Should I buy a house or pay off my student loans?
May 3, 2013 10:55 AM   Subscribe

Am I crazy for thinking about buying a house on a teacher's salary with 30k of student loan debt?

I'm thinking about buying a house when my current lease is up, but I've gotten differing opinions from just about everyone on whether or not it's a good idea.

I'm a teacher making about $40,000. I have about $30,000 in student loan debt. My monthly payment (on a 10 year repayment plan) is $345 a month. I also have around $8,000 saved up that I was planning on using as a down payment. My initial plan was to look at houses in the 100k range and use the 8k as down payment, so I would need a mortgage of around 90k. I have good credit (and wonderful parents with amazing credit that would be willing to cosign) and no outstanding debt other than my student loans, so I am decently confident that I could get that size mortgage.

I am currently renting for a little over $900 a month, but my lease will be up soon. I have the option of moving into a new place for a few months until I find a house or signing a new lease.

These are the two options as I see them right now. I understand that you are not my financial advisor, etc and that there's a chance I wouldn't even be approved for the mortgage I'm thinking of but assuming that I am, I would really like some advice on which option makes more sense.
1. Use my saved 8k as a downpayment to buy a house and make mortgage payments instead of renting. Take any extra money and push it towards student loan debts.
2. Continue renting indefinitely and use that 8k to pay off part of my student loan.
posted by kro to Work & Money (35 answers total) 6 users marked this as a favorite
You gotta remember that owning a house has more costs associated with it than just paying the mortgage. In two rentals I've lived in, a surprise water main break and boiler malfunction led to the landlords paying the equivalent of 3 to 5 months of the total rent on the places. Can you financially handle that sort of uncertainty?
posted by showbiz_liz at 11:00 AM on May 3, 2013 [9 favorites]

What is the interest rate on your student loan debt.

Also, why specifically do you want to own a house? Will your monthly payments be lower than renting, do like the intangible feeling security that comes with ownership, is it something else? As showbiz_liz points out, owning comes with a lot of extra responsibility and potentially extra costs.
posted by alms at 11:07 AM on May 3, 2013

In addition to the "what if" costs, remember, too that there are more monthly expenses as an owner than as a renter. I'm not sure of the situation where you are, but in most places I've lived the landlord is paying utilities you rarely think about like water and trash pickup. Also, what about property taxes? Homeowner's insurance? Regular maintenance costs like an exterminator, landscaping, etc?

Consider, too, whether you will enjoy all the things that suddenly become your responsibility as a homeowner. Cleaning gutters. Shoveling snow, if you live in a cold place. Battening down the hatches against hurricanes, if you live in a coastal area. Dealing with water in the basement if you live in a place that floods. One of my favorite things about renting is that all these things are someone else's responsibility.
posted by Sara C. at 11:08 AM on May 3, 2013 [3 favorites]

You've seen the NYT mortgage calculator, I assume?

Try to divorce the emotion of owning versus renting as much as possible, or at least calculate precisely how much that is worth to you.
posted by supercres at 11:09 AM on May 3, 2013

Do you have other savings in addition to the $8k? Because I definitely wouldn't put your entire life savings into a house. $8k is only 20% of what you make. If you lost your job, or got sick and couldn't work for a while, or had some other big emergency, make sure you'd have enough savings to live on. That, in my mind, is more important than either paying off your loans or owning real estate.
posted by decathecting at 11:13 AM on May 3, 2013 [3 favorites]

If it were me, I would move into a cheaper place at the end of my lease. I have never paid more than 450 a month in rent. I would use the 450 savings each month to save more towards the down payment and pay off the student loans at a faster rate. I might start to consider taking on a mortgage when I had 20 percent to pay down and money left over for cushioning.
posted by aniola at 11:14 AM on May 3, 2013 [3 favorites]

A couple of things - putting all your savings into the down payment means you have nothing left for emergencies. Like, nothing. If your roof starts leaking this winter then you are going to have a pretty miserable time.

You have to include property taxes in your calculation.

If you are getting a 90% mortgage then you are almost certainly going to be paying PMI. This is, to use a technical term, money you are flushing down the toilet each month.

Finally, just the process of buying a house costs money. You'll need an inspection, for example.

I hate to burst your bubble, but I don't think you are *quite* there yet. Personally, I'd wait a bit and build up some more savings. Sucks, I know, but that's the way it goes.
posted by It's Never Lurgi at 11:14 AM on May 3, 2013 [6 favorites]

As someone who makes a little less than you do, and has a little more student loan debt, this sounds like madness (and like you should find a roommate--or two--yesterday). However, if you're able to successfully save a modest amount (8-10% of your gross) for retirement in addition to what you're putting away for the down payment, I'd say you're in good shape--but that you should sit on your hands until you have at least 20% down. If you can lower your rent, either by moving or living with someone else, I can't imagine this will take more than a few years.
posted by pullayup at 11:18 AM on May 3, 2013 [1 favorite]

900$/mo in an area where you can buy a house for 100k$ seems like a lot in rent, are you renting a nicer place than you would buy? I would see about cutting my expenses (cheaper rent/roomates?) and paying off that loan in a couple of years, and then saving a 20-25% deposit. This would mean you need several more years though.
posted by McSwaggers at 11:21 AM on May 3, 2013 [1 favorite]

I definitely don't think you are crazy to buy a 100k house with your salary and debt load. I do think you are underestimating the amount of money you will have to pay in closing costs on your house, to the point where 8k in savings isn't enough if you want to make a halfway-decent down payment.

If I were you, I'd move into a cheaper apartment and save up more money for another year or two. If you can, find a roommate for the first year or two after you finally buy a place. It will give you more of buffer.

I know guidelines say that it is ok (even advisable) to mortgage 3x your annual income. I have done this and, honestly, it's not like I am starving, but money isn't exactly piling up in my bank account, either. Can you depend on reliable raises down the road?
posted by deanc at 11:23 AM on May 3, 2013 [1 favorite]

Two ways to answer this question based on how you're looking at the purchase of a home: (1) is it a comfort decision, i.e., you would just like to own a home? or (2) a business decision, i.e., there is a great house that's an absolute steal and it'll be worth twice what you pay for it in ten years, the date at which your student loans will be paid off? If the latter, and you've run the numbers, go for it. But if you want to buy a house because that's something people do, then the calculus is different. Just know that you're making a long-term business decision either way.

Your student debt will be factored into a debt-to-income ratio, which will adversely affect your interest rate and/or amount of financing. You already owe almost as much money as you make in one year, and you're proposing to a lender that they tack an additional $90k onto that. Obviously it's becoming more and more common with the education bubble, but think about how that looks to a lender. So if you can pay off your loan faster by renting more cheaply and, say, doubling your $345/mo payment, you can speed up paying off the $30k or at least get it down around $5k or something that represents a more manageable amount of debt that you could, if possible, pay off all at once with your savings. This, in turn, will let you purchase a home---and by then you might be married, and who knows if the person you marry will want to live in the crappy house :) you bought back when you were scrounging?---with a more reasonable down payment (20% is a great goal since you'll avoid paying the extra interest mentioned above).

Never get mixed up thinking renting is just wasting money---if you're making an interest-heavy payment at the beginning of a note's amortization life, then you're probably wasting money. You are always going to have to pay something to live somewhere---some people luck out and make a good profit when they sell a home they own and, in that sense, can be said to have lived for free, but most people don't. You're paying interest, insurance, property taxes, maintenance, etc., just to live somewhere even if you "own" a house.
posted by resurrexit at 11:26 AM on May 3, 2013 [3 favorites]

Spending your entire savings on the down payment is a sign you cannot afford to buy a house. As everyone else has said - you also need cash for closing costs, moving costs, roof-falling-in-a-year-later-costs. Maybe also for garden care equipment, DIY equipment, etc. that you haven't needed while renting.

What other savings do you have? How much is going for retirement, or do you have a solid pension plan? If you lost your job what would you pay the mortgage with? Do you have disability insurance that would pay the mortgage if you were sick and couldn't work for a year?
posted by jacalata at 11:27 AM on May 3, 2013

I will play devil's advocate. Something to consider is that rates are insanely low right now. So, yeah, you could save up for a few more years to get a larger down payment and not have to pay PMI, but if interest rates go up to 6% in the meantime, you pay more than if you bought now:

$90,000 mortgage at 3.5% over 30 years: $405 payment + $50 in PMI: $455/month
$80,000 mortgage at 6% over 30 years, no PMI: $490/month

Meanwhile you are enjoying the house for longer.

Also, yes, you have to figure in all expenses including property tax and maintenance, but on the other hand, some of your payment goes back to principal.
posted by payoto at 11:29 AM on May 3, 2013 [2 favorites]

You are a teacher and a first-time homebuyer. Lots of down-payment assistance programs are made with you in mind. Talk to your local credit union(s), find lenders that partner with the Federal Home Loan Bank, etc.

I don't personally think that $8k is enough savings. You'll be down to zero once you buy the house, and you will have just bought a house! Furnishings, appliances, repairs, emergencies, insurance ... owning a house is expensive.

But there really are a lot of programs out there under the radar that you qualify for. Find local lenders who will help you take advantage of them.
posted by headnsouth at 11:29 AM on May 3, 2013

Response by poster: Sorry, I should have clarified-8k is nowhere near my current savings, just what I would be comfortable using as a down payment. I have a pretty comfortable cushion in emergency savings or I would not be considering it at all.

Rent prices are ridiculous in my area. $900 a month is my current cost with a roommate in a moderate 2br apartment, which is my main reason for looking at buying-I am planning on staying in this area for a while, and from the calculations I've done, it makes more sense to me to put that loan into a mortgage payment. From the calculations I've done, the payment on a mortgage would be significantly cheaper than my current rent, to the point where I would be able to put money aside for house expenses, etc. I am really sick of renting, switching apartments every few years (with increasing rents, etc) and the housing market is still pretty low so I've seen a lot of nice houses in the 95k-105k range the past few months. Just not sure how/if student loan debt should consider into my calculations. Thanks for all the insight so far, I will need to crunch some numbers about saving up for house-related expenses.
posted by kro at 11:34 AM on May 3, 2013 [2 favorites]

Rent prices are ridiculous in my area. $900 a month is my current cost with a roommate in a moderate 2br apartment...

Well, are you sure that there are "houses in the 100k range" that would fit your needs? Like, have you checked? If your half of the rent is $900, I assume you mean that 2-beds go in your area for about $1800 total. What you are trying to do is shift to an entire house for ~$600 per month (maybe 700 or 750 once all the taxes and utilities are included). That is a pretty big ownership discount; before you move ahead you should verify that it is actually feasible given the housing stock in your area.
posted by Joey Buttafoucault at 11:40 AM on May 3, 2013

Well, if it were me I would pay down the debt.

If you can pay off your loans in 5 years instead of 10, you can save nearly $6,000.

$30,000 at 6.8% for 10 years: Total with interest is $41,428.92 (monthly payment is $345.24)
$30,000 at 6.8% for 5 years: Total with interest is $35,472.55 (monthly payment is $591.21)

So that's a savings of over $5,900. That's a big chunk overall. (Debt Management Calculator)

Also there are definitely extra costs to buying a house. Even in buying a house you need to get an inspection done. There may be repairs needed right away. Your utilities may be more - more space to heat, not splitting utilities with someone.

Depending on your budget you could increase your payment while saving for a mortgage payment for later. Personally I'm one for saving as much interest as possible on the student loan, but it totally depends on your total budget.
posted by Crystalinne at 11:40 AM on May 3, 2013 [1 favorite]

Congratulations on your nest egg. It's an accomplishment to amass that kind of money.

That said, I wouldn't buy a house until the student loan debt is paid off.

In fact, to live in a house with a big smile on your face, this is what you'll need:

1. 20% down payment on the house
2. The closing costs for the house (around 3% of the total purchase price)
3. A contingency fund of $5,000-$10,000 to cover any major problem you may encounter after you move in.
4. 6 months of expenses in an Emergency fund.
5. No other debt.

So as you can see, you need quite a lot of cash to make homeownership a happy experience, rather than a stress-filled nightmare.

Let me tell you what my little house cost me in just the past few years:

1. New siding due to a bathroom rennovation that revealed some serious issues: $9,000

2. New sewer pipe from house to city: $7,000

3. Replace fuse box with breaker pannel: $1,500

4. New hot water heater: $900

5. Correctly cap gas outlets: $500

6. Water pressure control valve: $400

7. Rewiring phone lines due to a bathroom flood: $300

8. Replace ice maker in 3 year old fridge: $450

9. Cost of removing Dangerous Dead Trees from the Yard: $4,000

10. Cost to neighbor when his Dangerous Dead Tree crashed into my backyard: $1,500

11. Cost to neighbor to have his other Dangerous Dead Tree removed: $2,000-plus his tree guy ran over and breached his water main.

Here are some adventures I encountered due to these repairs:

1. Having to shower at the gym because of not having the siding on the house and a ripped up bathroom.

2. Waking up one morning to NO water of any sort coming to the house, but a very nice lake in the front yard where the city connection became disconnected.

3. Slightly ripply feeling to wood floors after bathroom flood.

4. Having to run around in the shower to get wet due to low water pressure.

5. Low pressure causing ice maker to burn out prematurely.

6. Replacing dryer because the gas connection was wonky and Bunny don't fool around with gas.

7. Having the neighbors come up to me to ask me if everything is okay because a 50 ft Pine Tree had collapsed in my back yard. (WHAT? NO! WHAT THE HELL?)

You are young and you have a lot of cool adventures ahead of you. Don't go rushing out to borrow this heartburn until you are financially ready.

Honestly, I wish someone had slapped some sense into me because I love my house and all, but I would be a much happier renter somewhere right now if I knew then what I know now.

Oh, and the house I bought in 2006 is worth LESS now than when I bought it. So...yeah...that.
posted by Ruthless Bunny at 11:40 AM on May 3, 2013 [11 favorites]

Well, if it were me I would pay down the debt.

If you can pay off your loans in 5 years instead of 10, you can save nearly $6,000.

OP, correct me if I'm wrong, but I am assuming you are scheduling your debt based on the public service forgiveness option? In which case we have to assume that the 10 year payoff is a locked in plan, and they can't pay it off sooner.
posted by Think_Long at 11:41 AM on May 3, 2013 [1 favorite]

The info in your update sure makes buying sound good. Maybe look into finding a two-bedroom house so that you have the option of getting a roommate to help out?

In my area we have these community development organizations that offer counseling to homebuyers, especially first-time homebuyers. Do you have anyone like that in your area? They could probably give you more specific advice.

I think these people telling you not to buy until your student loans are paid off are CRAZY, unless you have very high interest rates on your student loans. And I say this as someone who is VERY happy renting, and usually encourages people not to buy.
posted by mskyle at 11:42 AM on May 3, 2013 [4 favorites]

I'd do it. Housing prices are cheap and mortgage rates are low right now, and if you're a teacher then maybe you'll be retiring in 30 years with a nice pension and a paid off house. And if you're looking at public services forgiveness on those loans? Dang. Buy a house already.
posted by elsietheeel at 11:47 AM on May 3, 2013 [2 favorites]

With that big of a difference between renting and buying, I would buy. You are planning to stay where you are, right? Your employment is stable? Yes, make sure you calculate through the total costs of ownership so that you are not surprised by your monthly outlay, but, seriously, this is one of the scenarios where it clearly makes more sense to buy than to rent.
posted by stowaway at 11:53 AM on May 3, 2013 [1 favorite]

Oh, to be clear, I agree with others that the financial advantage is huge and you should probably buy a house if it's actually feasible. My previous answer was responding to the fact that the scenario seems too good to be true, honestly. But the way you asked your question made it unclear how far you'd gone towards actually verifying whether it was possible.

Bottom line: buying a house for $100K: good idea. Buying a house for $160K+: bad idea.
posted by Joey Buttafoucault at 12:12 PM on May 3, 2013

Check out the Good Neighbor Next Door program, which offers teachers a 50% discount on homes that HUD have acquired.
posted by IanMorr at 12:14 PM on May 3, 2013 [2 favorites]

I'd do it. I did, in fact.

House prices probably aren't going to go much lower and neither are interest rates.

Wife and I were in your position. We bought a year-and-a-half ago, FHA loan. After fixing the initial problems [buying a new fridge, tearing out a dying tree, fixing the sewer pipe, repainting the house which was done by us], we're now saving roughly $200 a month compared to what we were paying in rent ($650 vs. $845). Of course, a couple trips to Home Depot will eat away those "savings" pretty quickly.

The initial must fix problems cost us about $10k-$12k. We paid 10% down. The home was a short-sale, in decent condition and quite inexpensive for our area, and not a fixer-upper by any means. Those first couple months, though, it was as if our bank account had sprung a leak.

Just be careful not to get your hopes of finding tons of nice houses in your price range. Get a Realtor. A lot of prices you're seeing are for houses that were sold a long time ago, including bank-owned, cash-only houses that would never pass inspection.
posted by Llamadog-dad at 12:19 PM on May 3, 2013

Buying always SOUNDS like a good idea, until you have to pau for the maintnence of the home. My husband and I bought a home when we were 19 and 20 years old, thinking it was going to be a good investment in our future. Truth was, we didn't make enough money and we spent a few winters without a working heater because the repairs were too much and spent a summer with no air conditioner because he was over 1000k to have it fixed and we just DIDN'T have the money. A home is a huge investment, and unless you have cash stashed back for repairs when things like that happen OR you're incredibly handy; I wouldn't do it. Our house ended up needing electrical work and plumbing done after 6 years and we short sold it to get out from under it because we had a small child and could no longer afford it and couldn't stay in the home without the repairs done.
posted by AbsolutelyHonest at 12:19 PM on May 3, 2013

Given that rent is so expensive in your area, I think you'll be better off buying a house provided that you can avoid paying PMI (which usually means putting 20% down and not getting an FHA loan). There are probably some other good first-time-home buyer programs around, you just need to find a good mortgage specialist to help you figure out what would be the best fit.

Have you looked at what a $100k home in your area looks like? You might find that what you can get for that budget won't work for you. If the only houses that meet your price range are dumps that will make you miserable, this is all kind of academic.
posted by VTX at 12:59 PM on May 3, 2013

Suggest you visit, not read about, houses in the price bracket that you mention. See the neighborhood, the condition of the roof and furnace and water heater and the kitchen appliances and the yard etc. Have you any idea of the cost of a coat of paint? All those will be your responsibility if you buy.
You might be a little early in your desire to own. Some time and the reduction of that $30k debt might make you a better ownership prospect. Your profile does not give your location, but in most markets real estate is booming again. Your $100k may not go far.
posted by Cranberry at 1:27 PM on May 3, 2013 [1 favorite]

I think all the folks telling you to get a cheaper apartment have not been single ladies looking for SAFE, clean, drama free living situations in awhile. $900 is right around the going rate people.
posted by WalkerWestridge at 2:12 PM on May 3, 2013 [5 favorites]

Our numbers were very close to yours when we bought. I had a contract for a salary at $38k, but my husband hadn't yet located a job in our new town. We had very little to put down, around $3000. I had way more student loans than you do, but they were spread out on a longer plan, so my payments were right at about what yours are. (The bank was less concerned with the total owed and more with the monthly payments). We were also in a low COL area, and to find a place to rent would have been several hundred dollars more expensive than purchasing a place. Other considerations for us included the fact that we have three pets and also that Mr. bizzyb is a musician.

As others mention, you do want to consider that a house can bring with it multiple other costs, but I haven't found these to be as nightmarish as some of the stories here. We were purposeful about buying a house that had recently replaced a lot of the major concerns, though, so consider carefully what you plan to buy. In some places you can get a great house for 100k, but in others it's a fixer-upper, and that's what you don't want.

We bought a house for around 95,000, with the closing costs included in that final total. We went through a local credit union that had an in-house loan where we both avoided any PMI and also had the assurance that the loan would not be sold off to other banks. Six years later, and it's been a worthwhile decision for us.
posted by bizzyb at 2:25 PM on May 3, 2013 [1 favorite]

That's a surprising difference between going market rental rates and market house prices. If these numbers are real, then I'd want to understand why before I bought. Is the local economy stagnant or failing? Is there some resource extraction industry that is bringing temp employment? Is there a reason people would want to be there but not stay there? This could make your house worth less than the purchase price over time. It could also mean that you may want to leave, too...

... which brings me to the following point - I don't know your age but everyone I know who bought under 30 got burned. They crunched the numbers just fine and worked out the percent this and percent that and tax yada yada. What they didn't do was acknowledge that their lives were not 'set' yet. They got married and moved and had to sell two years after buying. They got their dream job and moved and had to sell two years after buying. That kind of thing. YMMV.
posted by everythings_interrelated at 2:38 PM on May 3, 2013 [1 favorite]

It's not uncommon to have rental rates increasing while housing values remain stagnant. Credit tightened up considerably starting in 2008 and there just aren't enough buyers to go around (YMarketMV). So there's more demand for rentals and less demand for purchases. It's starting to change, but slowly. This is a good time to buy.

When I moved out of my rental in 2010 to buy a house, the owner listed it for $250 more/month than I'd been paying. My mortgage is less per month than what I paid in rent, and $300+ less than what the current rents are. The job market here is fine, and the housing industry here is healthy, just not robust. If that's what's going on in the OP's 'hood, then I say go for it.
posted by headnsouth at 2:48 PM on May 3, 2013 [2 favorites]

Response by poster: I am in my dream job and it is as stable as a teaching job is ever going to be, so there is that, and I'm in the area I want to stay in. Even if I were to need to find another job in this area, finding a job with my certification set shouldn't be a problem. I have looked at some houses in the 100k-ish range so I know what I'm looking at in terms of house quality, etc. Most of the difference between rental rate and purchase rate around here has to do with the composition of the area- it's an area that's a lot of seasonal owners. Finding a house for a year-round (not seasonal or vacation) rental is nearly impossible, and there aren't enough apartments to fill the demand for people looking for apartments, so they're able to charge crazy rates. And the housing market has not rebounded nearly as much as it has in other areas.

Right now, I'm paying way over the minimum on my student loans to get them repaid in 10 years, but I have been considering consolidating them and dropping my payment much closer to the minimum, then utilizing the Public Service Loan Forgiveness program to get rid of whatever is remaining. I've been loathe to do that for a few reasons (namely that I'm worried that sometime between now and when my 10 years is up, the government is going to get rid of the program), but I'm starting to think that I was kind of dumb for paying so much on them when I could have been paying minimums and utilizing the PSLF program instead.

Looking into the HUD Good Neighbors Next Door program right now, I can't believe I hadn't heard of it before. It looks like most of the houses in my area are fixer-uppers but definitely something to consider.
posted by kro at 4:37 PM on May 3, 2013 [1 favorite]

Sorry, after your followups it sounds like a much much more reasonable deal, if you can get mortgage+tax/insurance+15-20% buffer be less than or equal to your rent then yeah, quite possibly. (That rent sounds terrible, sorry, but that HUD deal sounds great) I still might want to see if I could scrounge up enough deposit in the short term for a 20% down to avoid PMI, because that is kinda an extra bit of money that you're losing although probably only on the order of 50$/mo

Also, is the 100k equivalent a 2-bedroom and do you like your current roomate? I would be awfully tempted to try and get my roommate to come with me if you two live well together because unless you need an office/guest bedroom that sounds like a win/win much cheaper living costs for both of you.

For the loans, I would really try ignoring what you have already paid in as thats a sunk cost and is easy to get emotional about even though it really shouldn't effect your decision making process going forward. I would look at a best case/worst case scenario and weigh the risk, maybe. If you consolidate and pay minimums until it is forgiven, whats that cost you? (Thats best case). If you consolidate, pay minimums for 9 years, and then lost the PSLF and have to pay the rest off at your consolidated rate (or your current accelerated rate), what does that cost you? (Worst case). If you keep paying it off at an accelerated rate, what does that cost you? This last should be your baseline, and then you just have to examine what you think the risk is vs the reward/loss of the two scenarios.
posted by McSwaggers at 2:40 PM on May 4, 2013

As someone who just paid off her student loans (I am not a teacher) after nearly 20 years I heartily encourage you to take advantage of PSLF if you are able (and it looks like you are leaning that way). As a teacher you have so many other sacrifices that you make. Just take it :)

(And if you really want to buy, I would try to do that ASAP because of interest rates)
posted by getawaysticks at 6:36 AM on May 6, 2013

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