Additional income: pay down debt or save for house?

[red92s]

My wife (26) and I (29) are recently married and currently renting. No kids. We'd like to buy a house in the not-to-distant future, at least 12 months out, probably closer to 18-24 months. At some point, if interest rates begin to climb again, we'll be faced with having to decide between continuing to grow the down payment, or buying at lower APR's.

We currently pay $650 a month into our downpayment savings account. Our only debts are her car (2007 Accord with $7k left on it; $250/mo) and her student loans (just under $20k). We've got a healthy emergency fund ($25k), and additional savings accounts for gifts/travel/charity/auto/etc.

We've been running off a budget we both feel good about, and have stuck too with little deviation, for about 6 weeks. I know that isn't long enough to be considered "successful" but we've only been married 9 weeks.

I recently accepted a new position (starting Monday, woo!) that results in about a $400 monthly bump in take-home pay. New employer also covers cell phone costs and has better/cheaper insurance options, so it's effectively "worth" about $500/mo net to our monthly income stream.

So . . . should the new-found income go towards paying down debt, or saving liquid cash for the downpayment? Conventional wisdom probably says debt, but with the depressed market values and interest rates, might it make more sense to expedite the home purchase?

[bjl584]

My wife (26) and I (29) are recently married and currently renting. No kids. We'd like to buy a house in the not-to-distant future, at least 12 months out, probably closer to 18-24 months. At some point, if interest rates begin to climb again, we'll be faced with having to decide between continuing to grow the down payment, or buying at lower APR's.

We currently pay $650 a month into our downpayment savings account. Our only debts are her car (2007 Accord with $7k left on it; $250/mo) and her student loans (just under $20k). We've got a healthy emergency fund ($25k), and additional savings accounts for gifts/travel/charity/auto/etc.

We've been running off a budget we both feel good about, and have stuck too with little deviation, for about 6 weeks. I know that isn't long enough to be considered "successful" but we've only been married 9 weeks.

I recently accepted a new position (starting Monday, woo!) that results in about a $400 monthly bump in take-home pay. New employer also covers cell phone costs and has better/cheaper insurance options, so it's effectively "worth" about $500/mo net to our monthly income stream.

So . . . should the new-found income go towards paying down debt, or saving liquid cash for the downpayment? Conventional wisdom probably says debt, but with the depressed market values and interest rates, might it make more sense to expedite the home purchase?

I think that you should do a little of both.

Pay down your debts and save for your house. Pay the car off first.

A word of caution. Buy a home when you have a 20% down payment and a 6 month EF in place. Pay no attention to interest rates when making your decision to buy.

[red92s]

Where is this $650 per month that you are saving for a down payment on a house? Is that included in an EF or do you have a another savings account for that?

You should pay off all of your debt, build up 3-6 months of expenses in an EF, save up for at least a 20% down payment and take out a 15 year fixed rate mortgage.

$650 a month goes straight to the downpayment account, which currently has only ~$3k in it. The emergency fund is a separate account, and essentially "fully funded" at this point (9+ months of fixed expenses). We still put in about $100 a month to keep it habitual.

I think that you should do a little of both.

Pay down your debts and save for your house. Pay the car off first.

A word of caution. Buy a home when you have a 20% down payment and a 6 month EF in place. Pay no attention to interest rates when making your decision to buy.

I guess I don't get the logic of being totally ignorant to market conditions and trends when considering a purchase. The people who bough when rates and prices were at "historic lows" in 2010 probably wouldn't agree. Half a percent on a $300k loan makes a big impact in monthly cash flow. I'm not debating the sage logic of walking in with a sizeable downpayment, but in all likelihood there is going to be a tipping point where pricing trends, interest rates, and downpayment amount become competing factors. My spidey-sense that will occur is probably just as valid as someone telling me it won't. We are both guessing.

Other than PMI considerations (which are certainly legitimate), what makes 20% some grail of being "ready" to buy a house? At 17% someone hasn't proved their capability to handle it, but at 20% they are good to go? Just the back-and-forth negotiations leading up to a sale could swing that number.

[MonkeyMama]

The others make good points.

It depends. If I had 20% down plus a solid emergency fund, I'd consider speeding up the purchase a bit to take advantage of low interest rates. Which means maybe all that money should be going to a DP. I wouldn't *jump the gun* too much, but it could be advantageous to jump on low interest rates. 20% down is my personal sticking point. (There is nothing magical about 20%, but I think even more is better - I wouldn't go any less than that - too much hassle with PMI and everything. Best loans/loweest rates if 20% DP).

Sounds like car will be paid in 1-2 years time, anyway. That doesn't bother me, and I am extremeley anti-debt. {I assume you aren't buying a new car the second it is paid off! }

What is the interest rate on the student loans? What kind of housing purchase are you looking at? $100k or $600k? If you are really stretching, that $20k debt is going to be hard. If you are not stretching too much, and the interest rate is not too bad, I think I'd make the house purchase a priority.

**The only other thing to add: Keep in mind that as interest rates rise, housing prices tend to fall. This is probably why my gut reaction is mostly not to get too caught up with interest rates. Most people buying in this day and age shop "monthly payment." Which means they can't afford as much when interest rates rise. My dad would tell you he was lucky to buy at a time of double digit interest rates, because housing prices were so depressed. They were only stuck with double digit interest rates for a few years out of a 20-year loan.**

In addition, if you save it all in a DP fund, you may later decide to throw a chunk at the debt. Sometimes "save cash now, and decide later" makes the most sense.

[MonkeyMama]

P.S. I think the 20% rule is also just a good guage for patience and common sense. It's likely that if you can't wait that long, that you are rushing. Period. Always exceptions to the rule, but everyone thinks they are the exception it seems.

I presume any homeowner would tell you there was no reason to rush.

[cypher1]

P.S. I think the 20% rule is also just a good guage for patience and common sense. It's likely that if you can't wait that long, that you are rushing. Period. Always exceptions to the rule, but everyone thinks they are the exception it seems.

I presume any homeowner would tell you there was no reason to rush.

I definitely agree with that for no rush. My biggest regret when I bought my home 3 years ago was not downing 20%. I see many others around me rushing take advantage of low interest with no EF, barely any down payment saved nor plan on staying at same location for more than 5 years.

[cypher1]

While I hate debt just as much as the next person, I wouldn't feel comfortable depleting over 75% of my EF to wipe out the student loans just yet. What was the interest rate on it? I'd be more in favor of paying the 7k for auto asap, and putting the additional 250 savings over to the SL debt in the meantime while still maintaining home goal. That's great that you got a pay significant pay increase and will be able to accrue more savings quickly. But who's to say another expense or surprise occurs when your EF is down to 1-2k while trying to rebuild?

[red92s]

The others make good points.

Sounds like car will be paid in 1-2 years time, anyway. That doesn't bother me, and I am extremeley anti-debt. {I assume you aren't buying a new car the second it is paid off! }

What is the interest rate on the student loans? What kind of housing purchase are you looking at? $100k or $600k? If you are really stretching, that $20k debt is going to be hard. If you are not stretching too much, and the interest rate is not too bad, I think I'd make the house purchase a priority.

**The only other thing to add: Keep in mind that as interest rates rise, housing prices tend to fall. This is probably why my gut reaction is mostly not to get too caught up with interest rates. Most people buying in this day and age shop "monthly payment." Which means they can't afford as much when interest rates rise. My dad would tell you he was lucky to buy at a time of double digit interest rates, because housing prices were so depressed. They were only stuck with double digit interest rates for a few years out of a 20-year loan.**

In addition, if you save it all in a DP fund, you may later decide to throw a chunk at the debt. Sometimes "save cash now, and decide later" makes the most sense.

Yes, the car should be paid off around the time we are looking at a home, even if we do nothing. In addition to her car payment we save $150 a month into automotive savings. Barring any major repairs needed until then, we'd have around $6k towards replacing my car (which will be ticking over 150k by that point).

The car loan rate is higher than the student loans. That, coupled with the non-discharageable nature of the student loans, is why we would go after the car first.

Home price would likely be in the $250-350k range. At the lower end of that is something we could do on one income currently, but where public schools would be insufficient (a "10 years from now" problem). At the higher end would require 1.5 incomes, but be something that could potentially last until we are empty-nesters. Obviously "20% down" looks a lot different at one end of that budget than the other. With my new job, we will gross about $135k annually with no bonuses considered. With bonuses factored in, it's edging towards $150k.

As an additional complication to this entire exercise, I'm tabbed to inherit a not-insiginficant amount when my grandfather passes. The amount is obviously dependent on what his end-of-life care ends up costing; but for the sake of conversation lets say it would cover most (if not all) of a downpayment. Feels morbid to consider how I'd handle that windfall, but at 95 years old, I think it's worth bringing into the "big picture".

[red92s]

While I hate debt just as much as the next person, I wouldn't feel comfortable depleting over 75% of my EF to wipe out the student loans just yet. What was the interest rate on it? I'd be more in favor of paying the 7k for auto asap, and putting the additional 250 savings over to the SL debt in the meantime while still maintaining home goal. That's great that you got a pay significant pay increase and will be able to accrue more savings quickly. But who's to say another expense or surprise occurs when your EF is down to 1-2k while trying to rebuild?

having gone through a 6 month unexpected unemployment about 2 years ago, this is my biggest fear. I like having that security blanket. We can debate the financial value of cashing it out to get rid of debt, but I sleep a lot better at night knowing it's there. Hard to discount the psychology of it.

[cypher1]

having gone through a 6 month unexpected unemployment about 2 years ago, this is my biggest fear. I like having that security blanket. We can debate the financial value of cashing it out to get rid of debt, but I sleep a lot better at night knowing it's there. Hard to discount the psychology of it.

I couldn't agree more. I have too many friends still trying to recover from their layoffs just a couple years ago. Having a mortgage with a single income myself, I can definitely relate to peace of mind for having a larger than average EF. As MM said earlier, it can't hurt to save now and decide later.