Loan question

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beatle

Diamond Member
Apr 2, 2001
5,661
5
81
I think a lot of you are under the assumption that we're ready to buy something this year... not reading all of the posts in the thread. We're not ready, nor would we even if we had a sizable downpayment. I want to see prices come back in line with incomes, THEN I'll go get the loan and go shopping. As I mentioned, we don't have any consumer loans. We could conceivably pay off our loans by the time the summer of 2009 comes around, but that would leave us with less in the bank. This is how I would spend my money if I were guaranteed to get the same rate in the end. Home equity doesn't bring down payments as much as the income in my pocket gets me every month, especially since it would be 2011 before I could save $70k for a 20% downpayment. Hopefully housing prices will have stabilized by 2009 so that we could spend even less on a starter home. We originally planned to buy in the summer of 2008, but I don't want to pour money into a depreciating asset.

Again, I'm not looking for advice in how much we can afford, just how to allocate our extra income: savings vs. student loan repayment. I'd head to a bank for an answer straight from the horse's mouth, but their hours are only good for those who are unemployed. :|

FWIW, our wedding + honeymoon is going to set us back around $5k.
 

dullard

Elite Member
May 21, 2001
24,998
3,326
126
Beatle, it really isn't that difficult.

1) Set up a way to access emergency funds if needed. This need not be in savings accounts, checking accounts, or similar accounts. It could be in the form of lines of credit, items you can sell without a substantial loss, etc.

2) Then save up for your house downpayment. With your numbers that you gave, you will have $3000 extra a month. Of course, that means you don't splurge on anything (with two people spendig, that is hard to do). So, realistically, you have $2000 extra a month. For a $350k home a 20% down payment would be $70k. You can be there in 2.5 years at $2000 a month or in 1.5 years if you don't splurge and save that full $3000. I'll just assume you are at $2500 a month in available money. Remember that savings does not need to be in a bank account - you can put it in a higher yielding location if you wish.

3) That higher yielding location CAN be your debt (such as student loans). So, lets do some math.

Assumptions:
[*]You have $12k now earning 4% in an online bank account,
[*]You have $2500 a month to do whatever you want with,
[*]You have $25k in debt at 7.5% interest with $300/month payments (for the standard 10 year student loan payoff).

Case 1: You don't pay off the student loans now, and you pay $300/month towards them.

Month 1: You take your $2500, put $300 towards the required student loans and $2200 goes into your bank account. Your bank also got $40 in interest. In the end you have $12,000 + $2200 + $40 = $14,240.
Month 2: Repeat and you have $16,487 in the bank.
...
Month 27: You have $75,175 in the bank, enough to buy the house with 20% down (and closing costs). Your student loan has dropped to $20,786. You have a $75,175 - $20,786 = $54,389 net worth.

Case 2: You pay off the student loans now, and put the full $2500 per month into the savings account.

Month 1: Your savings account drops to $0 as you pay $12000 towards your loans (high interest first). But you put your full $2500 savings into the student loans.
Month 5: Your student loans are gone and you put all you can (up to $2500) into savings.
...
Month 27: You have $57,808 in the bank but your student loan is still $0. You have a $57,808 net worth.
...
Month 33: You have $74k in the bank, enough to buy the house with 20% down (and closing costs). But your student loans are at $0.

Net effect: Paying off the loans means you get into your house 6 months later.
Net effect 2: At month 27 in case 2 you have much higher net worth. You have gained $3420 over case 1.
So, it is your decision: Is delaying the house 6 months worth a free $3420?

Of course, I ignored factors such as taxes (since gains in student loan payments are offset by losses in the savings). I also ignored housing price changes (since they are in so much turmoil it is hard to predict) and the effect of 6 more months of home ownership costs.

Oh, and good for you for keeping the wedding + honeymoon to $5000. That is close to what I did nearly a decade ago (if you include inflation). You'll hardly notice the difference between a $5k and a $50k wedding. But you'll certainly notice 2 years of savings out the window.
 

beatle

Diamond Member
Apr 2, 2001
5,661
5
81
Dullard is the man. I just need to figure out if it's possible to wait until 2010. Remember, my fiancee doesn't graduate until May. Until then I can only squirrel away about $700/mo, realistically less because I pick up all of my fiancee's emergency expenses (as well as my own, of course). I'm going to see if I can squeeze in a conversation with a loan officer at lunch, over the phone if I have to. I'll give them the scenario about which is more beneficial to a better loan: debt to income or down payment size.
 

Sho'Nuff

Diamond Member
Jul 12, 2007
6,211
121
106
Originally posted by: beatle
I'm pretty close to Kingstowne, right off Franconia Rd. We rent a 3br house and have a roommate right now.

Wow! I went to Edison High School, which is right off of franconia road by Van Dorn st. Nice area. Traffic is a bear, but still nice. I live in Boston now. If you think prices are bad down there take a look up my way. I paid ~15% more than what I would have to pay for a similar house in N. Va. That might not sound to bad, but then you have to factor in the fact that car insurance is triple what it is in Va (due MA's communist system, birthplace of freedom my A$$), the gas company charges triple the amount to deliver gas to your home than the value of the gas itself etc. . . By relocating I think I lost about 10% of my disposable income, which stings.