Pay-off student loans or save for a house???

[chemgirl]

DH and I are looking for a house and we both had student loans. I suggest you speak to your lender before you make any decisions. Our bank told us exactly what to do to make us look more attractive for a mortgage. In our case, my government student loan has a low interest rate and doesn't show up as a negative. It is factored in to our monthly expenditures, but the total isn't taken in to account. On the other hand, DH's parents made too much so he didn't qualify for a government loan. He had to get a student bank loan instead. The total of that loan showed up on our records and the lender couldn't tell the different between DH's student loan and credit card debt. They advised us to pay off DH's student loans, but to make the minimum payment on mine. We used a chunk of our savings to pay off DH's loan and then saved for a downpayment.

We're in Canada though so things might be different in the US. Also, because we're in Canada our student loans were nowhere near 6 figures. I don't know if the monthly payments would be high enough to affect your ability to get a mortgage.

For what it's worth, going to law school in Canada could also put you six figures into debt: U of T tuition for 3 years would be over $60k, so if you had to take out full living expenses, books and fees on top of that it could push you into 6 figure territory as well. Not that I am defending the cost of a legal education in either country!

Not trying to sound harsh, but it is a rarity, not the norm, for Canadian students to build large student debt. My sister just graduated from law in Ontario in June and her tuition averaged a little over 10k per year. Books were really expensive for her program, but she graduated with much less than 6 figures of debt. She was barely eligible to lend 6 figures to begin with. When she started in 2007, TD would lend law students up to 20k per year. She could also get up to 21k in government loan over the course of her 3 year law degree. Medical school is closer to 20k per year in tuition though.

My sister did choose to pay off her loan before buying her house. Her loan was under $30k though so she managed to pay that fairly quickly once she started work last September.

ETA: I agree that its expensive in both countries, but still far higher in the states.

And don't get me started on engineering grad programs. The difference in price is shocking.

ETA again: Just looked up U of Toronto fees and they are almost double U of Ottawa fees. Wow, they have a good reputation, but I didn't think it was that different from other schools.

 

[Octavia]

Thanks everyone for the thoughts and input. All things to definitely consider before we make a decision. It's a lot to think about and finances drive us nuts -- we never want to make a false move (who does??)! Keep you posted...

PS - I also emailed the question to Suze Orman...we'll see if she answers our question!

Please give us an update if she answers! I'm curious about what she'd say.

FWIW, I don't think that getting rid of debt can ever really be a "false step" -- the question is just whether the money can be put to use in another way that gives you as good or better long-term results.

 

[D&T]

I may be the voice of dissent, depending on how soon you are looking to purchase your house and how long you plan on staying because just my personal opinion only ( market may still dip - maybe irrelevant if you keep your house forever)?

-some factors to consider, both Student loan interest and mortgage interests are tax deductible. If you are only going to make a dent in your student loan Overall balance (not reducing monthly payments) but the amount that you have currently is significant towards a down payment in that its say 10% of your total down payment for the house, then I would put it towards your downpayment, IF you are looking to purchase in the near future.

-If your current student loan interest is less than your expected mortgage interest rates then I would put towards the house.
-I'm not sure if you have looked into mortgage financial equations but here is an example:

I don't just use the 28/32 rule, But I add an extra variable:
28/32/40 (depending on lender it can vary slightly)

EX:
Gross Pay annual: $100,000 (joint)

Mortgage ONLY (allowable) .28
(Gross Pay/12 x .2 = per month $2333.33
PITI (allowable) .32
(Gross Pay/12 x.32) = 2,666.66
PITI plus REVOLVING monthly Payments (allowable) .40
(Gross Pay/12 x .40) $3,333

$3,333-$2666.66= $667 (monthly) (means that you can only have this much left for any revolving credit and/or monthly student loans and/car loans payments)

If I were you I would pay off the car, as that reduces your cash flow monhtly and add towards your debt ratio. HOWEVER, If you only have 10 months of car loan payments left by the time you are inquiring on a mortgage, then It would be irrelevant, and the car loan will not be factor into your DTI.

Hope that helps

 

[charbie]

I may be the voice of dissent, depending on how soon you are looking to purchase your house and how long you plan on staying because just my personal opinion only ( market may still dip - maybe irrelevant if you keep your house forever)?

-some factors to consider, both Student loan interest and mortgage interests are tax deductible. If you are only going to make a dent in your student loan Overall balance (not reducing monthly payments) but the amount that you have currently is significant towards a down payment in that its say 10% of your total down payment for the house, then I would put it towards your downpayment, IF you are looking to purchase in the near future.

-If your current student loan interest is less than your expected mortgage interest rates then I would put towards the house.
-I'm not sure if you have looked into mortgage financial equations but here is an example:

I don't just use the 28/32 rule, But I add an extra variable:
28/32/40 (depending on lender it can vary slightly)

EX:
Gross Pay annual: $100,000 (joint)

Mortgage ONLY (allowable) .28
(Gross Pay/12 x .2 = per month $2333.33
PITI (allowable) .32
(Gross Pay/12 x.32) = 2,666.66
PITI plus REVOLVING monthly Payments (allowable) .40
(Gross Pay/12 x .40) $3,333

$3,333-$2666.66= $667 (monthly) (means that you can only have this much left for any revolving credit and/or monthly student loans and/car loans payments)

If I were you I would pay off the car, as that reduces your cash flow monhtly and add towards your debt ratio. HOWEVER, If you only have 10 months of car loan payments left by the time you are inquiring on a mortgage, then It would be irrelevant, and the car loan will not be factor into your DTI.

Hope that helps

It helped me! Totally makes me feel much better about the fact my husband talked me into paying off one of our cars this morning! It reduced the amount in our savings by a bit, but also took away a $225/month payment and since we are getting monthly rental payments now which and not paying rent, we will have our savings built back up by our closing date.
whew...my hubby will be happy since I've been doubting him and freaked out.

 

[charbie]

I may be the voice of dissent, depending on how soon you are looking to purchase your house and how long you plan on staying because just my personal opinion only ( market may still dip - maybe irrelevant if you keep your house forever)?

-some factors to consider, both Student loan interest and mortgage interests are tax deductible. If you are only going to make a dent in your student loan Overall balance (not reducing monthly payments) but the amount that you have currently is significant towards a down payment in that its say 10% of your total down payment for the house, then I would put it towards your downpayment, IF you are looking to purchase in the near future.

-If your current student loan interest is less than your expected mortgage interest rates then I would put towards the house.
-I'm not sure if you have looked into mortgage financial equations but here is an example:

I don't just use the 28/32 rule, But I add an extra variable:
28/32/40 (depending on lender it can vary slightly)

EX:
Gross Pay annual: $100,000 (joint)

Mortgage ONLY (allowable) .28
(Gross Pay/12 x .2 = per month $2333.33
PITI (allowable) .32
(Gross Pay/12 x.32) = 2,666.66
PITI plus REVOLVING monthly Payments (allowable) .40
(Gross Pay/12 x .40) $3,333

$3,333-$2666.66= $667 (monthly) (means that you can only have this much left for any revolving credit and/or monthly student loans and/car loans payments)

If I were you I would pay off the car, as that reduces your cash flow monhtly and add towards your debt ratio. HOWEVER, If you only have 10 months of car loan payments left by the time you are inquiring on a mortgage, then It would be irrelevant, and the car loan will not be factor into your DTI.

Hope that helps

It helped me! Totally makes me feel much better about the fact my husband talked me into paying off one of our cars this morning! It reduced the amount in our savings by a bit, but also took away a $225/month payment and since we are getting monthly rental payments now which and not paying rent, we will have our savings built back up by our closing date.
whew...my hubby will be happy since I've been doubting him and freaked out.

 

[NewEnglandLady]

So frustrating, isn't it? Usually I'm super gung-ho about paying off debt no matter what, but if I'm being honest, that's not what we did. I felt like buying a house was so daunting because of my student loan debt (not 6 figures, but around $60K) and we also live in an area where starter homes are $400K+, so we were looking at building a $100K house downpayment fund in addition to my school debt and I thought it would take decades!

What we did was we each took a task. DH was in charge of the house downpayment fund. He had a better-paying job anyway, so that worked out. I was in charge of my school debt, which...well, makes sense. Then we lived beneath our means. Like way, way beneath our means. Our apartment was zoned for Section 8 housing, though we felt at home with our decade-old 150K+-mile vehicle that we still drive. We lived there for a couple of years, then found another cheap house to rent during our final push, but it was totally worth it. I would get jealous when coworkers bought homes or had new cars, but I knew our day would come, haha. It did--I paid off my debt and we were able to put 30% down on a house.

I just wanted to offer support since I know how it feels to want a house (in an expensive area) and also have debt. I would definitely suggest a couple of years on beans and rice to accumulate everything you can. Good luck!!

 

[D&T]

It helped me! Totally makes me feel much better about the fact my husband talked me into paying off one of our cars this morning! It reduced the amount in our savings by a bit, but also took away a $225/month payment and since we are getting monthly rental payments now which and not paying rent, we will have our savings built back up by our closing date.
whew...my hubby will be happy since I've been doubting him and freaked out.

Hey Hey Charbie!! congrats on paying the car off! doesn't it feel great to increase your monthly cash flow?!

Most people see the overall picture of the accumulated debt, but more importantly imo is the monthly recurring payments and your ability to pay those. I know some people have opted to take out 15 year loan, but that drastically committed them to very high monthly payments to the point it drove them to sell since they could no longer refi due to the market and unforseen personal issues had come up- whereas I would advise towards the more conservative route of a 30 year loan and make extra payments, because you are not locked into huge maybe uncomfortable payments for the duration of 15 years, you have more flexibility in 30 - yes you maybe paying more interest, but ulitmately its the ability to repay monthly with a less financial stress/burden monthly makes me more inclined to take 30 year mortgage.

 

[megumic]

So frustrating, isn't it? Usually I'm super gung-ho about paying off debt no matter what, but if I'm being honest, that's not what we did. I felt like buying a house was so daunting because of my student loan debt (not 6 figures, but around $60K) and we also live in an area where starter homes are $400K+, so we were looking at building a $100K house downpayment fund in addition to my school debt and I thought it would take decades!

What we did was we each took a task. DH was in charge of the house downpayment fund. He had a better-paying job anyway, so that worked out. I was in charge of my school debt, which...well, makes sense. Then we lived beneath our means. Like way, way beneath our means. Our apartment was zoned for Section 8 housing, though we felt at home with our decade-old 150K+-mile vehicle that we still drive. We lived there for a couple of years, then found another cheap house to rent during our final push, but it was totally worth it. I would get jealous when coworkers bought homes or had new cars, but I knew our day would come, haha. It did--I paid off my debt and we were able to put 30% down on a house.

I just wanted to offer support since I know how it feels to want a house (in an expensive area) and also have debt. I would definitely suggest a couple of years on beans and rice to accumulate everything you can. Good luck!!

Ha, NEL, thanks for the support! Yeah, we are already doing the whole cheapie living situation, one car, rice and beans bit, which I think helps a lot. It amazes me sometimes to hear others talk about going out to $100 dinners twice a week -- in a good month we'll splurge for one $40 meal out! So yes, we are certainly trying in that sense.

It's not that we must buy a house now and feel the urge to (more like I have the urge to reproduce...like yesterday...) but we feel like renting is just cash down the drain. Meh. I wish there was a magic answer 8 ball to just tell us what to do...

 

[Hera]

I would do both! While rent is not quite throwing away cash (if you do research, you'll find that owning is sometimes more expensive), I would find a way to purchase the house and lower your student loans. You could maybe spend less money on a property and put the rest into student loans, or maybe you take on a temporary second job. My advice is not to overwhelm yourself with too much stuff. I always suggest what someone else said earlier about qualifying on one person's income in case something happens to the other's employment.
Good luck whatever you choose!

 

[Dancing Fire]

It helped me! Totally makes me feel much better about the fact my husband talked me into paying off one of our cars this morning! It reduced the amount in our savings by a bit, but also took away a $225/month payment and since we are getting monthly rental payments now which and not paying rent, we will have our savings built back up by our closing date.
whew...my hubby will be happy since I've been doubting him and freaked out.

Hey Hey Charbie!! congrats on paying the car off! doesn't it feel great to increase your monthly cash flow?!

Most people see the overall picture of the accumulated debt, but more importantly imo is the monthly recurring payments and your ability to pay those. I know some people have opted to take out 15 year loan, but that drastically committed them to very high monthly payments to the point it drove them to sell since they could no longer refi due to the market and unforseen personal issues had come up- whereas I would advise towards the more conservative route of a 30 year loan and make extra payments, because you are not locked into huge maybe uncomfortable payments for the duration of 15 years, you have more flexibility in 30 - yes you maybe paying more interest, but ulitmately its the ability to repay monthly with a less financial stress/burden monthly makes me more inclined to take 30 year mortgage.

D&T...didn't know you were sucha intelligent person...

 

[NewEnglandLady]

So frustrating, isn't it? Usually I'm super gung-ho about paying off debt no matter what, but if I'm being honest, that's not what we did. I felt like buying a house was so daunting because of my student loan debt (not 6 figures, but around $60K) and we also live in an area where starter homes are $400K+, so we were looking at building a $100K house downpayment fund in addition to my school debt and I thought it would take decades!

What we did was we each took a task. DH was in charge of the house downpayment fund. He had a better-paying job anyway, so that worked out. I was in charge of my school debt, which...well, makes sense. Then we lived beneath our means. Like way, way beneath our means. Our apartment was zoned for Section 8 housing, though we felt at home with our decade-old 150K+-mile vehicle that we still drive. We lived there for a couple of years, then found another cheap house to rent during our final push, but it was totally worth it. I would get jealous when coworkers bought homes or had new cars, but I knew our day would come, haha. It did--I paid off my debt and we were able to put 30% down on a house.

I just wanted to offer support since I know how it feels to want a house (in an expensive area) and also have debt. I would definitely suggest a couple of years on beans and rice to accumulate everything you can. Good luck!!

Ha, NEL, thanks for the support! Yeah, we are already doing the whole cheapie living situation, one car, rice and beans bit, which I think helps a lot. It amazes me sometimes to hear others talk about going out to $100 dinners twice a week -- in a good month we'll splurge for one $40 meal out! So yes, we are certainly trying in that sense.

It's not that we must buy a house now and feel the urge to (more like I have the urge to reproduce...like yesterday...) but we feel like renting is just cash down the drain. Meh. I wish there was a magic answer 8 ball to just tell us what to do...

I completely understand--I promise you will get there and you'll feel great about it! I also know how frustrating it is to be in the thicke of it and wanting to TTC. I remember making sure the last house we rented was baby-friendly just *in case* we got the urge to have a baby before buying a house. It will all fall into place the way it's supposed to and you'll back on this time fondly!

 

[NovemberBride]

We decided to buy a house and keep paying minimums on the student loans. We have no debt other than the mortgage and our student loans for grad school. We were fortunate to graduate at a time when interest rates on student loans were very low, so ours are locked at 1.6%. Our mortgage is at 4.625%, so we are actually paying down the mortgage before we pay down student loans. I know rates are not as low on student loans now, so that may not make sense for you. We know we'll probably never be able to borrow money for anything else at that low of a rate again and we can beat that rate even today on our other investments, so we have no interest in paying off those loans faster than necessary. Of course, if our loans were at today's rate (I think it's 6.8%), we'd be paying them off as soon as possible.

 

[rubybeth]

I know what Dave Ramsey would say... pay off the debt, then save for the down payment.

I would love to be in a house right now, but knowing that taking the 20 years to pay off the debt will result in paying over $25,000 in interest alone, I'd rather be debt free. Also, it will be a lot easier to save for a down payment when we don't have those monthly student loan payments. A lot of it depends on your student loan interest rate, I guess. Ours are in the 6% range so it drives me nuts to know we could get a mortgage at 4.5%.

Also, I've seen friends lose jobs, go into bankruptcy, and student loans don't go away with a Chapter 7 or 11.

 

[megumic]

Just wanted to update everyone who was following along...

The verdict is in. Although I never heard back from Suze, we did finally sit down with financial advisors/investors. They said hands down pay off the debt before saving (aggressively) for a house.

The reasoning is simply that we cannot earn more on the money elsewhere than we'd pay in interest, so just pay it down (with the caveat that we had an emergency cushion 6-8 months in place, which we do). Further, then when we apply for a mortgage, we'll have less debt and more disposable income (b/c less of it will be pre-allocated to loans).

So, we've already paid off the car and we're starting to work on those darn student loans. Woof. It feels good to know we at least have some direction now and can make a plan from here. Plus, housing market has and is continuing to drop around here, so maybe by the time we're ready to buy (about 2 years...) things will be as cheap as can be!

 

[Haven]

I'm late to your thread, but this sounds like a good plan to me, Megumic.

Like NEL, DH and I applied our money to different things all at once, and it worked for us. I didn't want to continue on with my student loan debt, so I focused on paying that off. We both saved up for new cars when we needed them, so we paid cash and didn't take on loans. And we saved up the 25% DP on our house together. DH is older and therefore more established in his career, so that helped with things, but we lived really far beneath our means to make it all happen. We were really clear and honest with ourselves about what mattered most to us, and then we cut everything else out.

On another note, I think someone else said it already, but houses are EXPENSIVE. We both lived in condos before, and we still own DH's condo, but I have to say that despite hearing this over and over again I was not really prepared for how much a home really costs. We've been homeowners for three years now and while I really love our home and location, sometimes I think home ownership is overrated. If I could go back and do it all over again, I'm not sure I would buy a home again. I don't mean to be a Debbie Downer, but seriously, a house can really be a money pit!

Another thing I'm really happy we did was we bought a home that we could afford on MY lower income alone. This is something my parents did with their home, and it was the best advice we ever got. It's allowed us to live comfortably in our home and not feel like we have to make tough financial decisions because we have a monster mortgage to pay back.

 

[Dreamer_D]

The interest rate of the loan, the savings account, and the potential mortgage would all factor into my decison.

And now I see you made a decision. That is what I would do in your shoes too, given the interest rates and how they stack up.

One other thing to consider: people vary in the recommendation of having 6 months liquid savings. If you have debt that has a higher interest rate than the rate you earn on your savings, some financial people say to pay off the debt from the savings, and then work to rebuild the savings when you are debt free (I suppose making sure you have access to an emergency line of credit for those unexpected situations). Something to consider.

D&T Great tips! Thanks! We took a long amortization on our mortgage -- 35 years actually, signed on before Canada changed mortgage rules -- for the reason you explained. I had not really thought about the car payment issue. Our interest rate on our car loan is really low -- like 2% -- so much lower than our mortgage (3.99%) that we had not thought to ever both paying the car off sooner, but you are correct about the monthly servicing payments being a factor beyond the interest rates. We will have to give that some consideration in the coming years as our financial situation changes and we shift our priorities for savings/debt repayment etc.