Pay off my student loans or make a large downpayment on a home?
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Should I pay off my student loans or put a down payment on a house? I have $35,000 saved up to put a down payment on my home. My student loans also total around $35,000, I have no other debt. My parents are adamant that I pay off my student loans, then think about saving up and buying a house. I currently pay $450 a month in student loans, it would take around six and a half years to earn back the money spent on the loans. I also get tax breaks on the loan interest and assuming the economy doesn't stay in the tank, in five years I'll still be paying the same amount but earning more. With a house I'd also be buying in a down market with the opportunity to actually get a return on my investment. Housing prices could continue to drop, but I think with the area I'm in, they'd at least stay stagnant. There's some risk involved, as with any investment, I think the upside is much more lucrative. My parents and my girlfriend, on the other hand, think I'm crazy and should pay one debt down before taking on a mortgage. They don't pay my rent or my student loans and will be contributing nothing to my house purchase, so their opinion doesn't really matter, but I'm willing to at least take it into consideration. I really don't see why they're so uneasy with the concept of multiple debts, especially when one is an asset with growth potential, unlike student loans or a car payment. Is my reasoning correct or am I missing something? Is my family just being a bunch of hardcore no-debtors? Considering they come from the school of thought that 5-year car loans are okay, I don't take financial advice from them, but the fact they're being so conservative has given me pause.
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Answer:
You have 35K saved up and you're paying interest on student loans? Dude, that is nuts. You should never have gotten into this position. Interest on the loan means you're paying a little money today for the privilege of paying money tomorrow. But you already have the money today, so why are you paying for it? This is like having a pool with a leak. You have the leak-fixer in your hand, but instead, you're just dumping more water into the pool to keep it filled. Pay off your debt today.
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Other answers
It is a mistake to think of a house as an investment. You should only buy a home as a lifestyle preference, that is, you don't like renting and like the idea of home maintenance, a yard, etc. And only buy a home if you are sure you will be living there for at least 5 to 7 years. A home is a risky, undiversified investment. It is like betting all your money on one spin of the roulette wheel. If you want to invest, use low cost index funds, e.g. Vanguard. In this way you own thousands of diversified stocks and no one failure will hurt you. Whether you should try to pay off your loans more quickly with additional payments depends on the interest rate, whether the interest is deductible and whether you have already maxed out your retirement investment accounts. If the interest rate is high, pay off the loan as quickly as possible. If the interest rate is low, max out your retirement accounts first, then dedicate whatever is left to the loan.
JackFlash
Financial decisions should be made with data. There isn't enough data here to help you. What is the interest rate on your student loans? How much of that do you get back in taxes? How much does a house that you might buy cost in your area? What do you pay in rent now? How sure are you that you want to stay in your area? On the face of it, there is no specific reason to avoid having two debts (mortgage and student loan), but without knowing more about your particular situation, it is impossible for anyone to provide you with useful advice here.
ssg
You'll need to do the calculations, but I strongly suspect you'll find that your student loan interest is much, much lower than the substantial compound interest you'll pay over the term of a home mortgage. I would try to reduce the principal you would borrow to buy a home, if you want to reduce how much interest you pay overall. This could mean buying a less expensive home, as well as putting more money into a down payment.
Blazecock Pileon
You should never have gotten into this position. Interest on the loan means you're paying a little money today for the privilege of paying money tomorrow. But you already have the money today, so why are you paying for it? If your student loan interest is lower than what you can earn by investing, then paying off a student loan is a losing proposition. My student loan interest rate is less than 1% right now - it's like 0.2%. It makes much more sense to invest my savings at even 1% - that gives me an effective profit of 0.8%.
muddgirl
I agree with your parents and girlfriend: Pay off the student loans before you take out more loans.
dfriedman
I'd first evaluate whether or not you want to buy a house, completely independent of the student loan issue. That's a decision that depends on the housing market in which you live, the affordability of monthly payments, the length of time you plan to keep the house, and all sorts of other considerations. If you decide to buy, keep whatever debt is the cheaper one. Without knowing the particulars of your situation, it seems to me that the student loan debt will usually be a less expensive burden than a mortgage on a house that you've bought with less than 20% down. Not only will you have a larger monthly payment, but you'll be paying PMI and possibly be subject to a higher fixed rate, since the bank is taking on a higher risk that you'll go underwater on the mortgage. Since (i) you have no credit card debt, (ii) the loan balance is relatively small and (iii) you're reasonably confident about your earning potential, I don't see why you'd need to be in a hurry to pay down student loans.
Saucy Intruder
It depends on the relative interest rates, but personally, I'd go for the house, if you find a good one in a stable neighbourhood and you want to live in the same place for at least the next 5 years and are up for the maintenance costs and time. Housing can be an investment (and rent is just going to a landlord), but it's only a good one if you're in it for long term. For me, my regular housing costs went down by approximately $200/month, even in the boom times, but the flip side of that is that I'm spending more time shovelling snow and mowing the lawn. I just like the idea that my mortgage payments are paying down debt rather than enriching a landlord, like my (higher) rent was doing. Also, student loan interest is a tax decuction (at least, it is where I am, not sure about where you are anonymous), so it's usually the last thing that people pay off.
Kurichina
What's the interest rate on the loans? How does it compare to the interest rate you might pay on a mortgage? Would you be spending all $35k on a downpayment, or leaving yourself some savings too (for house repairs etc)? Are you looking at a price range where your downpayment would cover at least 10%, preferably 20%? I tend towards saying you should keep the loans and buy a house, but only if the loan interest is very low, if you have enough to make a 20% downpayment, PLUS leaving yourself savings in case of emergency repairs (roof replacement etc). The tax break on the loans and the tax break on the mortgage, plus your "rent" money goes into your investment instead of someone else's pocket seems like a good idea. If you don't have enough saved for the 20% down plus repair buffer, then keep saving until you do. If your student loan rate is high, then pay that off first.
Joh
I never indicated that I thought buying a house was a good idea. Again, there are not enough details here.
muddgirl
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