post # 3
RubyStar: Since you looking to buy in 5 years and presumably will be saving money every month, you need to look at the interest rates. If the interest on the student loans is higher than the interest you get on your savings, it may be worth using your savings to try reduce the student loans and then saving for a deposit. We are currently in the process of saving for a deposit as well so I feel your pain. Thankfully only my dh has student loans and we should be done with those in about a year. If you can afford to pay more than the minimum payment do it, compound interest is a b**ch… Have a look at this website http://www.mycalculators.com/ca/loancxpsm.html , it is for bonds but all loans work in a similar way… Add whatever you can afford to pay extra and see how much shorter the term and total paid is… EDIT: Just to add, you will only see a real difference if the interest rate isn’t very low.. So if you have a rate of 3% on the loan but will get 5% on your savings, theen keep monthly payments and save but if you get 1% on your savings, pay off the debt
Post # 4
Student loans are ususally considered “good debt” meaning it wont hurt you unless you’re not paying it. DH and I pay a little over $500 combined and we were very adament about buying a house and didnt put 20% down. I think with house rates going up I wouldnt put off buying a house too long. We pay more into our mortgage than student loans because we want to build equity. I think it really depends on what you and your husband prefer to do.
Post # 5
All of the PPs have very good points. Because you’re planning on buying in 5 years you have a long time to budget and save and that’s awesome. Like BtoR said, it’s about interest. My student loans only have something like 3% interest, so I only pay off about $1200/month even though we could afford to pay off the whole balance right now (and just not have much left as a cushion).
As a general rule, you should always try to have about 3-6 months of what it costs you to live saved up as a safety net. Obviously at times this seems unrealistic, but you want to always have something in case one of you loses your job or has a medical emergency or something. So first I would figure out the minimum that you could live off of and then try to get 3 months of that in your savings, then use what’s left for debt and a house.
Also you should know that the bank will approve you for a mortgage that is bigger than what you can really afford. This isn’t a bad thing, but just know that when a bank tells you how much they will lend you it’s just that… it’s not how much you can realistically afford. However, presumably you will be growing your careers and will be getting increases in salary over the years so don’t be afraid to stretch yourself a little bit.
I would say 1) Figure out your monthly expenses and get a safety net saved up, 2) from what is left over, budget how much you need as “fun money”, how much you need to put towards student loans, and how much you want for a down payment. To do that it might be easier to work backwards and say “what kind of house do we want and roughly how much will that cost?” then figure out a down payment from that, and divide that by 5 years and then ask yourself if you still have enough left over to reasonably pay off your student loans. Play around with some of the online mortgage calculators and budgeting tools. Everything makes more sense when you can break it down into what you can afford monthly.
Post # 6
- Wedding: October 2014 - Church
RubyStar: My personal opinion is the following … I would be asking myself these questions: How much are you looking to spend on a home? How long would it take for you to pay off those loans? Or at least half of that ($20k)? Would you be able to pay down your debt while paying for a mortgage, property taxes, and all the other lovely things that come with home ownership while carrying such high monthly payments? I personally would spend the next couple years trying to shrink that debt as much as you can and then roll it into your savings in three years you could easily get a good downpayment. Take a look at your spending habits and where your money is going – there is no reason why both cannot happen. We are also paying for our wedding, have a 1.5 year plan to eliminate approximately the same amount of debt, and will be rolling all the money we are currently spending on debt into more savings, which would be more than enough for a downpayment. I would keep your money in savings for an emergency fund, though. Despite all this only you know what the correct thing to do is.<br />
Post # 7
- Wedding: March 2014 - A castle!
What about getting a different type of loan, like an FHA loan? With those, the minimum down payment is only 3.5%, although you can put down more. This way you won’t wipe out your savings. My student loans are still in deferrment but we went ahead and bought a house anyways. My best advice would be don’t use your maximum approval amount. For first time homebuyers there are things added to your mortgage that run it up, like PMI. Rule of thumb is that your monthly mortgage payment should not exceed one week’s combined take-home pay for you and your partner.
Post # 8
You can definitely purchase a home while having student debt! I would remember though, that while it seems like you are wasting 700$/month on rent that could be going towards a mortgage of 1000$, owning a home is very expensive. Taxes, repairs, maintenance, and that new couch that fits perfectly in your living room all take a lot of money/effort beyond your mortgage.
Post # 9
I have a ton of student loans (but lucky at a low percentage rate) and bought my house. I’ve always known that the student loans will be there and so I’ve never really thought of them. I have money deposited in a separate account and the loan is paid from that account. It’s always been part of my budget and, because of the interest, I have no interest in paying them off. However, I will say that my FI is a pay everything off type of person and I think they are going to bug him.
I also did not put 20% down on my house. I put 5% down on with a regular (non-FHA) loan. The tax benefit made up for the increased payment over rent but canadajane is sooo right–there are so many more expenses with a house. You will definitely want to keep your savings intact. Not only are there the “what if I love my job” contingencies you have to have, but there are also, “what if my furnace or a/c go out” contingencies you have to plan for.
So, you can definitely do both, as long as you know your budget.
Post # 10
RubyStar: I think you should keep the money in your savings, and try to pay off your debt as fast as you can. Simply because even after you bought a house, if you still have huge debt payments to do, money will be tight and personnally it’s not something I’d be willing to do (owning a house is expensive, and I don’t want to keep on paying huge chunks of my paychecks into debts on top). I’m paying roughly what you are paying, 800$/month into student loans. I’m now a little over the 18K mark, but I was over 28K a year ago. By the time I get married in August 2015, I’ll be 2-3 months away from being completely debt-free. i think it’s reasonable to plan your house 5 years from now, because you could probably pay off most of your debts in the next 3 years, then have 1 to 2 years of savings to have a bigger downpayment. It sounds like a good option to me ! I would put the money for a house into a saving’s account that’s got a higher % rate for 3 years so can make money off your investment while paying off your debts.
Post # 11
RubyStar: If the debt makes you sick to think about it, I’d formulate a plan to get rid of the debt or at least take a big chunk of it out. That way you won’t feel so sick about it.
Post # 12
Thanks for the replies! It’s definitely something to think about..
Post # 13
RubyStar: your debt probably won’t hurt your ability to get the loan you need, but you need to weigh interest rates. Do you have a low student loan rate? If it’s high, then it’s financially wise to tackle that debt before it takes more of your money ontop of a mortage loan with interest.
If you tackled the debt head on, how long would it take to pay off? Another question to think about before home buying.