Debt free or house down payment with raise?

[DisgruntledVirus]

Boss told me today I was getting promoted and a nice raise. I ran the numbers tonight with the net income increase and basically in the same time period (3.5 years) I can have 20% down on a first home OR I could be debt free (student loans+car) and then in 4.5 years have the down payment on a house. This is assuming the increase in pay all goes to either option, and debt stacking for the debts then that amount saving monthly. I already put in company match 401k and have Roth IRA being funded. If it matters I'm 26 and not married.

edit: Roth isn't maxed for the year at current pace

edit2: student loans are 6.8% (can't consolidate to a lower rate), and not quite 50% of what a house would be in my area (NE Ohio) that isn't a piece of crap or in a bad area

edit3: Student loans are ~$40k which amounts to ~70% yearly gross income. As a I'm the only person in my "household" making mid 50's/year I would highly doubt I qualify for IBR if a family of 3 @ 45k/yr is their example. It might reduce it some but not much. Also, I should note that the student loans are being paid off at a flat rate (instead of the graduated rate that starts payments low but you pay a decent amount more in interest). Finally the only other debt I have is my car which I do have a .9% apr loan out on.

I work with a good friend of mine and we have already talked about renting a place together as roommates, which is another reason for thinking of the house option.

 

[Red Squirrel]

Debts first. Once you're debt free then get a house.

On the other hand, see if you can get a house now and roll those debts into the mortgage. Check with the bank to see if they can do that.

 

[DisgruntledVirus]

Debts first. Once you're debt free then get a house.

On the other hand, see if you can get a house now and roll those debts into the mortgage.

Can't. Student loans are way too high to be able to do that (about 50% of what I'd guess my first home purchase price would be)

 

[DAGTA]

I believe we're in another housing bubble. I recommend paying off your debts and then saving for a down payment. Wait for the new bubble to pop and prices to fall for a while again. Congratulations on the raise and promotion!

 

[DaveSimmons]

In your shoes I'd worry about having a mortgage and loan payments at the same time. If you got laid off your monthly payments could be a problem.

Get debt free, then save up a down payment along with an emergency fund. After you have both, then get the house.

 

[Red Squirrel]

Can't. Student loans are way too high to be able to do that (about 50% of what I'd guess my first home purchase price would be)

In that case then yeah definitely pay that off first. Put everything you can on that.

 

[mmntech]

Debts should always be top priority once basic needs (food, shelter) are looked after. Since you aren't homeless, focus on paying those debts down first then you can start house shopping. Try to put away enough for a minimum 20% down payment. Fortunately housing in the States is a fair bit cheaper than it is here so it shouldn't be too much of a daunting task. It'll take me that long just to get the down payment with how high housing prices are here.

 

[Exterous]

A lot would depend on the interest rates you can get and what the interest rates are on your debts. We have some below 2.3% so I'm really not in a hurry to pay those off

 

[Net]

my friend paid off his student loans a few years back.

i did the minimum and put the rest in retirement. it's been a few years now and i've had an average return of 17% per year (plus tax deductions for retirement contributions and student loan interest).

i'm guessing the interest he saved was around 6-7% per year by paying them off.

 

[NutBucket]

I believe we're in another housing bubble. I recommend paying off your debts and then saving for a down payment. Wait for the new bubble to pop and prices to fall for a while again. Congratulations on the raise and promotion!

The bubble really depends on the market where the OP is. If property prices are reasonable I'd buy now given the rates. 4-5 years is a long ways away.

 

[Capt Caveman]

What's the interest rate on the student loans?

 

[DisgruntledVirus]

My student loans are 6.8% and can't be consolidated as they are all the same rate (new consolidation shit takes the weighted average of all loans +.25%).

I was thinking loans as well as the primary focus with setting a small portion of that aside as seed money for a house down payment.

 

[DisgruntledVirus]

Also I'm in NE Ohio. I'm at a job I expect to be at for at least 2 more years (more if things align right with it) as I'm happy there and they treat me really well obviously. I would like to move out from this area but that's 2-3 years out at the earliest. I don't mind being here for 5ish though that a house would require.

 

[Ruptga]

I would pay down the loans first, unless I wasn't happy with my housing situation.

 

[Jumpem]

Pay off your debts. You don't need much of a down payment to get into a house.

 

[Exterous]

My student loans are 6.8% and can't be consolidated as they are all the same rate (new consolidation shit takes the weighted average of all loans +.25%).

I was thinking loans as well as the primary focus with setting a small portion of that aside as seed money for a house down payment.

IF you think you'll be in the area for 5+ years then I might consider getting a house while interest rates are at historic lows. You'd need to be smart about an emergency fund and your monthly payments though as well as have a good idea on the area you'd be living in (Good schools? Low unemployment? Jobs increasing/decreasing etc)

Another thing to consider - does your loan program offer a payment plan that after X years of paying Y percent you are done regardless of remaining balance? For example:

If you have a federal loan and you're on an income-based repayment (IBR) plan, you can have the balance of your student loan forgiven after 25 years, or 10 years if you work in public service. All Federal student loans are eligible except, student loans in default, Parent PLUS loans, and Parent PLUS consolidation loans. Your monthly student loan payments are capped based on your income and family size. For example, family of 3 with an annual income of $45,000 would only pay $157 a month on an IBR plan. You can apply for IBR by contacting the lender servicing your loan.

Depending on your loan balance this might make sense instead of paying it down early.

Likely the safer option with a 6.8% interest rate is to pay down your loans though

 

[lothar]

How much total loans do you have at 6.8%? What is the proportion of your student loans to gross income?
For all I know, you could have $10k loan or $200k at 6.8%.

I have $11k in student loans at 3.x%...I could have paid them off well over 2 years ago, but I don't see a point in rushing to do so.
All my other fixed rate loans that were 6.8%, I paid them off about 2 years ago.

 

[Dr. Detroit]

Didn't read the whole thread - but, what if you buy house and get a roommate?

Your in shitsville Ohio right - housing has not increased much there so maybe its a decent time to buy before rates increase.

Take all rent money and put towards student loans?

 

[LegendKiller]

There is no indication we are in a bubble right now. Housing is doing OK but not super great and while there is still a lot of shadow inventory, it is being worked through. The attrition rate to new-build is almost even. The biggest drag on housing will be student loans, baby boomers and household formation from the younger generation, even then, it isn't projected to make that much of a difference.

Rates are still pretty low even with the latest drop in RMBS prices, rates are 4%.

One big question nobody has asked (I think) is whether OP can deduct SL interest. That right there is a huge ???.

Even if he cannot, you don't have to pay back your loans to buy a house. Both are term debt and that is fine as long as he stays within reasonable PTI measurements.

 

[LagunaX]

Didn't read the whole thread - but, what if you buy house and get a roommate?

Your in shitsville Ohio right - housing has not increased much there so maybe its a decent time to buy before rates increase.

Take all rent money and put towards student loans?

My thoughts exactly

 

[Corporate Thug]

I'm in the same predicament (although I own a condo right now). I'm thinking about going to the public sector to have uncle sam pay off my loans.

 

[boomhower]

How much do you have in student loans? At that interest rate I'd be inclined to pay them off. I'd be very comfortable putting 10% down on the house. (hell I put almost nothing down with a 15 year mortgage, should have it paid off in ten.)

 

[DisgruntledVirus]

Student loans are ~$40k which amounts to ~70% yearly gross income. As a I'm the only person in my "household" making mid 50's/year I would highly doubt I qualify for IBR if a family of 3 @ 45k/yr is their example. It might reduce it some but not much. Also, I should note that the student loans are being paid off at a flat rate (instead of the graduated rate that starts payments low but you pay a decent amount more in interest). Finally the only other debt I have is my car which I do have a .9% apr loan out on.

I work with a good friend of mine and we have already talked about renting a place together as roommates, which is another reason for thinking of the house option.

 

[TwiceOver]

Debt free is always the better decision. Think of it this way, do you really want yo stack a mortgage payment on top of your current payments? Probably not.

 

[Vdubchaos]

Debt Free first.
6-9 month Emergency fund 2nd.
Down payment 3rd.