What to do with my money -- pay off student loan or buy house?

[willdude]

Ah yes, the age-old question for people who are not particularly old of age. I'm facing this conundrum, and figured this would be a good place to seek advise.

My situation is this: I have $29k in a private student loan, with a variable interest rate based on LIBOR, which is currently 5.28%. There's about 8.5 years left on it, with a current monthly payment of $355. That projects to about $7200 in interest at the current rate over the remainder, which will no longer be tax deductible based on my income, and of course would change with the interest. If I just paid off my loan now, it'd take most of my savings, but I save at a pretty high rate and would be able to save this money back in about 2 years.

However, with house prices and mortgage rates as low as they are, it would seem advantageous to buy a house instead, especially since I'd qualify for the $8k tax credit as a first-time home buyer. I've been trying to wrap my head around this decision from several different angles, but it really seems to come down to a gamble as to whether the economy, and housing market in particular, will rebound significantly over the next two years. Any other advise or things I should be considering?

[jIM_Ohio]

The house should not be looked at as an investment (take the "gamble" out of the equation).

If you would be in house for 10-15 years, probably getting the house with its corresponding tax deduction (if you are in UK, does a house give you a tax deduction?). If you are in USA this is a no brainer- get the house, save on taxes, get the credit and work some of the tax savings into paying off the student loan early.

What tax bracket are you in?
What is expected mortgage value?

[disneysteve]

You don't buy a house based on market conditions, interest rates or tax credits. You buy a house when you need a house to meet your housing needs and can afford to purchase one with an appropriate down payment (20%) and an adequate emergency fund in place.

Of course, I agree with Jim, that a house is not an investment. You aren't buying it for the purpose of making money. You are buying it to have a place to live.

[willdude]

Originally Posted by jIM_Ohio

If you would be in house for 10-15 years, probably getting the house with its corresponding tax deduction (if you are in UK, does a house give you a tax deduction?). If you are in USA this is a no brainer- get the house, save on taxes, get the credit and work some of the tax savings into paying off the student loan early.

What tax bracket are you in?
What is expected mortgage value?

I'm in the 25% bracket, with an effective tax rate of about 20%. The mortgage I'm assuming for this case is $180k on a $200k house.

I probably wouldn't count on being in the house for as long as 10 years. I also don't really see the tax savings as a big advantage. I'd be paying more money than I am now as a renter, and only getting a fraction of that back from tax deductions. Plus, the student loan interest I'd pay over the remainder of its term wouldn't be tax deductible at all.

[jIM_Ohio]

Originally Posted by willdude

I'm in the 25% bracket, with an effective tax rate of about 20%. The mortgage I'm assuming for this case is $180k on a $200k house.

I probably wouldn't count on being in the house for as long as 10 years. I also don't really see the tax savings as a big advantage. I'd be paying more money than I am now as a renter, and only getting a fraction of that back from tax deductions. Plus, the student loan interest I'd pay over the remainder of its term wouldn't be tax deductible at all.

Can you explain the following:

1) how would a person in 25% not have student loan interest be tax deductable? I thought that was phased out closer to 28% bracket limits (I'd have to look up specifics, please enlighten me and save me the time).

2) How much you pay in rent. A 180k mortgage at 5.5% would get you an additional $2500 back on tax return- not including property taxes or state taxes. That is $200-$300/month. If the price difference from renting is less than $300 the house saves you money tax wise (relative to renting).

[willdude]

Originally Posted by jIM_Ohio

Can you explain the following:

1) how would a person in 25% not have student loan interest be tax deductable? I thought that was phased out closer to 28% bracket limits (I'd have to look up specifics, please enlighten me and save me the time).

For 2008, if your MAGI was above $70k the interest deduction is completely phased out. (Kinda lame that they make the max deduction $2500, THEN phase it out.)

Originally Posted by jIM_Ohio

2) How much you pay in rent. A 180k mortgage at 5.5% would get you an additional $2500 back on tax return- not including property taxes or state taxes. That is $200-$300/month. If the price difference from renting is less than $300 the house saves you money tax wise (relative to renting).

I pay $900/month currently. From a loan calculator, $180k at 5.5% is $1022/month, with close to $10k in interest in the first year, so there's the $2500 back. Property taxes are going to add $250/month, and then PMI maybe another $100, both of which should be tax deductible. That works out to $1372/month, with $295/month back from tax deductions. Still almost $200 more than I'm paying now.

[jIM_Ohio]

Originally Posted by willdude

For 2008, if your MAGI was above $70k the interest deduction is completely phased out. (Kinda lame that they make the max deduction $2500, THEN phase it out.)



I pay $900/month currently. From a loan calculator, $180k at 5.5% is $1022/month, with close to $10k in interest in the first year, so there's the $2500 back. Property taxes are going to add $250/month, and then PMI maybe another $100, both of which should be tax deductible. That works out to $1372/month, with $295/month back from tax deductions. Still almost $200 more than I'm paying now.

70k single- right- that is 28% savings not 25% I believe. I would have to look up the bracket cap for single though...

$95 more per month- about $1000 per year AND schedule A is now opened up for smaller things.

In addition if you get another 10k down you can avoid PMI altogether and you are at $195/mo savings then.

[rusty2832]

canceled by author

[DebbieL]

Rusty - nobody will really see your post unless you start your own thread and copy it in there. Good luck!

[rusty2832]

Originally Posted by DebbieL

Rusty - nobody will really see your post unless you start your own thread and copy it in there. Good luck!

Thanks, I just signed up the other day. I had tried to post after that and the computer wouldn't let me so I tried another way. That was my first post on a bulletin board type forum. I tried what you suggested and it did go through. I just goofed up on the first posting. - Amy

[wincrasher]

Buying a house is a big step. Many find it worth it for more than monetary reasons.

Keep in mind your real costs each month are about 1/3 of the mortgage payments - repair & upkeep, appliances, etc. - most people forget about these thiings.

Your student loan payments will work against you when you apply for a mortgage - you want to have as low a monthly outlay as possible.

Best advice I can give you is to have the 20% down and an emergency fund going into buying a house. PMI is required if you don't have 20% down - I was recently quoted $6000 fee for this - all due upfront at closing.

I'd keep saving and keep a look out for a fantastic deal. You may find something that is such a bargain that it trumps the other consideratioins.

[supercheap]

Originally Posted by disneysteve

You don't buy a house based on market conditions, interest rates or tax credits. You buy a house when you need a house to meet your housing needs and can afford to purchase one with an appropriate down payment (20%) and an adequate emergency fund in place.

Of course, I agree with Jim, that a house is not an investment. You aren't buying it for the purpose of making money. You are buying it to have a place to live.

This is true. A house should be look at as your home not as an investment. Buy a house today and by next year you could owe more than it's worth but if it's your home and you can make the payment who cares.