Student Loans vs New House - Looking for Perspective?

[AndyV]

Hello Mustachians! I'd formally relied on "Dave Ramsey's Way or the Highway" for the last few years as I've really dug into our finances, but recently found your community and have been thrilled to see another perspective.  Looking for some advice below.

My wife and I would like to move to a larger house Summer 2018 as our family continues to grow. In order to get 20% down (current home equity included) and for new home expenses, i've estimated that we need to save an additional $25k starting now to move Summer 2018 (we make 100k single income).  However, we have 35k in student loan debt hanging over hour heads ($475 per month total payment, $10k @ 2.5%, $25k @ 6.55% interest rate). Only other debt is a $10k loan from my parents, which we have no pressure to pay off at the moment.

Dave would say "put everything on hold and pay the loans off!!!", which would probably delay the home purchase another 1-2 years.  My brain says that our family's needs are more important, however I feel like I'm second guessing myself with Dave's voice in the back of my brain screaming "pay off the debt first!".

Any perspective on this would be greatly appreciated. Thanks Mustachians!

[plainjane]

My wife and I would like to move to a larger house Summer 2018 as our family continues to grow.
[...]
However, we have 35k in student loan debt hanging over hour heads ($475 per month total payment, $10k @ 2.5%, $25k @ 6.55% interest rate). Only other debt is a $10k loan from my parents, which we have no pressure to pay off at the moment.

6.55%! 

How small is the space really?  How old are the kids?  How much outdoor space is available now?  There is this thing now where people seem to think their kids need a bedroom each, and separate play areas and and and.  This is a new thing.  Plenty of kids grew up fine sharing a room.  I used to work in a house built in the 50s.  Two small bedrooms.  We had people come over, tell us stories about how they grew up there with four siblings.

I hear people talking about how they need a bigger space, but the kid isn't born yet.  In that case, they have 3 years.  Or they need more space, but the kids are 14 and 16 and in 2 years one will probably be out of the house.

[Playing with Fire UK]

$35k of student loans isn't a deal-breaker. 6.55% is more of a deal breaker. Can you refinance the rate down?

What is the rest of your financial picture like? Is the income earner contributing to a retirement account, do you have an emergency fund to your liking? Are there other expenses likely to come your way? Is there more income likely to come your way (will the non-earner start paid work?)?

What would the bigger house mean for your overall financial picture? How comfortably can you pay your mortgage/bills now and how would that be different in the bigger place (heating/tax/maintenance)? What do you think the bigger house could do that your current house can't? Is there a cheaper way of getting these things?

Would your parents be okay if you bought a bigger house when you hadn't paid back their loan?

I give you permission to do something that Dave wouldn't like.

[Sibley]

More important question. You have an income of $100k. What are you spending all that money on? You earn enough to wipe out the SLs, loan from parents, and save in a year or 2.

Post your budget and let us poke holes in it.

[financialfreedomsloth]

$35k of student loans isn't a deal-breaker. 6.55% is more of a deal breaker. Can you refinance the rate down?

Agreed. Getting a new or larger mortgage while still having a debt at 6.55% is insane. This rate, and preferably the 25K attached to it, should go.

Also, newborns do not take up that much space, why not wait another year with the purchase of a new home? To me, it is more of a WANT than a NEED

[acroy]

^^ all the above.
6.55% is worth paying off.
The 'family need' for a larger house will be, ahem, 'challenged' 'round here ;) As will the disposition of 100k per annum!
FWIW we have family of 8 (soon 9) in 2k sq ft. This is somewhere between too little, too much, or just right, depending on perspective. For us it feels pretty luxurious!

[Uturn]

I read your post and think that you are asking the wrong questions.  You and your wife first need to decide how you view money.  Money can either buy you stuff, or money can buy you freedom.  Life WILL throw curveballs at you.  Companies go out of business, or merge with another and you find yourself being an extra employee, leading to being not an employee.  Home appliances suddenly fail.  Health problems pop up.  The list is endless.  Having money set aside frees you from worrying how these curveballs will be handled. 

Your family NEEDS food, shelter, and loving parents that will prepare the kids for adult life.  The rest are wants.  As someone who grew up in abusive and dysfunctional homes, then in the CPS system for a while, and finally good parents, I am most grateful for the ones that actually spent time with me and cared, even though we lived in a 900 sq ft 2 bedroom apartment.  Big houses and nice cars never entered the equation.   I'm actually grateful for growing up poor because now I know how to fix things myself and make things last, and I have memories of spending time with Dad under the hood of a 69 Malibu wagon. 

If you and your wife decide to choose freedom over stuff, keep the smaller house, pay off the loans, and focus on increasing your net worth.  Get rid of the debt as soon as possible, interest is nothing more than paying extra for something in order to have it now.  Use Dave's snowball, or highest interest rate first, it really doesn't matter as long as you are making the debt go away. 

If you and your wife decide to choose stuff over freedom, it's just a matter of playing a shell game of moving your debt payments around, hoping to finance your way to prosperity.  Refinance, consolidate loans, pay other debt with home equity. 

The formula is easy.  Want it now = pay interest = everything costs more.  Want to increase your net worth = delay the purchase and save for it = everything costs less

[larmando]

Would you go buy a house while your air was on fire? You can be forgiven not paying off the 10k loans at 2.55% (possibly your mortgage rate would be higher), but you should get rid of the rest.

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[KarefulKactus15]

I agree with others. Pay off the 6.55 or refinance it.


Also my crystal ball is foggy, but I feel like home prices are a bit inflated atm.     But maybe I just got spoiled to recession prices?

[frugaliknowit]

6.55%! 

How small is the space really?  How old are the kids?  How much outdoor space is available now?  There is this thing now where people seem to think their kids need a bedroom each, and separate play areas and and and.  This is a new thing.  Plenty of kids grew up fine sharing a room.  I used to work in a house built in the 50s.  Two small bedrooms.  We had people come over, tell us stories about how they grew up there with four siblings.

I hear people talking about how they need a bigger space, but the kid isn't born yet.  In that case, they have 3 years.  Or they need more space, but the kids are 14 and 16 and in 2 years one will probably be out of the house

+1

[robartsd]

I grew up in a family with 8 kids in a 1500 sq ft, 3 bedroom, 1.5 bath house (the large family room got pressed into service as a 4th bedroom once there were more than 4 kids). I'm not saying we usually felt like it was enough space, but we all survived and pretty much like each other still. I"d never dream of planning on kids having a bedroom of their own.

Pay off (or refinance) the 6.55% ASAP.