Author Topic: Down Payment or Student Loan?  (Read 2825 times)

franallad

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Down Payment or Student Loan?
« on: April 10, 2012, 07:56:51 AM »
Hi All!  So, I am going to be honest about my financial situation - please be nice!  My question is, do I save up for a larger down payment on a house, or start paying off my student loan?  Here are my particulars:

In one year, I have paid off $12,000 in credit card debt (paid off in January).  In 3 months, my car will be paid off two years early.  Then it will be time to tackle my $100,000 in student loans (yes, I know).  Interest rates on my student loans range from 5.625% to 8.500%.  I am on an income based repayment plan and currently owe $0/month on my student loans.

A move-in ready house in our area costs $240,000.  Even a $200,000 could be livable, but anything less than this that we have looked at has serious problems with water damage, mold, no flooring, holes in walls, etc.  We will be using a VA Home Loan and they will not give loans for houses that have damage.  We have $12,000 saved up to go towards a down payment on a home (we have more savings than this, but that is for our emergency fund).  By the time we buy a house, this might increase to $15,000.  There is no private mortgage insurance (PMI) on VA Home Loans.

Once my car is paid off, I will have $1,330 left each month after expenses.  Now, I would like to dump this all into my student loans because they are accumulating $700 a month in interest.  But, should we be trying for a larger down payment than $15,000?  Again, even without a 20% down payment, there is no mortgage insurance with VA Home Loans.

arebelspy

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Re: Down Payment or Student Loan?
« Reply #1 on: April 10, 2012, 08:41:17 AM »
No.  Pay down the student loans.

Your mortgage interest will be below those student loan rates.  Since there is no PMI, any extra down payment you save up is like paying down a mortgage at a cheap (4% or so) interest rate while holding other loans at 5.6-8.5% interest rates.  Not to mention the holding time where it's essentially earning 1%, rather than 4-8%.

Save up the minimum down payment + closing costs + moving costs + a cushion (there's always unexpected expenses when buying a house -- starting utilities in your name that may want a deposit is one example), then throw the rest at those student loans, assuming paying those down or saving up a down payment are your two choices.

Well done on your progress (paying off credit cards, car, saving for down payment, etc.)
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