Author Topic: Buying a house vs paying off student debt  (Read 1927 times)

Ecky

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Buying a house vs paying off student debt
« on: December 19, 2017, 05:30:17 AM »
EDIT: After writing this out, it's longer and more detailed than I expected and I'm inclined to believe this should be in case studies instead. Can I get it moved by a mod?

I'd like to make some spreadsheets, and am working on them, but trying to budget one's entire life with changeable variables is unsurprisingly complex. Numbers provided are rounded, but fairly representative:

-Student debt is $100,000, at 5% interest. It could be paid off in 5 years at $1,900 per month, 10 years at $1,000 per month or 15 years at $800 per month.

-A 3 bedroom house may be purchased at $150,000. A 30 year mortgage at 4% interest is around $725 per month, 15 year is ~$1,100 per month, and 10 year at $1,500 per month. Property taxes are ~$250 per month / $3,000 per year. Home owner's insurance unknown, assuming $1,000 per year (?). 1-2 rooms in the house may theoretically be rented out at $500 per month. The alternative is renting at $650 per month.

-Take-home income is around $2,800 per month (after 401k, health insurance, federal and state taxes, etc.), or $34,000 per year.

-Car is owned, high fuel economy, high miles but runs well. I have no costly bad habits. A nice round number for "everything else" (utilities, food, car insurance) might be as high as $800 per month or as low as $500.

-Total liquid assets is approximately $20,000. Assume minimum $5,000 liquid desired at any given time.

So, with $2,000 per month in discretionary spending, how do you distribute it? Continue renting at $650 and paying $1,350 on the loans with an expected "out of the hole" date of ~8 years, assuming no rise in income (which is almost guaranteed, but best not to bank on)? Or, do you buy the house with a long mortgage, fill it with roommates, build some equity? Or, a shorter mortgage and slow down on the student debt payoff?

Again, numbers are approximate, but fairly representative. I can probably bring my monthly expenses down toward the $500 end - for instance I dumpster dive for vegetables sometimes, and bike when I can - but there are items like unplanned car maintenance may crop up, and there's more flexibility/safety without a mortgage or the risk of losing tenants. I'm unsure how to figure "flexibility" into my spreadsheets. Additionally, I bike to work 9 months out of the year from my present rental (only drive when it's below maybe 10F or snowing hard / very slick), but would not be able to from any house I could afford.

I'm not starting from the greatest place and it's tough to talk about sometimes, but I've been getting things in order for the last year or so and am finally able to commit to a path. I like my job and there's room to grow here, both in income and in skills. I like where I live, but it's high COL and I'm also not opposed to moving for a better job in a year or two, so long as quality of life factors don't suffer (e.g. ability to bike/walk, access to nature, less supportive local culture).

Thoughts?
« Last Edit: December 19, 2017, 05:59:33 AM by Ecky »

COEE

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Re: Buying a house vs paying off student debt
« Reply #1 on: December 19, 2017, 06:37:03 AM »
Personally, I would not advise taking additional debt.  At about 40k gross income and a debt load of 100k you already have a debt of 2.5x of your annual income.  This is the kind of home loan that I'd advise for someone that is taking out a loan on a house with no other debts. 

I would work double time to double your income and reduce your spending.  I'd be looking to double your income in the next two years and reduce spending by half in the next year.  I'm guessing that you have a reasonably well paid occupation path if you have that much student loan debt.  I'd also take a long hard look at killing the 401k contribution to have more money to sink into the student loan debt.  If your company match isn't greater than 5% then this is a obvious thing to do.  Even if you match is greater, it might be a better thing to do from a psychological standpoint

Your debt is a big fucking emergency.  Treat it as such.  https://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/

ooeei

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Re: Buying a house vs paying off student debt
« Reply #2 on: December 19, 2017, 06:50:02 AM »
A 30 year mortgage at 4% interest is around $725 per month, 15 year is ~$1,100 per month, and 10 year at $1,500 per month. Property taxes are ~$250 per month / $3,000 per year. Home owner's insurance unknown, assuming $1,000 per year (?). 1-2 rooms in the house may theoretically be rented out at $500 per month.

The alternative is renting at $650 per month.

Why in the world would you not rent? Buying is costing you more every single month before you add insurance, taxes, transaction costs, repair costs, or even consider your student loans.

It's a no brainer, rent.

Ecky

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Re: Buying a house vs paying off student debt
« Reply #3 on: December 19, 2017, 07:16:18 AM »
Personally, I would not advise taking additional debt.  At about 40k gross income and a debt load of 100k you already have a debt of 2.5x of your annual income.  This is the kind of home loan that I'd advise for someone that is taking out a loan on a house with no other debts. 

I would work double time to double your income and reduce your spending.  I'd be looking to double your income in the next two years and reduce spending by half in the next year.  I'm guessing that you have a reasonably well paid occupation path if you have that much student loan debt.  I'd also take a long hard look at killing the 401k contribution to have more money to sink into the student loan debt.  If your company match isn't greater than 5% then this is a obvious thing to do.  Even if you match is greater, it might be a better thing to do from a psychological standpoint

Your debt is a big fucking emergency.  Treat it as such.  https://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/


Why in the world would you not rent? Buying is costing you more every single month before you add insurance, taxes, transaction costs, repair costs, or even consider your student loans.

It's a no brainer, rent.



Thanks for the advice. The student debt is certainly an emergency and I'm dumping all of my discretionary income into it. I'm just trying to understand whether it might be wiser to redirect some of that. I'm currently living with two roommates for $650 per month rent and am curious whether it might be better to have a $725 mortgage + $350 in taxes and insurance, with a potential $1,000 per month from tenants, than to keep paying rent. I'm very uncomfortable with the idea of having that much debt but at least at a glance, it seems like I might come out ahead financially, at least under a specific set of assumptions.

With regards to doubling my income, I don't know if doubling is feasible but I can probably conservatively earn 50% more within the next 4-5 years where I am and doing what I am; frankly it shouldn't have cost me as much to get my degree as it did, but that's water under the bridge and not something I'm ready to talk about with internet strangers.

I have a BS in Geology and am currently working out-of-field doing IT work. It's been long enough since I was in school that I'm unsure of my prospects of moving into something geology-related. I feel it would be wise to stay with my company for at least another 1-2 years for the sake of my resume and for the practical knowledge I'm gaining, and there's a lot to love about Burlington even if the cost of living is relatively high. I could probably make more money by moving, leaving family, friends, and community, but I've historically struggled with loneliness and a feeling of isolation.


« Last Edit: December 19, 2017, 07:23:34 AM by Ecky »

Sibley

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Re: Buying a house vs paying off student debt
« Reply #4 on: December 19, 2017, 07:29:54 AM »
OP, work through the NYT Rent vs Buy calculator. But pay down some of that SL debt first.

Ecky

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Re: Buying a house vs paying off student debt
« Reply #5 on: December 19, 2017, 07:39:48 AM »
OP, work through the NYT Rent vs Buy calculator. But pay down some of that SL debt first.

Plugging some factors in,

Quote
If you can rent a similar home for less than $643 PER MONTH then renting is better.

This assumes I'd be living alone in the purchased 3 bedroom, vs living with 2 other people while renting.
« Last Edit: December 19, 2017, 07:45:26 AM by Ecky »

COEE

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Re: Buying a house vs paying off student debt
« Reply #6 on: December 19, 2017, 12:33:47 PM »
https://www.google.co.in/amp/s/www.forbes.com/sites/trevornace/2015/11/22/make-degree-geology-salary-survey-reports/amp/

According to that link with a BS your starting salary should be around 90k.  Go double your income tomorrow.  Someone should have no problem hiring you for 80k if youve been out of school a few years.  Doubling your income overnight.  Then you put 40k a year towards your loans for 2.5 years and your done without changing anything.  Then at least youre even and can choose to go back to lower paying IT at that point.

Having an extra 1k a month will not help you much... Especially if you take on more debt.  Go earn 3k more a month and be done with it.  Then choose if you want to take the landlord risk.

Youre talking about putting a bandaid on a hacked off limb.

Go be badass.

Ecky

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Re: Buying a house vs paying off student debt
« Reply #7 on: December 20, 2017, 04:43:33 AM »
https://www.google.co.in/amp/s/www.forbes.com/sites/trevornace/2015/11/22/make-degree-geology-salary-survey-reports/amp/

According to that link with a BS your starting salary should be around 90k.  Go double your income tomorrow.  Someone should have no problem hiring you for 80k if youve been out of school a few years.  Doubling your income overnight.  Then you put 40k a year towards your loans for 2.5 years and your done without changing anything.  Then at least youre even and can choose to go back to lower paying IT at that point.

Having an extra 1k a month will not help you much... Especially if you take on more debt.  Go earn 3k more a month and be done with it.  Then choose if you want to take the landlord risk.

Youre talking about putting a bandaid on a hacked off limb.

Go be badass.

My initial reaction was to be offended, as I spent two years hunting jobs in-field while working low paying jobs before deciding to try a different path. Most positions had GPA requirements I didn't meet, required a graduate degree, or were in places I couldn't realistically go at the time. However, I no longer have a marriage or any living family, so it's now feasible for me to live on an oil rig or remote site. This is probably the reminder I needed. Time to start being badass.
« Last Edit: December 20, 2017, 04:55:36 AM by Ecky »

speedofsound

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Buying a house vs paying off student debt
« Reply #8 on: December 20, 2017, 05:07:39 AM »
https://www.google.co.in/amp/s/www.forbes.com/sites/trevornace/2015/11/22/make-degree-geology-salary-survey-reports/amp/

According to that link with a BS your starting salary should be around 90k.  Go double your income tomorrow.  Someone should have no problem hiring you for 80k if youve been out of school a few years.  Doubling your income overnight.  Then you put 40k a year towards your loans for 2.5 years and your done without changing anything.  Then at least youre even and can choose to go back to lower paying IT at that point.

Having an extra 1k a month will not help you much... Especially if you take on more debt.  Go earn 3k more a month and be done with it.  Then choose if you want to take the landlord risk.

Youre talking about putting a bandaid on a hacked off limb.

Go be badass.

I have friends with BS-Geology diplomas that are tending bars and waiting tables. The diploma alone often doesn't get you into high paying work. Often it requires a masters - my uncle is a geologist (got his BS in the 80s), and didn't get a decent salary until he went back to school to get his masters and specialize in hydrogeology in the early 90s.  Of course, back then getting a masters at a state school wasn't back-breakingly expensive.

Point is, I'd take the Forbes salary figure with a grain of salt.  There are a lot of folks out there with undergraduate degrees in the physical sciences that are struggling, unfortunately.


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« Last Edit: December 20, 2017, 05:09:24 AM by speedofsound »

Ecky

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Re: Buying a house vs paying off student debt
« Reply #9 on: December 20, 2017, 05:28:10 AM »
Yeah preliminary reading suggests that without a masters I can qualify for a job as a mudlogger (a dirty job with tough hours) or possibly in engineering geology or environmental consulting; the rest of it is out of my reach without a graduate degree. Looks like most mudloggers start out under $40k before taxes, and the average base pay for everyone in the field is $52k according to glassdoor. Environmental consulting seems to pay about 40k starting, scaling up to 60k before leveling off. There isn't enough data for engineering geology to map out salaries. Still, it can't hurt for me to apply around.

I can probably expect $3-5k raises every year for the next 3-5 years at my current job; I was hired below the pay of most working here because I lacked experience and some of the required qualifications. I just didn't want to assuming what raises I'd get when trying to figure out finances.
« Last Edit: December 20, 2017, 05:38:24 AM by Ecky »

ooeei

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Re: Buying a house vs paying off student debt
« Reply #10 on: December 20, 2017, 08:59:52 AM »
Yeah preliminary reading suggests that without a masters I can qualify for a job as a mudlogger (a dirty job with tough hours) or possibly in engineering geology or environmental consulting; the rest of it is out of my reach without a graduate degree. Looks like most mudloggers start out under $40k before taxes, and the average base pay for everyone in the field is $52k according to glassdoor. Environmental consulting seems to pay about 40k starting, scaling up to 60k before leveling off. There isn't enough data for engineering geology to map out salaries. Still, it can't hurt for me to apply around.

I can probably expect $3-5k raises every year for the next 3-5 years at my current job; I was hired below the pay of most working here because I lacked experience and some of the required qualifications. I just didn't want to assuming what raises I'd get when trying to figure out finances.

Be aware that the mudlogger pay you found is BASE pay, if you live/work out on a rig regularly that will only be a portion of your overall compensation. I don't work in the field so I can't comment on the realistic numbers, but I know it will be much higher than 40k. Applying/interviewing wouldn't hurt, and you could figure out compensation during the process.

As for the roommates thing, be careful buying a house based on roommates paying part of the mortgage. I've seen a lot of people do that at 22-26 years old, and roommates are really easy for the first 1-2 years then tend to drop off. They get in relationships/married, move to new jobs, or just want their own place. Finding new roommates gets more difficult as well.

That's not to say it can't work, I've seen it work well, but it really takes a specific type of person (usually someone really laid back and social, and with a significant other to match) to make it pay off. You have to be pretty not-picky about your roommates if you want to keep the place occupied, while also being confident in holding them to their end of the deal (paying rent, keeping clean, etc).

specialkayme

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Re: Buying a house vs paying off student debt
« Reply #11 on: December 20, 2017, 09:35:36 AM »
https://www.google.co.in/amp/s/www.forbes.com/sites/trevornace/2015/11/22/make-degree-geology-salary-survey-reports/amp/

According to that link with a BS your starting salary should be around 90k.  Go double your income tomorrow.

Seriously? You google what a geologist makes and based on that you're telling the OP how much they should be making and career advice? I'm not sure I can roll my eyes hard enough through this computer.

Thoughts?

First, buying real estate is a long term investment, no matter how you break it down. By long term, I'd think in terms of 5-10 years at a minimum. The first question you should ask yourself is if you plan on living in the same place for 10 years. Things may change, but if you aren't sure or comfortable you're going to stay, it may not be a good investment. If you use a real estate broker to sell your home, it'll cost you 6% of the purchase price. Most of your monthly payment on your mortgage will go to interest, so it might take 3 years before you can sell your home and "break even." Things to keep in mind.

Second, it's a question on what you're comfortable with. If you are the type of person that can be comfortable and sleep at night with a large amount of debt, understanding that it has the greatest avenue to put you in a better financial position 20 years from now, with SIGNIFICANT risk, keep that in mind. If not, you need to adjust accordingly.

The answer to those two questions will likely push you in a direction. From there, do some projections on what is going to benefit you the most.

Personally, I've run my own projections and learned that my money is better spent being put into 401k's and the stock market first, real estate second, and paying down student loans last, when you consider inflation, time value of money, anticipated returns on stock market and real estate markets. If I assume a 7% annual return in the stock market, if I have $1,000 to put each month to either A) investments or B) student loans, I'll be better off by approximately $60k at the end of a 10 year time period, and almost $200k over a 20 year time period by investing over paying down student loans. That doesn't count for tax benefits of 401ks and IRA's, or inflation adjustments, which push all the numbers even further toward the benefit of investing first. But it's a crap shoot. No one can predict the future on the value of homes or stocks, taxes or inflation, and your student loan interest is guaranteed. So it all comes down to the second factor above.

BTW I'm very much the minority in this forum. And I'm probably going to get tons of sh*t for saying the above. But the math checks out for me. And it's my life. So there you go.
« Last Edit: December 20, 2017, 09:37:33 AM by specialkayme »

notactiveanymore

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Re: Buying a house vs paying off student debt
« Reply #12 on: December 20, 2017, 12:47:12 PM »
If my income was $34,000, I would not take on a mortgage of that size even if I didn't have 100k in student loan debt. It also sounds like maybe you're not 100% rooted anymore to your current location, so that is a big thing to determine before locking yourself into a house payment.

Personally, we paid off our 55k in student loans before jacking up our retirement and throwing money towards a downpayment and I'm so happy with that decision. But with your ratios, I might look at a modified approach. Maybe you can go 100% all out attacking the debt for two years and see if you can get it under 60k. Then take a new look at your situation and decide how you want to handle the remaining balance. You could transition to a 10 year repayment at that point and then your cashflow situation gives you a lot more options.

Also, if this is a federal student loan, the two years of huge payments will be treated as prepayments (still reduce the principle, but also extend your next payment due date based on your repayment plan). That basically acts as a hedge against a financial emergency. In an ideal situation, you keep paying at whatever new rate you've decided on to finish out the balance. But if something happens, you can go a few months without making a payment until you get back on your feet.

You are just too leveraged to buy a house right now on a single income, even with roommates. Sure, roommates help bring down that mortgage cost, but your roommates aren't going to pay extra when the heater goes out or the sewer line needs replaced. And frankly, I'd be somewhat troubled if you could get a mortgage that size at 4% with your DTI...

frompa

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Re: Buying a house vs paying off student debt
« Reply #13 on: December 20, 2017, 08:59:22 PM »
A big factor is that it sounds like you're not particularly committed to staying where you are.  I'd recommend against buying real estate unless you are one hundred percent sure that you can deal with having your limited resources tied up for the long term. It makes more sense to think of your living situation as an expense, even when/if you buy, than as an investment into a tangible asset.  I've known plenty of people who bought a home on the idea that "it's an investment" only to suffer through years of the additional expenses of homeownership  (oops, new roof; oops, new heating system; oops, oops, oops...) and then had to sell in a down market, so they realized no financial benefit and a lot of headaches.   If you are frustrated or bored with the slow pace of your financial progress, perhaps you can find a more tangible goal to improve your situation.  You do have a shit ton of debt already.  Even if you are comfortable with that, you might feel very differently about taking on a mortgage after you have the experience of getting all your debt settled and out of the way. 

Ecky

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Re: Buying a house vs paying off student debt
« Reply #14 on: December 21, 2017, 05:19:06 AM »
Thanks all, great advice. Even if I might come out financially ahead, I'm going to hold off for at least a few more years.