What would you do? House vs. Student Loans

[Farmer123]

I am hoping to get some feedback on my situation as I feel like it is somewhat unique. My wife and I are both 25 and are planning building our dream home starting in the spring of 2018. Here is a rundown of our situation.

Gross Income: $120,000
Currently saving about $4,500/month - living with my parents until the house is built
$80,000 in cash
$80,000 inheritance coming at the end of the year
Hoping to save another $60,000 - $70,000 before the house is built
Total cash to put down would be around $200,000 - obviously leaving $30,000ish in cash

Expecting the house to cost around $400,000

Have $39,000 in student loans left
- payment is $475/month
- average interest rate is 5.5%

Option A: Put down the entire $200,000 on house:
  - mortgage all-in on the remaining $200,000 is $1,730
  - student loan payment continues to be $475
  - total monthly payment of $2,205

Option B: Pay off the student loans and put down $160,000 on house:
  - mortgage all-in on the remaining $240,000 is $1,932
  - student loan payment is $0
  - total payment of $1,932
  - also since the $475 monthly payment would be gone, we would save an additional $7,000 over the next 12-16 months
        - could stretch it and put down an additional $10,000 using the $7,000 saved, would lower mortgage to $1,882

Other notes:
- this is not including the interest deduction that helps somewhat with lowering taxes
- does not include the interest we would save by paying off the loans early
- there are 3 student loans for $4k, $12k, and $23k so we could pay some off and leave some..

So what option do you think is the best? When writing it out like this, it seems to lean towards paying off the loans now, but I also have thoughts that I want to put down as much as possible to keep the mortgage payment lower.

Any thoughts?

**forgot to mention there is 7 years left on all three of the student loans**

[okobrien]

Why is the monthly mortgage payment so high? Are you going with a 15 year? If so those numbers make sense, if it is a 30 year, they don't to me.

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[Farmer123]

This payment includes insurance and taxes. Otherwise it would be $750 less.

[Goldielocks]

I would build a smaller house.  Go for building a nice home, not a dream home.   

This, from experience (re)building a "dream" home in when we turned 40.   I would tell myself not to next time.   I would tell myself to lower expectations about the home, and at most, build something that could be expanded in future.

[Metric Mouse]

build something that could be expanded in future.

Having added onto my home, I would disagree with this part of the advice. Get what you want the first time - living through a construction zone again, later, is not worth it. Good luck op! Getting a dream home at 25 is pretty awesome.

[Farmer123]

I agree Metric Mouse. We are taking the approach of spending roughly $100,000 more now so we can get some of the dream home pieces.
Walkout basement, bigger garage, in floor heat in basement, nice windows, etc.

[chasesfish]

Payoff the student loans immediately for multiple reasons.

Debt stinks...

Student loan interest isn't deductible as soon as you're successful with your income.  Mortgage interest is currently deductible.  Your mortgage debt would be less than 5.5%.

Consider just putting the 20% down on the house and having the flexibility of money in investment accounts.  You can always prepay a mortgage without penalty, but no one will give you a cash-out loan if you ever "need" it. 

On a side note, I think one of my biggest *mistakes* was prepaying my mortgage by almost $80,000 when I was in my mid 20's.   That would have been worth $200,000 today because I was doing a lot of prepayments in 2008-2011 when the market was really depressed.  In a normal market, it'd still be worth twice that.

[Farmer123]

Chasesfish - thank you for your advice.

It really hit home with me and made for good conversation with my wife. I am planning on paying off the loans this weekend.
We are also going to put a lot of thought into how much we put down on the house.
If we can get comfortable with the monthly mortgage payment with putting 20% down then we will for sure go that route and invest the rest.

Thanks again!