Author Topic: House sale proceeds: pay off debt vs save for next house down payment?  (Read 2164 times)

frieselr

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It's moving time again in this perpetual student's life (PhD, really?) and we are fortunate enough to expect some proceeds ($20-30k) from our current house when we sell. We will be renting for at least a year until my next career step is decided, so I'm contemplating what to do with said proceeds. On one hand, my wife and I still have ~$70k in student loans (3.5-6% interest rates, mine are deferred [some subsidized], some eligible for PSLF) that we'd love to pay off, on the other, we do want to own another house in 1-4 years (3 kids FYI, house > apartment) and want to have a 20% down payment to avoid PMI. With my stipend (student, remember) and my wife's teacher salary we don't manage to put away much every month, so saving up for that down payment again would take a long time. How to make this decision? Any other good options?

A few particulars for those who like to calculate:
-current student loan monthly payments= $230 (mine are in-school deferred, half of my wife's loans are PSLF-eligible [assuming PSLF doesn't go away]), could reduce to <$50/month initially with $17k payoff.
-other current non-retirement savings= $20k (in various stocks and mutual funds)
-other debts= 1 car ($14k, 3% rate), no credit card debt
-future housing purchase cost= no idea (prefer suburban Midwest if possible, so theoretically moderate)

SC93

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Re: House sale proceeds: pay off debt vs save for next house down payment?
« Reply #1 on: February 06, 2018, 04:59:00 PM »
My vote is debt. Just think.... if you would get it paid off or down and something happened to you or your wife you wouldn't have to worry about paying the debt. It's all a risk. Some people like risk, some people LOVE risk and some people don't like it at all. You have to decide which one of those YOU are; no one can make the choice which one you are, you and your wife must make that choice.

Either way.... you can't afford to buy a house.... you are broker than broke.

SwordGuy

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Re: House sale proceeds: pay off debt vs save for next house down payment?
« Reply #2 on: February 06, 2018, 05:03:58 PM »
Presumably, after graduation, you'll be moving to where you can both get jobs.   

If you don't know a town, it's a good idea to ren$8t for a year while you learn the area.

So, if you dump that money in the student loans and cut your payments from $230 to $50 a month, you'll be able to save

($230-$50) * 48 months =  $8,640 if you shunt that money into savings.
Toss in whatever you make the first year in your new job - any stipends you currently get and that's all available for your down payment.  So, if your stipend is $10k and your new job brings in $30K net, that's another $20K available for a down payment.

You mentioned a $20k to $30k profit on the sale but only a $17K loan paydown, so you'll have an extra $3k to $13k to add to the pot.

That's a good down payment amount.   

Kwill

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Re: House sale proceeds: pay off debt vs save for next house down payment?
« Reply #3 on: February 06, 2018, 05:05:58 PM »
Would you owe income taxes on the house proceeds?

Are you finishing the PhD now? Are you planning on an academic career? If so, do you have good contingency plans in place, or are you and your wife happy to live mainly on her income for a few more years? You could get your dream job right away, or you could struggle along from one underpaid temporary position to the next for the rest of your life. Hopefully you will find a good job within a couple years, but there aren't any guarantees.

With that in mind, I would suggest doing what you can to make your overall position stronger rather than worrying about the future house down payment since you don't know when or where or how much to plan for. Payments toward loans now will result in more available income each month further down the line when you're ready to buy a house again.

I would prioritise any student loans that are not eligible for PSLF and incurring interest, even if they are currently deferred. I believe the ones that are both subsidised and deferred won't be currently incurring interest, and if that's the case, ignore them for now. Start with the ones that have the highest interest rates. When I had student loans, I think the company would treat any extra payments as prepaying future payments unless I specifically instructed them to apply the extra money to the principal. If you make a big payment, it could be worth making sure the money goes to the principal.

SC93

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Re: House sale proceeds: pay off debt vs save for next house down payment?
« Reply #4 on: February 06, 2018, 09:03:59 PM »
Yes, Principal.... You are dealing with $7.25 an hour people so record your phone call for possible later use. Even if you can only record your side of the conversation. Most of them could care less.... all they are waiting for is quitting time so repeat yourself several times. Principal.... :)

I've never had debt so I always forget to tell people about applying it to the principal.

Gronnie

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Re: House sale proceeds: pay off debt vs save for next house down payment?
« Reply #5 on: February 06, 2018, 09:21:12 PM »
Any extra payment on a student loan goes to principal automatically, no matter what you instruct -- that's how student loans work.

Lmoot

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Re: House sale proceeds: pay off debt vs save for next house down payment?
« Reply #6 on: February 07, 2018, 03:38:37 AM »
You say one of the things you’re concerned about in regards to not using the profits towards a down payment on another house, is how long it would take for you to save up a down payment on a moderately priced house.  I’d be more concerned in the fact that it would take long for two working adults to save a down payment on a moderately priced house. That is a red flag to me that there isn’t much cash flow (which you admitted as well), and I personally wouldn’t feel comfortable buying a house, even if I had the money and the income to, until I got my cash flow to a point where I could continue saving a decent amount after the house is purchased. Sometimes people are so focused on saving up for a down payment, they forget that the struggles they have to save money, will only be amplified likely, after buying the house.

Exempting high cost of living areas, I personally would not be comfortable buying a house, assuming 20% down, if it took more than 2-3 years of diverting most of my leftover cashflow to save up the down payment. And that is on a single income.

If you and your wife saved for 20% down on a $250,000 house, over the course of 2 1/2 years, then you would each need to save about $835 per month. If you have other savings, or even some of the profit from the sale to apply towards closing costs and some of the down payment, you would have to save even less per month.  Don’t get me wrong, $835 per month, per income is not chump change. But if you play your cards right, and that’s limiting the debt and expenses, and increasing income, it should be a reachable goal. I would much rather be in a position to save $1000 or more, or at least have the cash flow option to, by the time I buy a house, than to get a false sense of security in the form of a down payment boost from the sale. In my opinion the best thing about saving up for a down payment, is being able to prove to yourself that you can. That way if you run into issues, or you’re not saving as quickly as you wanted, it forces you to take a look at your finhances, and to adjust accordingly before making such a large purchase.

I understand large expenses are easier said than done to save for, but have you tried? When you finance everything like education, house, car, it not only hampers your ability to save, but it takes away the motivation to save (since you don’t have to), and the pittance flow after paying principal and interest on loan, only kills the motivation more. Saving is a habit you need to practice. If you add debt instead of challenging cashflow head on, You will be caught in the cycle of having to work to pay the debt and bills, instead of working to add to your stockpile. I don’t know about you, but I get more motivation saving hard cash, then I do paying off debt. And for me more motivation means I’m more likely to fight harder to save more money.

Summary: Pay down higher percentage debt, and apply savings from that towards the down payment for a house. Continue to challenge and reevaluate every month to increase that cash flow so you can begin to meet the monthly savings requirement needed to meet your timeline for buying the house. It will be difficult, but it’s a one-shot. Suck it up and just get it done and you don’t have to think about it for a long long time. Without the buoy of that $30k towards a down payment, you’ll need to swim harder, but you’ll get there faster and stronger.
« Last Edit: February 07, 2018, 05:37:25 AM by Lmoot »

Dragonswan

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Re: House sale proceeds: pay off debt vs save for next house down payment?
« Reply #7 on: February 07, 2018, 06:17:16 AM »
You should payoff the 14K car loan first.  Then payoff the half of your wife's student loans that aren't PSLF.  Take the payments from those two payoffs and whatever is left from the sale of the house (if anything) after paying off those debts and save that for the down payment.  Once you're out of school and your loan payments kick in you can evaluate if the job you have will be enough to make student loan payments and a house payment.  Because you should keep saving the car payment and other loan payment except now it's for retirement. 

I agree with the others that you're setting yourself up for a cash flow issue if you rush into buying a house based solely on having the down payment available.

frieselr

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Re: House sale proceeds: pay off debt vs save for next house down payment?
« Reply #8 on: February 07, 2018, 06:19:01 AM »
Seems to be some disdain for owning a house in this conversation, but I've had good (and profitable) experiences with both of the houses I owned. Now I am handy and do 90% of the maintenance myself (repaired my HVAC myself last year to save $1200), and have been careful not to buy houses out of my price range. I also capitalized on the first time homeowners credit (10% of sale price) on my first house (a foreclosure). For my second house, comparisons of renting vs buying with a 5-6 year residence period were in favor of buying (rental costs were 2x more than what I pay for my mortgage). So my conclusion is that, when done right, home ownership can be profitable as well as satisfying (but avoiding PMI is a big factor in profitability).

Regarding increases in salary, once I graduate in a year I do expect an increase to at least 50k/year, and potential increases to 100k+ in 3 years depending on the career path I take. That will be slightly offset with an increase in student loan payments as they come out of deferment. But overall, the income picture looks promising, and justifies owning a house, but doesn't give me much time to accumulate a down payment since relocation is likely (note: renting for a year after moving is a viable option and one I had already considered). 

House proceeds would be tax-free.

Extra payments on student loans (at least mine) always go toward principal after paying unpaid interest, not future payments.

So far, I'm leaning toward paying down the $17k loan, saving the rest, and concentrating on growing a down payment in the 1-3 years before buying again.

 


partgypsy

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Re: House sale proceeds: pay off debt vs save for next house down payment?
« Reply #9 on: February 07, 2018, 08:29:00 AM »
No there's no disdain at all for owning a house. I think people are just asking you, what exactly is your plan given that you have 70K in student loans, a 14K car loan, and as you say, very little cash flow. Posters are saying if you have a windfall to use all or the majority to reduce your debt burden. But it sounds like you want to reserve it for a downpayment, because you say it will take you a really long time on your own to save up for a down payment. And that's kind of a red flag. Finances are usually tighter after buying a house than before. I see that your plan is that you will get a job with a increase in income, with it possibly doubling in 1-3 years. If that's true fine, but wait until you are in that position, and then you don't need to even post here!
 
« Last Edit: February 07, 2018, 08:33:01 AM by partgypsy »

Just Joe

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Re: House sale proceeds: pay off debt vs save for next house down payment?
« Reply #10 on: February 07, 2018, 09:46:04 AM »
Regarding increases in salary, once I graduate in a year I do expect an increase to at least 50k/year, and potential increases to 100k+ in 3 years depending on the career path I take. That will be slightly offset with an increase in student loan payments as they come out of deferment. But overall, the income picture looks promising, and justifies owning a house, but doesn't give me much time to accumulate a down payment since relocation is likely (note: renting for a year after moving is a viable option and one I had already considered). 

Be cautious. Note what the markets did a couple of days ago. Note other discussions here about the economy. Note the circus that the current White House represents.

When you graduate in a year the economy might be a very different critter than in it is now. You would be best to have cash you can access, lower debt, etc. You also might not stay local after graduation - the best job might be elsewhere. This might be a very good time to rent and stay entanglement free.

I'm very much in love with owning a house and have owned a couple including one now. I hated renting. Owning houses can be expensive to maintain, repair and sell on short notice.

Good luck to you.

Lmoot

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Re: House sale proceeds: pay off debt vs save for next house down payment?
« Reply #11 on: February 07, 2018, 11:09:27 AM »
No homeownership disdain from me. Like you I also benefited from the full FTHB tax credit, and the low pricing and rates. Now my first house is a profitable rental property. Your situation brings to my mind the saying: a mortgage, an education, kids…choose two. In your case you would be juggling all three, plus a decent sized car long to boot.

Not saying that you shouldn’t pursue buying another house as soon as possible… But you should try and get rid of one of the balls in the air, or make it lighter before adding another one.  I don’t know your background so I don’t want to presume, but it seems like you haven’t had much experience with needing to save up a lot of money. Even with the purchase of your first house, you had the market working with you and a large cash assistance. Other than that it seems like everything is financed at a pretty good chunk. Which is fine, and expected in the beginning of a career or change, it just seems like you’d be taking on ALL the big things at once, before the payload gets going. At the same time I can empathize with not wanting to rent with 3 children.