Pay off student loans in one go or buy a home with savings?

Submitted by blankusername666 t3_127nem9 in personalfinance

I know someone just posted a question pretty similar to this, but I think my situation might be a little bit different; hopefully this is okay to post still!

To the point, I have 30k in a savings account and 20k in student loans. I'm currently living with my family so my total monthly expenses are pretty cheap (about $500), but I'd like to buy a 1 bedroom 1 bathroom condo or house soon. In my area, you can find decent small apartments for under 100k and shitty homes that need a lot of work for the same amount. The job I have is alright for my area too, especially because it's my first real 'adult' job out of college; I make a little over 3k a month after taxes, IRA and health insurance is taken out.

My student loans are 4.09% interest right now, which if I'm being honest I don't really know what that means... I also know that mortgage rates are high right now too, right?

So with all that in mind, what would be both the more responsible and the least risky option -- paying off my loans as a lump some before the payment freeze ends and waiting to buy a home, or using my savings to buy a home now and slowly pay off my loans monthly? Also, with my financial situation, would it even be feasible to I could afford to buy something? I know there's probably a lot of hidden costs and repairs that comes way home owning, not to mention HOAs that most condos have, so I'm not even sure if my salary would even be enough to purchase something.

Sorry if this is a dumb question lol. I admit I'm not knowledgeable about finances or stuff like that, which isn't good but I've been a numbers person.

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Nuclear1975 t1_jeewafz wrote

Get rid of the debt, it’ll keep building. Adding debt to debt isn’t a good idea. Pay off the student loads, use the 10k as a down payment in a house.

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blankusername666 OP t1_jef0uoe wrote

Get rid of it in one go before the interest freeze expires? Or pay it off monthly? And, would 10k would reasonably be enough of a down payment? It seems a little small to me, but I've never bought a home before so lol

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MahatmaAbbA t1_jef5slt wrote

You need 20% of the purchase price to avoid mortgage insurance. If you’ve got an exceptional mortgage rate, it might make sense to pay the mortgage insurance. Your lender would decide what $10k is enough of a down payment for a particular loan. Chances are pretty good they would not let you go below 5% of the purchase price for a down payment. In theory, you may have a down payment on a $200k house. Any other assets, credit, income, and whatever other made up metrics are also used to calculate your mortgage though. Technically, if the house appreciates in value faster than your loans grow; you should buy the house. Houses are mediocre investments, but a great way to save money. It may cost more to live in your own home. The money isn’t really gone like with renting. It’s in the value of the house.

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blankusername666 OP t1_jef8qr0 wrote

That makes sense. I have what my bank tells me is a 'very good' credit score, but I'm not sure if that matters lol. I also consider myself pretty thrifty, so saving some more wouldn't be too difficult for me.

But anyways, what you're saying is buying the home isn't a bad idea, even with my student loans?

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arrowfan624 t1_jefart6 wrote

Are the student loans federal or private?

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blankusername666 OP t1_jefetp6 wrote

All federal

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arrowfan624 t1_jeffz81 wrote

Select the repayment plan that gives you the lowest monthly payment, and then use that extra money how you see it. It allows you to decide if you want a house, a car, or maybe pay off your loans ASAP.

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Praxician94 t1_jefbfok wrote

If the student loans are federal I would wait until the Supreme Court decision before paying them off.

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blankusername666 OP t1_jeff7rx wrote

They're federal. I was planning on waiting to pay until the Court makes its decision, but after they do they'll be like a 60 day period where they're still interest free, I believe. So would it be better to pay them all off in that period, or spread out my payments to monthly?

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Praxician94 t1_jeffvav wrote

Just get ‘em done after the decision and be debt free. No reason to accrue interest when you have the cash, and that cash is not presently being invested.

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jgomez916 t1_jefme2f wrote

How much you will get approved for a loan will depend on your income.

Here is the math formula a lender uses to decide the max approval amount they say you can afford for a PITI mortgage payment ( Principal, Interest, Taxes, Insurances on PROPERTY and Insurance on LOAN ie the PMI)

Formula is X-Y =Z

X= Gross monthly incomes X .42

Y= the Sum of the minimum debt payments on all the liabilities you have in car notes, cred cards, student loans etc)

Z= the maximum PITI monthly mortgage a lender says you can afford

Mind you Z is the maximum at 50% debt to income and it’s not advisable to buy at your max you should always stay close to under 36% Debt to income, let’s call this A.

‼️Example at $55k ‼️

X= $4,583 x0.42 = $1,925

Y= $350 (student loan payment)

$1,925- $350= $1,575 max PITI Mortgage (Z) you would likey qualify for today in March 2023. poor.

This would be MAX a $180k house at 10% ($18K) down payment at 7% interest rate at a PMI rate of 0.80% at a 1% property tax rate.

The mortgage would be $1,480.

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turnipham t1_jeg939c wrote

Don't pay off the student loans in advance. I had a similar amount and I paid it off over 20+ years at somewhere between $100-$150 dollars a month. It really is not going to impact you that much, especially decades later when you're earning way more.

I imagine it this way. Imagine if someone assembled 20k from your earnings over 20 years. That's quite an assembly of capital and a decent interest rate. You might as well do something with it you can't otherwise do because you're never going to get a 20k loan with 4% interest ever again (credit cards? LOL) except maybe a new auto loan or a mortgage.

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