Down payment for a home vs. paying student loan debt faster

[bakerzman05]

Hello everyone,

So I am new to this forum and have read some good things. I am in debate of purchasing a home as it is a buyers market with low interest rates. I have a credit score of 730 and was recently pre approved for an FHA loan of $160k with a 3.5% interest rate with a down payment of 3.5% . The only thing that is keeping from pursuing this idea is my student loans. My minimum payments for my student loans are about $500 per month. I have no other debt. I am currently renting an apartment at $750 per month. I have been in the mind set of paying down my student loans as quickly as possible as I have been paying $1,000 per month split 50/50 between private/federal loan. My first question is, with being pre approved at 3.5% due to interest rates being so low, should I jump on the opportunity of buying a home in this down market and save for a down payment? If I were to do this, I have the opportunity to move into a rent free situation with my girlfriends parents for for up to a year in order to save for a down payment as I want to start building equity by purchasing a home. Also I am purchasing this house on my own considering my finances because she is still in college and as a safety measure eventhough I see myself with her and marriage in the next few years but you never know what may happen. Or the 2nd option should I continue to pay my student loans as fast as possible as I have been doing?

Personal Statistics
- $50,000 in annual salary (I am a young professional in public accounting where job security is high)
- $52,000 in student loans. Half private and half federal, I believe they are both around 6.5%
- Other expenses are for utilities, only utilities not attached to current apartment is cell phone bill of about $70 per month.
- Looking to buy a home anywhere between 120-160k

Seems that if I were to wait on buying a home, it would take me 5 to 7 years to pay off my student loan debt. That would be a long time in renting out an apartment, this is why I am considering it, especially with the market the way it is now.

Thanks so much for your help guys

[disneysteve]

I am in debate of purchasing a home as it is a buyers market with low interest rates. I have a credit score of 730 and was recently pre approved for an FHA loan of $160k with a 3.5% interest rate with a down payment of 3.5%

If I were to do this, I have the opportunity to move into a rent free situation with my girlfriends parents for for up to a year in order to save for a down payment

Personal Statistics
- $50,000 in annual salary
- Looking to buy a home anywhere between 120-160k

I say don't do it.

1. You shouldn't make the decision to buy a home based on market conditions or interest rates. You should buy when you are financially ready to do so and are confident that you will be staying put for at least 5-10 years.

2. NEVER buy a house with a 3.5% down payment. If you don't have 20%, you probably aren't ready to buy.

3. With a $50,000 income, I'd keep the purchase price under $150,000.

4. Getting rid of 6.5% debt is going to benefit you much more than taking on new 3.5% debt.

5. Interest rates aren't going anywhere anytime soon. The Fed has said they intend to keep rates low at least until 2014.

I would suggest that you continue making extra loan payments but maybe put a portion of that extra money toward your down payment fund. You need to have a 6-month emergency fund and a 20% down payment. When you've got that, then you will be ready to buy at least financially speaking.

[dczech09]

I completely agree with DS. I would pay down the loans if I were you.

Basing your decision to buy on external forces such as market conditions is exactly what a bunch of people did several years ago. That realy did not benefit them in the end. Buying because that is what is expected of you, or because the rates are so low, is really dumb.

Here are 6 criteria I recommend. I know not everyone will agree with me, but these are my guidelines. And fyi, I am 25 and hold myself to a higher standard than this:

1. Have a 20% equity position when you buy (either do a large down payment or get a discount)
2. Only 15 year fixed rate mortgages
3. Payment of the mortgage (with tax and insurance) should not exceed 28% of your income
4. Ideally, you should have no other debt
5. Have an emergency fund of 3 to 6 months of expenses
6. Rule of 3- the house should be no more than 3 times your income

Once you meet these criteria, you're good to go ahead with home ownership. If you do not meet these criteria, I would either steer clear or be VERY VERY VERY cautious!

People will say that you need to get into a house as quick as possible. The majority of these people either have lost their house recently, or are in a good position to lose it in the event of an emergency.

I hope this advice helps. Ultimately, you want to get yourself a house. You just don't want the house to get you!

[JoeP]

Is the one year rent free option available only if you're saving for a house? If not, then take them up on the offer, saying that you are working hard to pay down your student loan debt first.

Do you see the wisdom of getting rid of your debt first, and saving 20% down?

[dojo]

As a new free of debt person, I'd also go and try get rid of the current debt before getting into anything new. Job security can be high, it doesn't matter it's 100% there. not to mention that, god forbid, you could no longer work or have other problems and you'd have 2 big loans.

Solve your current problems, build up your savings and then you'll be able to make a decision from a better position.

[jla85]

One Size Does not Fit all

I will go against the current here. I say your answer lies in the numbers. You are paying $750 in rent. If you were to get an $80k mortgage at 3.5% your payment is $359.24 depending on your taxes and insurance you could be looking at about $722 in a mortgage payment. You are already paying $750. Also with short sales and foreclosures at an all time high you can find deals like this all around you but you have to learn how. It is not a cakewalk. By the time you save enough for 20% you could have bought a home with instant equity built in. Plus now you have an additional tax break beause you can write off the interest on both the mortgage and your student loans. Your housing expense will always be there whether you buy or rent, its true, homeownership is no easy task but I just bought my home for $62,500 and it is tax assessed at 88k and with some repairs I've made I expect its worth $90. My mortgage payment is $525. I'll take that any day plus my tax write off and the savings goes towards my loan payments. So not everything is for everyone run the numbers first. You may be too high in how much home you are buying. Just run the numbers and let them guide the numbers will never lie.

[auron]

I will go against the current here. I say your answer lies in the numbers. You are paying $750 in rent. If you were to get an $80k mortgage at 3.5% your payment is $359.24 depending on your taxes and insurance you could be looking at about $722 in a mortgage payment. You are already paying $750. Also with short sales and foreclosures at an all time high you can find deals like this all around you but you have to learn how. It is not a cakewalk. By the time you save enough for 20% you could have bought a home with instant equity built in. Plus now you have an additional tax break beause you can write off the interest on both the mortgage and your student loans. Your housing expense will always be there whether you buy or rent, its true, homeownership is no easy task but I just bought my home for $62,500 and it is tax assessed at 88k and with some repairs I've made I expect its worth $90. My mortgage payment is $525. I'll take that any day plus my tax write off and the savings goes towards my loan payments. So not everything is for everyone run the numbers first. You may be too high in how much home you are buying. Just run the numbers and let them guide the numbers will never lie.

Maybe the numbers won't lie, but your interpretation of them might. Putting a hypothetical 80k mortgage in place of the OP's 120-160k range simply isn't justification for buying a house. Your readiness should be defined by your current and future finances, not market conditions.

[jla85]

Maybe the numbers won't lie, but your interpretation of them might. Putting a hypothetical 80k mortgage in place of the OP's 120-160k range simply isn't justification for buying a house. Your readiness should be defined by your current and future finances, not market conditions.

Like I said I am going against the current. I totally agree that your readiness is defined by your ability to handle the situation. I'm also not jutifying buying a house. I am saying that there are considerations to make an argument that perhaps you can be a homeowner before you know it. To avoid ending up a statistic however i recommend running numbers to make a sound decision and yes my example used a lower mortgage than the considered one; meaning you may have to look for a different type of home if this is viable for you. There are many important factors to consider. I also think that my peers who have posted here make valid points but do be open minded run the numbers you should know best what you can and can't handle. Homeowners do have to be ready at a moments notice to foot repair bills.

[greenskeeper]

I would buy if in bakerz position, well actually I was in that position 10 years ago.

I got married, bought a house, paid off my wife's credit card debt, and our student loans all at the same time.

We now have no debt aside from our mortgaqe, which will be paid off in 12yrs retroactive to 2007 when we purchased the house we are in now (2nd house).

Interest rates were a lot higher back when we bought our 1st home as well.

The house cost 100k and we both made a combined $55k

The house we are in now cost $255k and we make a combined 70k.



You can have a mortgage that takes up more of your income IF YOU DON'T HAVE ANY OTHER DEBTS, which is the situation that bakerz is in.

Nothing wrong with 3.5% down, surprised the bank doesn't ask for more (which if you can put more down that's great) but you will not be *invested* in the property as much with equity at the beginning, which can be a good or bad thing depending on how you look at it.

[NuggetBrain]

While I agree you should have an emergency fund of at least 3 months, as well as some cash put aside for things like moving costs, repairs (a house that's $120k is probably going to need something or another fixed) furniture and the like, I think you're really not in that bad of a position to buy. I know everyone on here is rabid about the 20% down but if you aren't planning on moving within the next 10 years, you've got no debts other than your student loans and the mortgage amount is going to be close to the rent amount you're paying now I would say go for it.

Now, that being said everybody and their mother were riding our butts because we didn't buy a house during the boom, since it was "a sure-fire investment" and "prices were just going to keep going up" because we were "wasting our money on rent". We waited until we felt we personally were ready which was last fall. We did a construction loan and are in the process of refinancing into a 30 year loan at 3.85% while every person who gave us crap for not buying into the market back in 2005 is underwater in their homes and can't refinance out of their 6% loans.