Author Topic: To pay off loans or save for house?  (Read 2946 times)

gfxprotege

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To pay off loans or save for house?
« on: July 31, 2015, 10:27:36 AM »
Hi there,

Here is my current financial situation:

I have ~30k in student loan debt and about 15k (@3%) on the car (upside down on the car, but close to breaking even). I have 2 months salary saved as well as 1k in a Betterment account (which i contribute 200/mo). I currently pay 1k/mo rent + utilities, etc but am able to save 1k/mo. I was considering saving for a down payment on a 2bdrm condo or small house, in which I could rent out space to a close friend or two (who are also overpaying for their 1 bedroom apartments in Denver). My internal arguments are thus:

Save for house first before paying off loans: loan payments are well within my budget. By moving into a house/condo where I could rent a room, I would be able to minimize my cost of living which would free up money for paying off loans. Would take about a year (as I just renewed my lease).

Pay off loans first: Frees up more money to save for a home, spend less in interest, but have to overpay for housing. Would take 1.5 years to pay off car loan in full then another 2 years for student loans (all the while rent seems to go up by 100/mo each year).

On one hand, locking into a mortgage next year could lower my rent to 0/mo (if I rent a room to a friend) which would free up an additional 1k to pay off car quicker. On the other, its another debt that needs to be paid.

Thoughts?

Thanks,
Jordan


Rezdent

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Re: To pay off loans or save for house?
« Reply #1 on: July 31, 2015, 10:55:38 AM »
See MMM'S latest post on renting/buying.

Is renting really cheaper than buying for you, in your area?
Are you willing to stay in the house for years?

There are online calculators that help compare costs and are useful for making the decisions.

Some considerations:
The rent price per month is inclusive.  A mortgage payment is not, and you will be paying property taxes, miscellaneous repair expenses, etc.  Utilities often run higher as well.
The costs incurred in buying a place are high enough that it makes no sense unless you plan to live there for seven or more years.  Selling too soon will cause losses, so you will be locked into that house and that mortgage for a long while.

I would vote that you pay down more debt first.

And you didn't ask, but I'm gonna say it:  cut your losses on that car, jeez.  15K, upside down, and years to pay it off?

Roboturner

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Re: To pay off loans or save for house?
« Reply #2 on: July 31, 2015, 10:56:53 AM »
I'd keep in mind the taxes associated with home-ownership, as well as maintenance costs, we bought our first house  last August and have already invested ~30k in repairs, nearly all of which would be "dire" not frivolous.

Ontop of that Denver is a feeding frenzy sellers market right now
« Last Edit: July 31, 2015, 11:01:11 AM by Roboturner »

Roboturner

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Re: To pay off loans or save for house?
« Reply #3 on: July 31, 2015, 10:58:12 AM »
Also +1 for utilities, we went from $25/mo to anywhere between $150-$300/mo depending on season

water,sewage,electricity,gas ----> higher in winter, no A/C

gfxprotege

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Re: To pay off loans or save for house?
« Reply #4 on: July 31, 2015, 10:59:53 AM »
One bedroom apartments in Denver rent for $1351 a month on average and two bedroom apartment rents average $1782. I could probably do a bit better than the average, but I wouldn't be saving an incredible amount of money. Whereas, I've seen 2bdrm condos in the 100k range. Using a mortgage calculator, a 150k loan at 4% interest would be roughly 700/month, which is what I would charge for the 2nd room, yielding free rent (ish).

therethere

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Re: To pay off loans or save for house?
« Reply #5 on: July 31, 2015, 11:00:04 AM »
How would you save up enough for a downpayment in a year when you are projecting you can only save 1k a month?

Have you looked at pricing in Denver? Its a highly competitive market right now and I (personally) think prices are at their peak. Unless its a dump everything is selling for 5-20k above asking right now. I even looked at one place that was listed reasonably and found out later it sold for 60k above asking! I would make sure you really understand the market and price ranges before you get your heart set on buying.

Unless you are looking in the close suburbs outside of Denver I have no idea where you are finding 2bd condos for <150k. The 1bd condo I used to live in Five Points just sold around 290k with no amenities other than a parking garage and snow removal. The HOA fees there are 275$. Do not forget about HOA fees. They can range from 150-300$ per month.
« Last Edit: July 31, 2015, 01:24:49 PM by therethere »

Roboturner

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Re: To pay off loans or save for house?
« Reply #6 on: July 31, 2015, 11:04:19 AM »
How would you save up enough for a downpayment in a year when you are projecting you can only save 1k a month?

Have you looked at pricing in Denver? Its a highly competitive market right now and I (personally) think prices are at their peak. Unless its a dump everything is selling for 5-20k above asking right now. I would make sure you really understand the market and price ranges before you get your heart set on buying.

+1 paid 15k above asking and *barely* won.

Also condos have a lesser resale value + HOA costs, be sure to check the solvency of the HOA, payments per month can be ridiculous and go up with little warning!

TheLazyMan

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Re: To pay off loans or save for house?
« Reply #7 on: July 31, 2015, 11:21:50 AM »
What's the interest rate on your student loan? Is it variable or fixed?

ashwihi

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Re: To pay off loans or save for house?
« Reply #8 on: July 31, 2015, 12:08:20 PM »
I'm still kind of a newbie here also, but I can't stand debt.  Paying the bank or someone else interest is a thief taking from my pocket book every night after I've worked my tail off for 8+ hours.

I was debt free* before I married into it.  On August 1 we'll be sending the last check to Sallie Mae and officially throwing her out of the guest bedroom.  DW's loans were at 6.8% and designed to basically never pay off at the minimum payment (~15 year pay-off, what the heck!)

I now that frugal toque has a great article about being mortgage debt free and I can't wait for that also some day.  There's something incredibly liberating about not owing anyone else a dime for the real and personal property that you possess.

*other than a ridiculously inexpensive mortgage payment at 2.75% for a 15 year in Oklahoma City, where it's more economic to buy than rent and real estate values have historically remained very consistent.  We didn't experience the housing 'bubble' effects that others did. 

slugline

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Re: To pay off loans or save for house?
« Reply #9 on: July 31, 2015, 01:07:15 PM »
I think the OP should read MMM's newest rent-vs-buy blog post too. Also I would feel better about buying a house if I didn't have other debts to juggle. How much is the interest rate on the student loan?

I'm still kind of a newbie here also, but I can't stand debt.  Paying the bank or someone else interest is a thief taking from my pocket book every night after I've worked my tail off for 8+ hours.

Awww . . . now I feel guilty for my interest investing in bond funds and/or Lending Club. :(
« Last Edit: July 31, 2015, 01:12:55 PM by slugline »