Yahoo Finance Does It Make Sense to Buy a Home If You Have Significant Student Loan Debt?
Everything is going according to plan. You went to college. You landed a good job. You met someone and are planning a marriage. You're thinking a house is in the near future.
But it's probably around now that you're starting to wonder if you're crazy, or if you're taking on too much debt. After all, students who graduated from college this year are paying back a little over $35,000, according to an analysis of government data conducted by Mark Kantrowitz, publisher of Edvisors.com, a college financial aid planning website. If you're well above that average, and you're thinking of buying a house, you may have good reason to be nervous.
So should you do it?
Only you can make that decision, but it isn't unusual to manage student loans and a mortgage; some even end up in better financial shape when paying down both debts at once. But before you contact a real estate agent, you'll want to consider these issues first.
Budget. With or without monthly student loan payments, you need to figure out whether you can actually afford to buy a house. With an apartment, after it's furnished, you typically won't have many costs associated with your rent, aside from renter's insurance. When you buy a house, not only will you be paying your monthly mortgage payment, which will likely be wrapped in with your homeowners insurance and taxes, you'll need to buy more furniture and additional items you haven't had to think about, like a snow shovel or lawn mower. And when appliances break, a pipe bursts or the roof leaks, you'll have to shell out money for that.
Add up all of your debts. See what you think you'll have left over at the end of the month. Think about those future purchases and start envisioning how a budget with a house will look versus the lifestyle you're living now. You may decide you'd like to wait until that promotion kicks in or you kill off more student loan debt.
"You don't want to be that friend or family member who can't go out to eat or see a movie because all your money is going to student loans and a mortgage," says Kevin Parker, an assistant vice president at Navy Federal Credit Union, headquartered in Vienna, Virginia.
The important numbers. Beyond budgeting, the real numbers you'll want to pay particular attention to isn't the amount of debt you owe your alma mater, but the interest rate you're paying on the student debt.
Brad Sherman, president of Sherman Wealth Management in Gaithersburg, Maryland, says that if you have an interest rate higher than 5 percent, you should make it a priority to pay it down, or get different terms with a lower interest rate, before buying a house.
"Otherwise, you're spending your hard-earned cash on borrowing costs," Sherman says.
Sherman also suggests looking at the rent-versus-buy calculator at Realtor.com, which is designed to help prospective homeowners determine the net cost of buying a house versus the cost of renting a place over time.
Using the house to pay off the student debt. Some homeowners do this. It's a risk, of course, if you feel everything hinges on this going well. While you may buy a house and several years later, sell it for profit, you could also sell it for a loss if the market tanks or some other unknown factor plays against you; then you'll suddenly be learning new curse words and in more debt than ever.
You may not have to sell your home to use it to pay off debt. There's no guarantee things will work out as well for you, but Michael Velazquez, a certified public accountant and personal financial specialist in Glendale, California, says his company helped a young couple, one a doctor and the other a teacher, who had a great collective income, but owed over $300,000 in student loans.
"Every time the equity increased, they refinanced, pulled cash out and paid down their student loans. Within five years, they had paid them off," Velazquez says.
Your reasons for wanting a house. Does it feel right to you? Or does it feel like something you're thinking about doing because everyone does at this point in their lives? Jimmy Moock, a public relations executive in Philadelphia, lives in a nice house and is still paying off his college loans at age 40. In fact, he is paying the minimum he can get away with, and because of that, he will be paying student loans until 2030.
But he doesn't regret his decision to stretch out his student loan payments and go ahead and live his life.
"I know that it's costing me more than I would like, but I get more out of the monthly income," Moock says."I also consider the college education as the reason for me being able to be where I am now in life, which is a series of trade-offs, as we know."
And it isn't as if because of his student loans, Moock is living in a house but eating rice and beans for dinner every night. He has bought a few homes over the years and things have worked out fine for him.
First, he bought a condominium and later sold it, letting him make a larger down payment on a townhouse, and then years later, he and his wife and kids moved into an affluent neighborhood, in a house they bought when it was in foreclosure. He still owns the townhouse, renting it out.
"I make barely 50 bucks a month as a landlord, but since someone else is paying the mortgage, I consider this the safer part of my retirement portfolio," says Moock.
Still, buying a house with significant student debt won't work for everyone, and Moock says he had an advantage not everyone has. His mother is a real estate agent, and she gifted him her commission, which helped him with down payments and closing costs.
But, as Moock noted, there are trade-offs. If you wait until your student debt is completely vanquished and then buy a house, you may look back at the time spent renting and have some regrets about that, too. Moock's oldest daughter, after all, is a sophomore in college and before he knows it, will probably be buying her own house. As Moock says, "Man, does time fly."
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