Author Topic: Pay off student loans, or buy a house?  (Read 3871 times)

mtn

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Pay off student loans, or buy a house?
« on: October 02, 2015, 08:31:47 AM »
We just moved into an apartment (rental) and have decided that we want to own a house. We're done with renting, we're tired of landlords (even great ones), we're tired of not knowing if the rent will go up, we're tired of not being able to fix things that don't need fixing, but really need updating.

So here is the situation:
About $90,000 combined income "guaranteed", and depending on what happens with the wife's job, could be as much as $110,000. We're playing with the lower number.
$25,000 in student loan debt--about a 6% hit.
$14,000 in taxable accounts (index funds for the most part)
$10,000 in cash

Other:
$50-$75k (not sure what the latest correction did to us) in retirement accounts that we're not touching

So with that layout, what would you be doing? Buying a house (and using the money in the taxable accounts and cash as a downpayment), or aggressively paying off the student loans? We'll probably have an additional $10,000 saved in a year.

tvan

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Re: Pay off student loans, or buy a house?
« Reply #1 on: October 02, 2015, 08:40:25 AM »
I would probably liquidate the taxable accounts and apply it to the student loan.  Then aggressively pay down the last 11k, if not use some of the cash to further pay it down.  Then start saving for a house.

waffle

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Re: Pay off student loans, or buy a house?
« Reply #2 on: October 02, 2015, 08:47:16 AM »
I think you're asking the wrong question or at least not enough questions. What is the market like in your area? I know you say you are tired of renting, but does renting or buying make sense in your area? If the numbers aren't strongly in favor of buying then I'd wait till you have a more substantial down payment. Here in Denver rent prices were so high when I was looking that I went ahead and bought even though I had to pay pmi. Now a year later I can refinance and get rid of pmi, but if renting wasn't so expensive I would have just done that till I had at least 20% down.

Easye418

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Re: Pay off student loans, or buy a house?
« Reply #3 on: October 02, 2015, 09:01:20 AM »
Almost the same situation here, slightly different, more income, more student loans, no other debts, +100k in retirement.

Buy the house if it will make you happy.  A lot of the folks here are pro-renting.  Also, you should wait for 20% DP.

So it looks like you have savings cash flow of $833 a month....

Re-fi into a variable student loan, save for down payment, get down payment, buy house, switch cash flow to student loans, win life.
« Last Edit: October 02, 2015, 09:05:17 AM by Easye418 »

Lanthiriel

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Re: Pay off student loans, or buy a house?
« Reply #4 on: October 02, 2015, 09:03:50 AM »
My husband and I were in almost your exact same position down to all the numbers and chose to buy last winter. I wish we had waited. The first year in a house is very expensive. Unless you are buying new, there is likely to be deferred maintenance plus the costs of changing anything you just can't stand. In our case they left huge holes in the walls (every room had a wall-mounted TV... Seriously), requiring us to paint the whole interior. They also left mountains of stuff (wood, gutters, children's toys) throughout the entire yard and under the decks that, when the snow melted, attracted all sorts of critters to the house and needed to be hauled away. And more...

I wish we had waited until the loans were gone. We were supposed to pay them off this month and still have $15k, which is a tough pill to swallow. I sincerely doubt you will regret it if you focus on the loans, have them done in a year, and then start saving for a down payment. FWIW, I'd also recommend liquidating your taxables in favor of paying off the loans.

mtn

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Re: Pay off student loans, or buy a house?
« Reply #5 on: October 02, 2015, 09:14:49 AM »
I think you're asking the wrong question or at least not enough questions. What is the market like in your area? I know you say you are tired of renting, but does renting or buying make sense in your area? If the numbers aren't strongly in favor of buying then I'd wait till you have a more substantial down payment. Here in Denver rent prices were so high when I was looking that I went ahead and bought even though I had to pay pmi. Now a year later I can refinance and get rid of pmi, but if renting wasn't so expensive I would have just done that till I had at least 20% down.

Real estate in general is crazy, but renting is more expensive. It isn't an apples to oranges comparison, since we're renting in a place we wouldn't buy due to the school districts. With the places we've been looking at buying on zillow, with PMI, we'd be paying about $200-$500 more a month buying than renting--but we'd be getting about 2x the living space and a two car garage compared to our current street parking. Additionally, I believe that due to tax increases, the rents will be increasing about $100-$300 a month next year whereas the taxes for buying (different towns) would not have that same increase.

Cpa Cat

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Re: Pay off student loans, or buy a house?
« Reply #6 on: October 02, 2015, 09:21:57 AM »
So with that layout, what would you be doing? Buying a house (and using the money in the taxable accounts and cash as a downpayment), or aggressively paying off the student loans? We'll probably have an additional $10,000 saved in a year.

I'd say buy the house, except... an 11% savings rate seems kind of low, considering you're in a rental. Lanthiriel is right, the first year of owning a house is expensive. So you'll see your savings rate decline once you get in there.

Try to drop your student loans to less than 10,000 over the next year by increasing your savings rate. If your incomes rise to $110,000, put the extra money toward your downpayment fund.

Don't completely pay off your student loan before applying for a mortgage. The length and nature of that credit account can be helpful to your credit score.

mtn

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Re: Pay off student loans, or buy a house?
« Reply #7 on: October 02, 2015, 09:24:32 AM »
So with that layout, what would you be doing? Buying a house (and using the money in the taxable accounts and cash as a downpayment), or aggressively paying off the student loans? We'll probably have an additional $10,000 saved in a year.

I'd say buy the house, except... an 11% savings rate seems kind of low, considering you're in a rental. Lanthiriel is right, the first year of owning a house is expensive. So you'll see your savings rate decline once you get in there.


Sorry, that wasn't clear from my post. We'll have approximately $10,000 saved by the end of the year in either downpayment fund or else going straight to the student loans. That is not our whole savings. We're putting about 12% each into our 401k's and maxing out our IRA's as well. This was after about 2 years of my having a 45% savings rate personally before life changed that for the worse, temporarily. In about 2 years we'll have it back up in the 30-40% range for the two of us.
« Last Edit: October 02, 2015, 09:26:41 AM by mtn »

Bob W

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Re: Pay off student loans, or buy a house?
« Reply #8 on: October 02, 2015, 09:42:06 AM »
Student loans are forgivable (generally) in the event of death or disability.  You would be surprised how frequently disability occurs.  They often can also be deferred in the event of income problems.    If they are high rate refi at Sofi.     So basically for most people the math on student loans says never pay them off. 

Regarding the house -- it is a big risk you understand?  Highly leveraged if you borrow.  The contract favors the banks not you.  There are huge hidden costs such as depreciation,  continual need to replace expensive items (roofs, HVAC, flooring,  bathrooms,  kitchens).  Just basic upkeep can be 2% a year.    Basically the house owns you if you are in hock to it.   I hope you enjoy lawn work, gutter cleaning, home repair, being on call 24/7 etc...  And then there is the selling of the beast --- market might be up,  might be down,  might keep you stuck in a job or town you would prefer not to be in. 

Rule of thumb -- You can afford to buy a house when your total net worth equals the cost of the home.  (then 10% down and invest the other 90% at today's rates)

Have you considered upgrading to a much nicer rental while you save your 10K per year?   Sounds like you have had shitty rental experiences thus far.  That is not always the case.  I have had great renting experiences in general.   You do realize that you can have a shitty home ownership experience as well right?

It sound like you have home buying fever so I am assuming you will fly ahead with this in the next year --- So  buy a house that is reasonably prices and wait until you find the perfect one.   Pay less that value.   Buy one that is well below what you qualify for.  Consider a fixer upper that primarily has cosmetic needs. 
Be sure the HVAC, Roof etc are fairly current.   Have a home energy audit done prior to moving in.  Allow several (more than 6) weeks between taking possession and moving.  This will allow you to repaint every surface,  install new flooring and generally get the place up to like new condition.   It is hell to do that while already moved in. 

YMMV.   Best of luck!

gillstone

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Re: Pay off student loans, or buy a house?
« Reply #9 on: October 02, 2015, 09:55:47 AM »
I sympathize with being tired of renting

1) Look at refi for the student loans to get that rate down to closer to 3%.  Once that's in the bag you can take a better look at the housing question

2) Take an honest look at your housing market and your career.  Will you be in this job for the next five years? When you change jobs will it be in the same town and same part of town? Can you access your current/future job in a timely manner via foot, bike or bus?  If you find yourself in a "drive until you qualify" situation you should either change towns or keep renting.

Easye418

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Re: Pay off student loans, or buy a house?
« Reply #10 on: October 02, 2015, 09:59:18 AM »
Student loans are forgivable (generally) in the event of death or disability.  You would be surprised how frequently disability occurs.  They often can also be deferred in the event of income problems.    If they are high rate refi at Sofi.     So basically for most people the math on student loans says never pay them off. 

Regarding the house -- it is a big risk you understand?  Highly leveraged if you borrow.  The contract favors the banks not you.  There are huge hidden costs such as depreciation,  continual need to replace expensive items (roofs, HVAC, flooring,  bathrooms,  kitchens).  Just basic upkeep can be 2% a year.    Basically the house owns you if you are in hock to it.   I hope you enjoy lawn work, gutter cleaning, home repair, being on call 24/7 etc...  And then there is the selling of the beast --- market might be up,  might be down,  might keep you stuck in a job or town you would prefer not to be in. 

Rule of thumb -- You can afford to buy a house when your total net worth equals the cost of the home.  (then 10% down and invest the other 90% at today's rates)

Have you considered upgrading to a much nicer rental while you save your 10K per year?   Sounds like you have had shitty rental experiences thus far.  That is not always the case.  I have had great renting experiences in general.   You do realize that you can have a shitty home ownership experience as well right?

It sound like you have home buying fever so I am assuming you will fly ahead with this in the next year --- So  buy a house that is reasonably prices and wait until you find the perfect one.   Pay less that value.   Buy one that is well below what you qualify for.  Consider a fixer upper that primarily has cosmetic needs. 
Be sure the HVAC, Roof etc are fairly current.   Have a home energy audit done prior to moving in.  Allow several (more than 6) weeks between taking possession and moving.  This will allow you to repaint every surface,  install new flooring and generally get the place up to like new condition.   It is hell to do that while already moved in. 

YMMV.   Best of luck!

Bob, just wanted to drop a note that you are a significant asset to this community.  Everything I read from you is golden.

Cheers.

mtn

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Re: Pay off student loans, or buy a house?
« Reply #11 on: October 02, 2015, 09:59:25 AM »


(1)
Regarding the house -- it is a big risk you understand?  Highly leveraged if you borrow.  The contract favors the banks not you.  There are huge hidden costs such as depreciation,  continual need to replace expensive items (roofs, HVAC, flooring,  bathrooms,  kitchens).  Just basic upkeep can be 2% a year.    Basically the house owns you if you are in hock to it.   I hope you enjoy lawn work, gutter cleaning, home repair, being on call 24/7 etc...  And then there is the selling of the beast --- market might be up,  might be down,  might keep you stuck in a job or town you would prefer not to be in. 


(2)
Have you considered upgrading to a much nicer rental while you save your 10K per year?   Sounds like you have had shitty rental experiences thus far.  That is not always the case.  I have had great renting experiences in general.   You do realize that you can have a shitty home ownership experience as well right?

(3)
It sound like you have home buying fever so I am assuming you will fly ahead with this in the next year --- So  buy a house that is reasonably prices and wait until you find the perfect one.   Pay less that value.   Buy one that is well below what you qualify for.  Consider a fixer upper that primarily has cosmetic needs. 
Be sure the HVAC, Roof etc are fairly current.   Have a home energy audit done prior to moving in.  Allow several (more than 6) weeks between taking possession and moving.  This will allow you to repaint every surface,  install new flooring and generally get the place up to like new condition.   It is hell to do that while already moved in. 

YMMV.   Best of luck!

(1) Yes I know it is a big risk. I've listened to my dad, seen him buy a vacation home that was a foreclosure and deal with the banks and the counties. I also happen to work for a bank behind the scenes, and for a while was in a Collections center so I have a better idea than most about what is available for the bank and for the debtor as far as the foreclosure rights go. I also did a lot of yardwork and minor repairs growing up on my parents house; those that I can do I will do myself, those that I can't I will pay for, and I think that I am good at recognizing what needs to be done, what can wait, and prioritizing from there.

(2) Much nicer rental that we can afford is not really viable. Either it increases one of our commutes, it is in a bad area, or it isn't actually all that nice. And I wouldn't say that we've had shitty rental experiences at all--on the contrary, we're happy in general with it. We're just tired of it. Probably because we want to put down roots, and realistically we can't do that in a rental in Chicago--the big ones in Chicago proper are expensive because its the city. The small ones in the suburbs are expensive because there are not many of them, and the school districts. Yes, there are some sweet-spots out there, but they are hard to find. Our sporadic rental history doesn't help our case; no one would rent to us because of the lack of rental history because we're young. When we were in school, we moved every year. Or maybe you're right and we're blinded to it because we want to buy.

(3) Ideally, the house that I'd be buying would be the worst house in the best area that I can afford, keeping the big ticket items into that cost valuation if they need to be done within 5 years. I figure that there are certain things I need to look for to keep the value up, that can't be changed--things like the school district, or waterfront, or proximity to public transport. Everything else I can change.


mtn

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Re: Pay off student loans, or buy a house?
« Reply #12 on: October 02, 2015, 10:02:45 AM »
I sympathize with being tired of renting

1) Look at refi for the student loans to get that rate down to closer to 3%.  Once that's in the bag you can take a better look at the housing question

2) Take an honest look at your housing market and your career.  Will you be in this job for the next five years? When you change jobs will it be in the same town and same part of town? Can you access your current/future job in a timely manner via foot, bike or bus?  If you find yourself in a "drive until you qualify" situation you should either change towns or keep renting.

1: Yeah, we need to do that. Just haven't had the chance yet. Too much going on with job changes, wedding, moving, etc.

2: Housing market is Chicagoland. It is crazy. Jobs? I'll be in this job or similar for 5 years, sure. Chances are I'll be able to take public transport from anywhere. For her, she'll be driving almost no matter what. We don't know that she'll be at the same hospital, but she probably will since she likes the people she works with. Actually, she did just apply to a job that would make us try to stay at our current place for awhile longer, but I doubt that one pans out.

Bracken_Joy

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Re: Pay off student loans, or buy a house?
« Reply #13 on: October 02, 2015, 10:10:27 AM »
Following, since we're at a similar place. Easier choice for us though- there really aren't many SFH rentals where we're going to move, so the numbers work out well in favor of buying. The New York Times Rent vs Buy Calculator has been VERY helpful to us.