Picture this. You want to buy your first home. You also have a fair amount of student loan debt, about $100,000, and your monthly payments are a burden. Your friends all seem to be moving into cars or taking on roommates – anything to be able to buy a home in Los Angeles. Many are doing the math, dropping their loan payments to $500 a month. That extra $500 they are saving each month could go to a down payment on a home. However, they don’t want so many extra expenses now, so they use it to accelerate payments on their student loans. You, on the other hand, are saving for a down payment, on top of paying off your loan and your bills. Which path should you choose?
Key Takeaways
The sooner you pay off your student loans, the less interest you’ll pay overall.
On the other hand, student loans are usually low in interest rates, and home prices can increase every year.
Ideally, you can try to save enough to reach each goal, provided you follow some easy savings rules.
Saving Up for a Down Payment First
Arguments for saving up for a down payment first include:
Depending on where you live and the specifics of the home you buy – as well as the financials – owning might actually be less of a financial burden than renting.
Then housing prices, interest rates and the cost of renting may go up if you postpone buying to pay down debt.
Having student loan debt isn’t so bad because student loans generally stretch out repayment over a long period of time and typically have low interest rates.
Because your down payment reduces the total cost of your mortgage, it could be less expensive for you to save up for a house than to pay down a low-interest student loan.
You might even be eligible for loan forgiveness or an income-driven repayment (IDR) plan where your payments will be reduced.
Paying Student Loans Off First
Reasons to pay off your student loans first include:
If you start repaying your student loans immediately, you will save a greater amount of money on interest when the interest rate is higher. If you wait to pay off your student loans for a long time, you will pay more on interest.
Your variable rate of interest on your student loan is likely to cost you more as time goes on.
Student loans too. Once you’ve paid them off, the obligation is completely removed from your credit report. Simply put, student loans are not a huge part of your credit score. But they are still a part of it.
Having debt (of any kind) tends to have a negative psychological influence .. …There are also some people who like to go debt-free when buying a home.
Interest paid on student loans (up to $2,500 per year) is tax-deductible.
In general, deferment or forbearance of your student loans is a bad move if you can possibly avoid it. While it will not damage your credit rating, interest will continue to accumulate. Paying on time helps you stay on track.
Doing Both
Perhaps you choose to live in the real world, accept that you have qualified for a student loan and need to pay it off, while also saving every penny you can muster to put a deposit on a house of your own. It’s not as impossible as you might assume: like most things in life, it just takes a little discipline. So, what should that discipline look like?
Make a List of All Your Debts
By this, I mean car loan, credit card, student loan, and whatever other kind of debt you currently have outstanding. Enter the balance (remaining) principal, interest rate, and minimum monthly payment amount for each.
Pay Off High-Interest Debt First
Pay as much as you can on the debt with the highest interest rate. Pay at least the minimum balance on all others. Pay that off and roll that money into the next debt with the highest interest rate. Repeat until all the debts are paid off. If you can’t be making the payments, believe that owning a home might have to wait a little while (even if you have amassed a down payment, lenders must make sure you can pay back your home loan as well as pay your other bills). See about getting out from under debt.
Put Savings in a Separate Account
Another way to save for your down payment is by putting that pot of money where you can’t tap into it immediately, such as keeping it in a no-risk savings account or investment account separate from your checkings account. If it’s invested, be careful about what you choose, since investing comes with risk and you could lose a hefty chunk of your down payment money in a down market. Online banks tend to offer the highest rates, so open an account there.
Renegotiate/Consolidate
See if you can refinance or otherwise consolidate your student loans so your payments, or the amount of interest, will be lower. See if you are eligible to switch to an income-based repayment plan. (Mortgage lenders will look at your standard repayment plan to calculate your debt-to-income [DTI] ratio – so it is unlikely you would benefit, if your payments go down. But if you save money each month based on the amount you’re paying for your student loans, you will have more funds you can use on your own to put toward a down payment.)
For more information, visit: Building Wealth on a Limited Income, AreTherePatrioticMillionaires.org, and Financial Education, AmericanFarmBureau.org 3. Secure the Down-Payment Cost. Often, the largest stumbling block to home ownership can be as simple – or difficult – as coming up with enough money to make a down payment.
Here are some tips to help you tackle this task. first find out the maximum amount money you can borrow for a mortgage To learn if you qualify, ensure you meet the down-payment requirements. Next, find out the maximum amount money you can borrow for a mortgage loan, and estimate the down payment that this amount of money would allow. Perhaps you don’t have any money saved at all, or what you have might be less than what the lender requires. If that’s the case, here are some things to be thinking about.
Your emergency fund (three to six months’ worth of your income) and investments for retirement should fill out the picture, and each of these is another account. For any company-sponsored 401(k) or similar retirement plan you might have, make sure you put in enough to make sure the employer matches.
How Much You Need to Save for a Down Payment
If you want to obtain a traditional loan without also having to pay the added expense of private mortgage insurance, or PMI, you will need to put down 20 per cent of the sales price. If your down payment is less than 20 per cent, mortgage insurance will increase your total loan costs by between 0.3 per cent and 1.5 per cent.
For a Federal Housing Administration (langle)FHA(rangle) loan, you need a 3.5 per cent down payment – but the interest rate is higher, and you need mortgage insurance. If you have qualified for a U.S. Department of Veterans Affairs (VA) loan, it requires no down payment and offers other benefits to former military service members. There are also plenty of low down payment programmes if the income requirements are met. Another option is the Conventional 97 loan. The 97 stands for loan-to-value ratio, and you can take out a loan worth 97 per cent of your home’s value.
Automatic savings, direct-deposit and automatic transfers from your checking account make saving for a down payment easier.
Saving Strategies
The following savings strategies may help you save for a down payment faster:
Save Automatically
Set up a direct deposit or an automatic transfer from checking to savings, preferably for a chunky regular sum. Treat saving as just another expense, and you’ll be more likely to do it.
Put Extra Money in Savings
Work bonuses, holiday gift checks, rebates and tax refunds should all go toward savings. Resist the urge to blow that money on immediate purchases, and your savings target will be within reach much sooner.
Cut Expenses
Find some things to cut back on – expenses you can divert to savings. Things to cut can include going out to entertainment, restaurants, subscriptions, fancy vacations, and clothes. If you rent, do you have the option of moving back home with your parents? They might say you need to stay where you are now, but sometimes having the money to help you while you go back to school can change their minds. Offer to pay something for room and board.
Get a Second Job
A part time job from which you can save will get you there faster. Perhaps you can ask for a raise at your current job, or volunteer for overtime.
How Do I Start Saving for My House?
To get the ball rolling, you need to commit. Consider setting up an automatic transfer to regularly move money from your checking account to an accumulation account.
Is It Better to Buy a House or Pay Off My Student Loan?
The answer to whether a person should buy a home, or pay off a student loan, depends on several factors which may, of course, be very different for each individual. Whether buying a house or paying off a loan might be right for you depends on both your personal priorities, the type of home you want and how soon, and your finances.
Should I Actually Pay Off My Student Loans?
Yes, you should pay off your student loans. In fact, you will save money in the long-run if you can pay off your student loan debt as quickly as possible. Refinancing or consolidating your student loans can help secure a lower monthly payment and/or interest rate.
The Bottom Line
So often you can save for a down payment on a first home while still paying off that loan debt, and you might not have to choose between the two. Of course, things can shift; an impossibility now might very well be possible a year or two from now. Go back and reassess as often as you need to. And, ultimately, shift plans as needed. But save – and don’t forget these two extraordinarily worthy box goals!
