Pay off student loan vs. Down Payment on home

[jawbrey0610]

Hello all,

My partner and I are making our way through debt together and we should be done within the next year, minus some school debt of hers. We want to get into the housing market and start a family in a few years, and right now we're dialing in our financial road-map.

Right now I'm not sure how I would calculate this decision: pay off the school debt (roughly $50k, not sure of the interest upon posting), or save for a down payment and get into a house before paying off the school debt.

Any best practices out there that come to mind? I imagine it's something like comparing interest rates on the school load versus what we could get on a home loan... any responses are much appreciated :)

[ShoulderThingThatGoesUp]

You have a $50,000 debt that you don't know the interest on? You have a lot of dialing in to do! The interest rate is the key figure in deciding whether to pay off a debt faster than the contract amortization.

[JustGettingStarted1980]

This is optimizable if you want, but if you can do it in a year, just suck it up and pay off the student loans, and be done with it.

This will be good practice for the following 1-3 years of saving for your House down payment, and will simplify your life long term.

If you want my interest rate argument, I can give that too. Any money you save for a down payment should be held in a Savings Account only (interest approximately 1%), any loan at >3% interest will give you a better return being paid off (for life!) than your 1% Savings.

[jawbrey0610]

Nope I'm not sure what the interest rate is on her loan, but I know the information is obtainable :)

I had first leaned toward paying off the student loan for simplicity, but I wasn't sure if it really made sense financially... the next thought that came to mind was, "if I start paying on a home loan sooner rather than renting, that will help me get through that faster...", but I don't think that is much of a solid thought either when it comes to calculating how I can get on top faster.

I didn't think about comparing the interest on the school loan versus the interest gained on saving for the down payment... thanks! That helps put some things in perspective for me.

[BarkyardBQ]

A standard loan gets more expensive the longer you have it. A mortgage gets cheaper the longer you carry it.

Get rid of your debt, then learn to use it properly.

[Bob W]

Standard answer from me ---- 

Refi the SL through SoFi for best rate.   Most SLs have a death or disability clause the makes them non payable should you die or be disabled.   From a numbers standpoint,  never pay them off.   Also, (Hill, Biden, Sanders) may push for some sort of forgiveness or super reduced rate, so definitely don't pay until this election cycle is over.   

Death is much rarer than disability at a young age.  Disability effects a very large percentage of workers in their lifetimes.

Open an account and label it "Paid Off Student Loan Account"  -- make sure it is a middle of the road index account.   Then, after your IRA,s, 401Ks,  HSAs and Down Payment Account are filled up,   fill that POSLA up to the amount owed and let it ride forever, while paying down the minimum on the actual SL.

Short math --

If your SL rate is 4% and your avg annual investment return is 8% you will have around 300K more if you invest rather than pay off in 50 years.   
That is about 6K per year for making a 15 minute decision one time.   Pretty good return.    Would your grandkids rather have 300K and a paid of SL or just a paid off SL?

[Jack]

Fundamentally, the choice between getting out of debt, investing, or even getting into debt in order to invest more is simply a question of which action gives you the highest risk-adjusted return.

For me, choosing to pay only the minimum on my student loans (and even deferring payment / changing to extended payment plans) and buying a house with almost zero down-payment in 2009 have given me much better returns than doing things the "Right Way (tm)" (i.e., getting out of debt first and saving a 20% down payment) would have.

I don't think houses are "on sale" any more and so buying one isn't urgent enough to justify foregoing the 20% down-payment anymore (unless you want to go with a "house hacking" strategy where you buy a du-, tri- or quad-plex and get tenants to pay your mortgage -- which is an excellent idea that I wish I'd done), but I do think student loan rates are still cheap enough to justify minimum-only payments. YMMV, of course.

[Easye418]

I wonder if this is the single most frequently asked question on MMM boards. 

I asked the same question when I joined :)

[Bob W]

I wonder if this is the single most frequently asked question on MMM boards. 

I asked the same question when I joined :)

It is asked a lot.   

I forgot my other standard reply on "home buying."     You "buy" a home for cash.  That means if you want a 200K home you actually have 200K.   I would in this environment put a small amount down and invest the rest.

As someone mentioned homes are not on sale now like they were a few years ago.   Most people don't understand the risks or how one can lose 80K when they put 20K down on a 200K house.

I'll explain as I saw this happen lots in 06-12. 

1.  You save up 20K and buy a sweet 200K house.
2.  The economy goes down (as it always will)
3.  You need to sell the house because hey,  you lost your job or need to move or fell in love,  whatever.
4.  The home you paid 200K for is now worth 120k.  Plus you pay 7K in selling fees. 

You paid 200,  you sold for 113.   You lost about 90K on a 20K transaction.   

Yep,  it happened a lot and will happen a lot in the future.  Don't be that person.   Just a little thing to think about.   

[Rhoon]

Another thing to consider is your credit rating and how the future market may shift. Will interest rates go up in the next 1-2 years? That could change the mortgage payment drastically. If you have decent credit and can get a really good interest rate now, I say go for the house now, get the tax write off and your student loan interest can be thrown on top of that. Once the house is settled, work on the student loan debt.

If your interest rate will be higher (6% range), you may want to consider paying off the student loan debt now and improve your credit rating in the mean time.

[MDM]

I wonder if this is the single most frequently asked question on MMM boards. 
I asked the same question when I joined :)

It is asked a lot.   

Consequently, it appears in the FAQ sticky http://forum.mrmoneymustache.com/forum-information-faqs/frequently-asked-questions/.

[MDM]

A standard loan gets more expensive the longer you have it. A mortgage gets cheaper the longer you carry it.

Huh?  Might be helpful if you could you show the math...?  Maybe it's the definition of "standard loan" that I'm not following.

[jawbrey0610]

Thanks for all the responses, I didn't know the 'Stache boards were so active.

I'll do some research and definitely read through that FAQ!

[Jack]

A standard loan gets more expensive the longer you have it. A mortgage gets cheaper the longer you carry it.

Huh?  Might be helpful if you could you show the math...?  Maybe it's the definition of "standard loan" that I'm not following.

I'm guessing maybe he's talking about the difference between a loan that amortizes over a fixed term versus a revolving line of credit?