Author Topic: Buying a house when I still have a lot of student loan debt?  (Read 5394 times)

blissmonkey80

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Buying a house when I still have a lot of student loan debt?
« on: October 22, 2013, 06:14:28 PM »
I am currently carrying a student loan balance of about $30K and I'm trying to decide if it's a better move to pay the loan off first or put payments on hold until next summer so I can save up for a down payment on a house?  I've been paying way more than the minimum balance on my loan and don't have a payment due until next November.  I don't have a ton of money saved up right now (about $2500 in an emergency fund--I don't touch it ever), so I'd be starting from scratch as far as saving for a house.  I think I could save close to $10K by June if I am extra frugal and also save all of my tax refund next year.  I'm super frugal and have cut my expenses about as low as they can go.  The cheapest I could get a house for in the area I want is between $150-200K.  I'm a single mom teacher with a 10 year old girl and 8 year old boy, so I need 3 bedrooms.  Thoughts?  Advice? 

Miss Growing Green

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Re: Buying a house when I still have a lot of student loan debt?
« Reply #1 on: October 22, 2013, 06:27:30 PM »
Great question!  First of all- what is the interest rate on your student loan?  I have a student loan that is 2.2% interest that I refuse to pay off, just because the money that would be used to pay it off is generating higher returns in other investments.  For the short and simple answer, my advice is keep the student loan if the interest rate is really low and you will be using the money that wold have gone towards you student loan for other investments (i.e. a house)

I have a blog post that might be useful for you.  It covers the pros and cons of renting vs. buying, and has some useful tips and a spreadsheet so that you can analyze your specific scenario:
http://www.thegrowinggreen.com/mortgages-101-should-i-rent-or-buy/

blissmonkey80

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Re: Buying a house when I still have a lot of student loan debt?
« Reply #2 on: October 22, 2013, 06:31:13 PM »
I wish my rate was 2.2!  It's 7.125. 

Another Reader

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Re: Buying a house when I still have a lot of student loan debt?
« Reply #3 on: October 22, 2013, 06:47:50 PM »
If I were a single mom with high interest debt that can't be bankrupted, I would pay that off before I did anything else, except possibly some contribution to retirement, if I did not have a pension.  From your comments, the student loan people are applying your extra payments as future payments instead of applying them to the principal.  You are not reducing the interest expense unless the extra payments go to the principal.  I would get that straightened out ASAP.

What is your retirement situation?  Are you getting child support?  If you are getting money for the kids now that will go away when they get older, I would max out the retirement and pay off the debt.  You never know when those payments will stop anyway.

In your shoes, I would rent until I paid off the debt, made sure my retirement would be funded, and I figured out how much house I could afford on my post-student loan and retirement adjusted salary.

DCUrbanMM

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Re: Buying a house when I still have a lot of student loan debt?
« Reply #4 on: October 22, 2013, 07:57:42 PM »
MMM had a phenomenal article on this topic a couple years ago.  Really eye opening.  He makes a very convincing argument to just power through the loan repayment before saving the down payment.

http://www.mrmoneymustache.com/2012/01/25/reader-case-study-student-loans-or-saving-for-a-home/

ShortInSeattle

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Re: Buying a house when I still have a lot of student loan debt?
« Reply #5 on: October 22, 2013, 08:04:04 PM »
With that interest rate I'd probably pay off the loan first.  The good credit history from paying it off plus the free income from having no debt payment will all benefit you when the time comes to get a loan.

Kudos on your discipline!

blissmonkey80

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Re: Buying a house when I still have a lot of student loan debt?
« Reply #6 on: October 22, 2013, 08:22:28 PM »
MMM had a phenomenal article on this topic a couple years ago.  Really eye opening.  He makes a very convincing argument to just power through the loan repayment before saving the down payment.

http://www.mrmoneymustache.com/2012/01/25/reader-case-study-student-loans-or-saving-for-a-home/

Thank you for that link!  I somehow missed that article in my MMM browsing ;)  My gut has been telling me pay down the loan, too, but I look at what I'm paying in rent and see so much more value in owning, so I want to make sure it's worth it to wait vs. buy.

I'm happy to say that my student loan debt is my only debt.  I've become pretty disciplined with my budgeting and spending (so much so that my friends all ask me to help them figure out their budgeting issues!)  That budgeting has allowed me to pay that loan down from $37K last February to 30K now on a teacher's salary...not bad!  If I put all extra money into it, I'm hoping to get it paid off within 2 years, which I think is absolutely reasonable (just feels like a long time from now!)  Next project is to find a job closer to where I live (or find a new job in an affordable area and find a place to rent there).

chasesfish

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Re: Buying a house when I still have a lot of student loan debt?
« Reply #7 on: October 23, 2013, 04:45:48 AM »
I think it really depends on the housing opportunities available.  Personally, I was able to execute on a very good deal for my first house and made a 20% gain in three years while keeping my rent vs buy cost the same.

That being said, I had a unique opportunity due to a FSBO property I found in a town with huge housing demand and adamantly opposed to allowing any new construction there. 

Rebecca Stapler

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Re: Buying a house when I still have a lot of student loan debt?
« Reply #8 on: October 23, 2013, 08:04:37 AM »
My first reaction is to pay down the loan because it has such a high interest rate. Would making SL repayment a prerequisite to home ownership speed up the payoff process?

But that's mitigated by wondering why you want to buy a home -- is the rental stock in your current town unsatisfactory? Are you unhappy with your current rental? I understand the emotional reasons why we want to buy (I feel them all the time! We still rent!) but it's still important to weigh them against other alternatives.

You mentioned that you think renting in your area is a poor value. Have you checked out the NYT rent v. buy calculator? It does a good job of quantifying some of the less tangible expenses of home ownership (maintenance, etc.) to see whether it would actually cost less to own and at what point owning costs less than renting.

Dezrah

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Re: Buying a house when I still have a lot of student loan debt?
« Reply #9 on: October 23, 2013, 09:18:59 AM »
To the OP, you are clearly awesome and on the right track and whether you pay off loans or buy a house, that will always be the case. 

Something I would suggest would be sitting down with your kids and talk to them about this.  Are they unhappy and dying to get out of your apartment or are they willing to “help the family out” by sacrificing their own bedroom now and serve as your cheerleaders.  I think this is a great opportunity to introduce them to adult realities while empowering them by making them feel part of the discussion and solution.

From your comments, the student loan people are applying your extra payments as future payments instead of applying them to the principal.  You are not reducing the interest expense unless the extra payments go to the principal.  I would get that straightened out ASAP.


This was a misconception I had about our student loans at first.  Don't worry, her lenders are not "applying your extra payments as future payments instead of applying them to the principal".  Here's how it works.

Her loans have a principal balance at $30,000.  Everyday, the interest accrues, but does not compound.  This means everyday her total grows by about $30,000 x 7.125%/365 = $5.86.  So let’s say she went 20 days without making a payment.  Her principle is still $30,000, she has accrued $5.86 x 20 = $117 in interest, totaling $30,117.  Now she makes a $1,000 payment.  She first has to pay off all the accrued interest with the remaining going to principal, so her new principal would be $29,117 and interest now accrues at the rate of $5.68/day.

The “next official due date” is based on the original loan plan and minimum payment schedule.  So let’s assume that according to her original loan schedule, $29,117 principal is where she would expect to be three months from now if she only made minimum payments; her next penalty free due date would be at that three-month mark. 

If she so wanted, she could stop paying for three months and she would be in the exact situation as if she’d only paid the minimum instead of a large overpayment.  This is meant to encourage you quickly pay down the loan since you can effectively give yourself a cushion of non-payment time if a crisis comes up and you will be no worse off than you originally planned for.  As far as I know, this is a feature unique to student loans.  Your mortgage still expects you to pay every month regardless of the amount you have overpaid in the past.

blissmonkey80

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Re: Buying a house when I still have a lot of student loan debt?
« Reply #10 on: October 23, 2013, 10:41:23 AM »
But that's mitigated by wondering why you want to buy a home -- is the rental stock in your current town unsatisfactory? Are you unhappy with your current rental? I understand the emotional reasons why we want to buy (I feel them all the time! We still rent!) but it's still important to weigh them against other alternatives.

You mentioned that you think renting in your area is a poor value. Have you checked out the NYT rent v. buy calculator? It does a good job of quantifying some of the less tangible expenses of home ownership (maintenance, etc.) to see whether it would actually cost less to own and at what point owning costs less than renting.

I currently pay $1250 + utilities (about $120/mo) for a 2 bed + loft condo (1150 sq. ft., which feels too big) in a suburb (I don't really like suburban living at ALL, but we're close to my parents, who take the kids before and after school).  I had been in a 2 bed 575 sq. ft. apartment for the 3 years before that, which was $1000/mo and included all utilities except electric.  I loved it, but we had no outside space.  That apartment was in an awesome neighborhood, but my kids shared a tiny room and they are at the ages where privacy is a big deal.  My ultimate solution would be to find a job at a school where I actually want to send my kids (NOT the one I currently teach at!) and then I could move close to that and not rely on my parents for before/after school care.  But I digress...

Anyway, I feel like I could get more bang for my buck by buying, but I'd have max $10K for a down payment by June (when my current lease is up) and I think the cheapest I'd be able to buy would be $150-175K min.  Does the extra info change anyone's thinking on this?

gimp

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Re: Buying a house when I still have a lot of student loan debt?
« Reply #11 on: October 23, 2013, 12:03:24 PM »
Your current rent is $1250 + 120 utilities.

How much is the sum for your theoretical house where you live: mortgate, utilities, maintenance and repairs and contribution to a maintenance and repair emergency fund, taxes, fees, insurance, and probably a few things I am missing?

Now, if all of the house costs are cheaper than renting, that's one situation. If the house costs are more than that of renting, that's another. That should influence your decision.

Also, how are the prices compared to the build cost? Are there houses selling for cheaper than it would cost to build one? Significantly cheaper? That may indicate very good deals that you won't find for many, many years. On the other hand, if it's the other way around, maybe buying a house is simply a bad deal right now.

With all that said, I suspect you'll find it much better to pay off that 7%+ loan.

MsSindy

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Re: Buying a house when I still have a lot of student loan debt?
« Reply #12 on: October 23, 2013, 12:11:38 PM »
I think you've been given great advice to pay off the SL first, so I'll just add a couple of other things to think about:
 - make sure that you have enough for a down payment so that you're not paying mortgage insurance ($10k seems really low)
 - make sure you have enough for all the estimated costs at closing - usually a couple of thousand
 - make sure you have enough to put money aside for maintenance/repairs (eventually you'll need roofs, water heaters, driveway resealing, etc.)
 - if you don't know how to repair things like toilets and simple drains, think about taking an adult night course or something to start to learn those skills so you don't have to hire them out.....or better yet, start to learn these skills so that you can get a fixer-upper and save a lot of money
 - be prepared for all the things that usually come with buying a new house - need a lawnmower, water hose, curtains, etc. - ask anyone who just purchased a house and how it kind of nickel and dimes you to death.
 - make sure that you have a minimal Emergency Fund in place BEFORE you buy a house, so that something unexpected doesn't side-line you right from the start (i.e. job loss or illness)


I know it seems like a long way away, but don't be in a hurry - enjoy renting and the flexibility and easier lifestyle it allows.  I grew up in a rental and as a kid I could care less.  Yes, it was nice to see my single Mom buy her own house, but it didn't really impact my 'happiness' as a kid.  If you would have asked me to share a room with my brother so that we could 'save for a house', I would have said no thanks, this house is just fine.

Owning a house is not the holy grail - be open to challenge the "rule" that everyone should own a house.

blissmonkey80

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Re: Buying a house when I still have a lot of student loan debt?
« Reply #13 on: October 23, 2013, 07:58:13 PM »
I think you've been given great advice to pay off the SL first, so I'll just add a couple of other things to think about:
 - make sure that you have enough for a down payment so that you're not paying mortgage insurance ($10k seems really low)
 - make sure you have enough for all the estimated costs at closing - usually a couple of thousand
 - make sure you have enough to put money aside for maintenance/repairs (eventually you'll need roofs, water heaters, driveway resealing, etc.)
 - if you don't know how to repair things like toilets and simple drains, think about taking an adult night course or something to start to learn those skills so you don't have to hire them out.....or better yet, start to learn these skills so that you can get a fixer-upper and save a lot of money
 - be prepared for all the things that usually come with buying a new house - need a lawnmower, water hose, curtains, etc. - ask anyone who just purchased a house and how it kind of nickel and dimes you to death.
 - make sure that you have a minimal Emergency Fund in place BEFORE you buy a house, so that something unexpected doesn't side-line you right from the start (i.e. job loss or illness)


I know it seems like a long way away, but don't be in a hurry - enjoy renting and the flexibility and easier lifestyle it allows.  I grew up in a rental and as a kid I could care less.  Yes, it was nice to see my single Mom buy her own house, but it didn't really impact my 'happiness' as a kid.  If you would have asked me to share a room with my brother so that we could 'save for a house', I would have said no thanks, this house is just fine.

Owning a house is not the holy grail - be open to challenge the "rule" that everyone should own a house.

That is all really good advice!  And I know I wouldn't have that much saved by next summer.  I am actually not at all opposed to the idea of renting (I would actually prefer it to buying), but the cost goes up SO much from a 2 bedroom to a 3 bedroom rental.  I prefer tiny spaces.  If I found a rental with a huge master bedroom that I could divide up for my kids, then I could stick with a 2 bedroom.  I moved to the suburbs in June because the rental cost is so high in the good parts of the city, but all I've been thinking about since I moved down here was how much I want to move back to where I was.  Good food for thought on sticking with a rental.  Sometimes I just get the buying bug and entertain the idea for awhile, but most of the time, the commitment aspect of buying totally freaks me out ;)  I know that I need to just leave the focus on paying off that SL and then see where I am after that.

Rebecca Stapler

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Re: Buying a house when I still have a lot of student loan debt?
« Reply #14 on: October 26, 2013, 06:36:24 AM »
I understand where you're coming from, because we rent and have SLs, and have a preschooler who will be going to kindergarten soon. But every time I wonder if buying is right for us, I go here: http://www.piticalc.com/ and enter in the down payment we would have and the expected home value, etc. It takes into account whether you would pay PMI (mortgage insurance). (except for some reason there's a glitch and if you put down 0%, it doesn't calculate PMI)

According to that, a $150k home with a $10k down payment would cost you $100 less per month than if you rent. But is there housing stock at that price that would meet your needs?

But that $100/month savings may or may not cover your regular maintenance costs on the home -- depending on the state of the home you buy and whether you can do repairs and maintenance yourself. It seems pretty risky to me, but it's your decision!