buy a home or pay down debt?

[gforce1124]

I am a baby mustachian living in MD, just outside of Washington, DC.  I just got married last week (woot woot!) and now my wife and I are trying to make the best decision on housing.  Here are the facts:

She makes $55k/year, I make $75k.  We have no credit card debt, car payments, etc, but she does have $100k in student loans at 7% interest.  Our monthly expenses are $1000 for student loan payments (the min we can pay), $1200 rent/utilities, $2000 everything else.  After taxes and expenses we’re banking about $3500/mo.  We have $51k in cash right now.  She has a government job in DC so she takes the metro to work every day (metro costs paid by the government).  I work 28 miles away in Annapolis and drive each day.  Living on a metro line allows us to have only 1 car.  We both like our jobs for many reasons so we will not consider leaving.  We both love the DC area, and all of our best friends live here too so we won’t consider moving.  We plan on having kids within 2 years, and at that point we will lose most of her income.  We would love to move out of our tiny apartment (which is not in a very good area) into a bigger house to allow for kids and for our out of town relatives to visit more often.  Our lease is up on 12/31/13. 

It seems to me that we have a few options:
1.    Throw the $51k at the student loans, put all savings towards the balance and pay off the student loans in about a year.  That would keep us in the apartment for at least 2 years, which would suck.
2.   We buy a place by 12/31, using the $51k as a down payment on a ~$350k house.  Since we wouldn’t have 20% down, we would have to pay $4100 for a 1 time MPI fee. 
3.   We save up for 6 more months and buy on 5/31/14.  This should allow us to save up enough to avoid the MPI, but my realtor warned that competition and prices heat up in the spring/summer (and interest rates could rise) so what we save in MPI might not be enough to offset other costs.

What would you do?  Poking holes in my logic, being harsh or suggesting other options are welcomed!

[Numbers Man]

Living in your apartment would suck since you live in a crappy location. How about upgrading from your apartment for a few hundred dollars more a month into a better location that could accommadate a bigger family and not buy a house. Payoff the debt and then save for a down payment on the house. Then qualify for a house payment on one income in 3-4 years.

[dadof4]

Why would living in the apartment for 2 years suck?  Is it because of the bad neighborhood?  As NM suggested, you can upgrade that pretty easily.
You're young, don't have a lot of accumulated junk, don't have kids and the room they take. This is the best time to live frugally and build the foundation to your future wealth.

From a financial standpoint, the best option is to attack that debt ASAP while you're making a lot of money and don't have a lot of expenses. 7% APR on 100k is not something you want to keep around. Without the student loan payment, and with a more manageable mortgage and emergency fund, you'll be in a better position to buy a house, have kids and live on only one paycheck.


What concerns me is that buying a house now would put you in a situation with little margin for error.  Having a $1000 SL payment, $2000 house payment, and $2000 living expenses comes to $5000. Your take home pay is around $5000 without your wife's work. There is little to no wiggle room for further saving. And if you are out of work for any appreciable time, you're in a lot more hot water.

[SunshineGirl]

Living in your apartment would suck since you live in a crappy location. How about upgrading from your apartment for a few hundred dollars more a month into a better location that could accommadate a bigger family and not buy a house. Payoff the debt and then save for a down payment on the house. Then qualify for a house payment on one income in 3-4 years.

This sounds like a great plan. Find a nice rental and nest there for awhile.

[engineerjourney]

Living in your apartment would suck since you live in a crappy location. How about upgrading from your apartment for a few hundred dollars more a month into a better location that could accommodate a bigger family and not buy a house. Payoff the debt and then save for a down payment on the house. Then qualify for a house payment on one income in 3-4 years.

+1

[sherr]

My advice would be to do #1. 7% is a really high interest rate these days, you probably want to get that taken care of before you add another $300k in debt. I paid off all my student loans before buying a house, having only mortgage debt is a lot more comfortable / stress-free of a position to be in then having mortgage debt and student loan debt (and potentially other forms of debt as well). You don't worry so much about potentially loosing your job or whatever.

You didn't mention any form of tax-deferred (401k and IRA and the like) saving, do you have any? You may want to look into maxing that out even before paying off the student loans. It depends on what tax bracket you will be in in retirement of course, but if your taxes in retirement are low enough you may be gaining an instant 25% return on investment (since you're currently in the 25% tax bracket) by contributing to a tax-deferred account.

Also: of course your realtor wants you to buy now, his paycheck is depending on it. That's not necessarily to say that he's wrong, you might could do well to buy off-cycle, just always be aware of people-who-give-you-advice's financial incentives. If things are too expensive in the summer why not wait a few more months till the fall?

Also: I agree with everyone else that posted while I was typing this. A house can be a great investment, but you have to be financially ready for it (and know a good deal when you see one).

[gforce1124]

Thanks to all for the quick feedback!  Some questions and points were raised, so I'll add more info to my run down. 

My current rental situation is fairly unheard of in the DC area.  My rent is $1037/month for a 2 bed room apartment, utilities are about $160/month.  The only reason I pay this rent is because a few years ago my high credit score qualified me for a below average rate, the apartment complex was running a special.  The complex is in Greenbelt, MD and it's largely section 8 housing.  The leasing rep I was working with was shocked that someone actually qualified for the low rate at the time.  Today a 1 bedroom in the same complex rents for $1600/month.  There is a fair amount of crime in this area and my wife doesn't always feel safe.  We try to mitigate this by me picking her up/dropping her off at the metro station even though it is less than 1 mile away, etc.  I appreciate the advice to spend a couple hundred dollars more per month in a nicer area, I hadn't considered that.  However, a 2 bedroom in a nicer area like Silver Spring, MD costs $2000/month.  In DC my friends all pay $2500/month or more.  Does that advice hold true if the jump in rent is that much?

I'm also at zero risk of losing my job.  I sell insurance in my family agency and I work on straight commission.  My customer base belongs to me so I actually can't be fired unless I do something illegal (and I have nothing planned there).  Starting my career in this business 8 years ago was very tough, I made almost no money in the beginning.  But my residual income has finally been built up to a point when I'm comfortable, my commission has grown at $5k per year (this year $10k!).  I suppose I could be at risk of losing a lot more clients than normal in a given year, but by and large insurance is a very stable profession. 

I have $0 saved for retirement, although we both have indexed universal life insurance that builds cash value and disability policies with "full return of premium riders".  When we reach retirement age, The IUL policies will be worth about $200k each, the disability policies can be cashed in for about $25k each.  I'm 30 and my wife is 26.  The combination of her student loans, my above mentioned work history and the fact that we paid for our wedding ourselves didn't allow us to think long term before.  My wife has a 401k that she can contribute to at work, but we thought it might make more sense to get rid of the student loans before doing that. 

A last factor that might make a difference is if we bought a house our mortgage would be $1400/month.  Of that, less than $1000 would be interest. 

[TrulyStashin]

Given the screaming deal you're getting on rent right now, you'd be crazy to leave this apartment.  Hang on to it like the life raft it is.

Put the $50k toward the student loans and payoff the rest over the next year by pretending your wife's income is already gone (gone to student loans, rather than SAHM) and funneling her entire paycheck to the loans.  If you can't manage this now, without a mortgage or babies, then you can't manage it once the baby arrives and the mortgage is due.

So what if you have to live in the apartment for another year or two, or even three?  I'm in my forties and I can promise you that by the time you get to my age, you truly won't care (or even remember) exactly how long you lived there when you were young.  You will care about your finances.

Also, the arrival of a baby does not necessarily need to coincide with home ownership.  Babies are small and easily portable.  You could  have a baby in two years but remain in the apartment for 3 or more and you'd be just fine.

[dadof4]

Some more considerations:

1. Have you considered living close to your work? That way you could walk/bike to to work while your wife drives. Rent might be lower there.

2. Why do you need a 2 bedroom apartment? If it's an extra $500 vs a 1BR, you could downsize. A 1BR in a good neighborhood you feel safe in is better than a 2BR in a bad one.

3. Does that $1400 mortgage payment include taxes, insurance and maintenance?   Probably not. I would assume that actual cost is closer to 2k.

[gforce1124]

dadof4, you make some good points.
The $1400 mortgage wouldn't include those other items.  Property taxes are $3500-$4000/year in the area we're looking.  Insurance would be ~$600.  Maintenance, who knows.  We have a 2 BR only because that's what the "special" was that I referenced earlier, from the apartment complex.  I mentioned before that a 1 BR is actually more expensive that what I have now.  Living closer to my office wouldn't really help because rent isn't much different in the Annapolis area and I sometimes need to drive to meet with clients so I need my car during the day.  If we did that, my wife would have to buy a 2nd car. 

[dadof4]

Since you drive her to the metro anyway, the proximity doesn't mean quite as much. you can widen your search.

Did you do your due diligence regarding 1BR apartments? Don't just compare to your current complex or your non-mustachian friends.

For example, these are 1br in Silver Springs for under $1000.
http://www.rent.com/washington-dc/silver-spring-apartments/langley-gardens-4-10217777
http://www.rent.com/washington-dc/silver-spring-apartments/university-landing-apartments-4-678555