Should we pay off all debt before buying a home?

by Karen on July 21, 2009

house

We’ve been doing some big planning again for the future. That’s always dangerous. :) But lately, we’ve been talking about a timeline for becoming homeowners.

The closer Tony gets to finishing school (about 17 months now), the more confident we feel that we want to live near family. We’re pretty set on starting our own family shortly after Tony finds a teaching job, and we don’t want to raise our kids more than a couple hours away from their grandparents, aunts and uncles.

Now that we’re pretty sure we know where we want to settle down, we’ve been bitten by the homeowner bug. We want a backyard where the dog can run, and we want more space of our own for our family. Our original plan was to rent a house when we move. Then I started looking at the cost of rent for even small houses.

I don’t know how much the market will change in the next couple years, but as of right now with our stellar credit history and low housing costs in the Midwest, a small, older home in Indiana would likely yield a lower mortgage payment than we’d pay to rent a comparable home, especially if we can save a chunk of change for a down payment. It just doesn’t make sense to me for us to pay more in rent than we would if we owned a home, especially since we don’t want to move again for a long time. We’ve spent the last 6 years of our lives moving way too frequently. We’re ready to just settle down and stay put.

The only problem is that we won’t be anywhere near paying off our student loan debt. In the past I had lofty dreams about paying down our student loans before even thinking about buying a home. But now I’m just not so sure.

Currently, our only remaining debt is $60,000 in student loans. It’s overwhelming, and when I think about trying to pay that down, save for a house, and survive all on one teacher’s salary, it feels impossible.

The plan was to move into an apartment, pay down that debt, and then start saving for a down payment for a home after that. I’m just concerned that on that plan we’ll be 35 before we can start saving for a home.

So we’ve been talking about an alternative plan: continuing to save as much money as we can, renting a tiny apartment for a year or so after we move to save even more money for a down payment, and then buying a home. Then we’ll work toward paying off student loan debt from there.

Even the tiniest apartment will be doable for just a year while we’re working toward the goal of home ownership. The longest amount of time we’d have to live there with a baby would be 3 months (and that’s under the unlikely circumstance that I got pregnant immediately after we start trying). However, I wouldn’t want to be cramped like that for the long term while we paid off student loan debt and saved for a house for 5+ years.

Right now we’re paying a little more than the minimum amount on the student loan debt, and that’s what we’d continue to pay while saving for a house. Now that we’re out of credit card debt, I feel okay about paying off the student loan debt slowly while we’re getting started. It’s going to take us so much time to pay off, I just don’t want to wait years to start working toward other goals.

What do you think?

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{ 11 comments }

1 Simplelivin' July 21, 2009 at 9:17 am

I saw the title of your post and just had to comment! My husband and I are having a similar discussion right now. We just finished paying off his student loans, and have about $6k left on mine. With the $8,000 being offered for first time home buyers, it seems like a perfect time even though we still have the loan, and don’t have a huge down payment. Since you are still over a year away, I’d say to keep saving what you can. Depending on how things look then you can decide to pay down the loan with it, or apply it to a house, but at least you’ll have the choice. Good luck!
.-= Simplelivin’´s last blog ..Weekend Spending: July 17th-19th =-.

2 Jill July 21, 2009 at 10:04 am

I would save what you can for a house, but that is just my opinion. I look at it this way…it’s sort of what you always hear about “paying yourself first.” A home is a huge investment for you that will reap rewards later. Having a downpayment is going to help you more in the long run, I would think, because then you won’t have that additional PMI bill to pay. As for the student loans, what we did for mine was just figured out how much of the monthly payment was actually going to principal, and then paid that much “extra” so it was like making 2 payments…even though it may have only been $40 extra.
.-= Jill´s last blog ..I have to say, I am surprised… =-.

3 Marie July 21, 2009 at 11:51 am

Ah this debate we had last year with 55k in student loans. Renting for the first year out of school is a good idea as it will help you figure out where to move to when you do buy a home.

With young kids I would make sure that whatever house you do purchase has your bedroom plus two bedrooms for kids on the same floor. My sister bought their home before kids and has 2 bedrooms that are unusable till her kids get older. We bought our home after we had two kids so knew better what we wanted. Being in a cramped apartment for 3 1/2 years after our first was born was its own special kind of misery but at least we knew what kind of house would be conducive to kiddies.

In the end we bought the house. I wouldn’t say theres one right answer but when I re read the Total Money Makeover he says if you have a 2nd mortgage worth over half your annual income you put it in your snowball at the same time you pay off your house.

Since our student loans were very close to being our annual income and have a repayment rate of 1.65% I stacked them with mortgage repayment or rather we bought our home first and are now accelerating our payments on both. We did pause for awhile to get me a car with cash because his carpool groups kept falling through. As it would take more than five years to pay of his student loans in their entirety thats too much time to be at risk and so we are beefing up our e-funds especially since homeownership exposes you to risks renting does not.

4 The Fat Dietitian July 21, 2009 at 12:17 pm

My husband and I purchased a 3 bedroom home last year, and we pay about what we paid for renting a 1 bedroom apartment. If you are planning a family, and are certain that you will pick up student loan payments as soon as you are in the home then go for it! Good luck… :)

5 Kacie July 21, 2009 at 3:50 pm

OK here’s my $0.02.

As you know, we also were bitten by the housing bug. We saw what a low mortgage payment could be and thought, “Heck yes we can do that.”

And then we saw that the figure did not include property taxes, insurance, maintenance, and higher utilities. And then we cried inside.

Run the numbers on what you think your future budget will be, including your student loan payment. Then, when it gets closer, live on that amount of money for awhile.

I hope property taxes in your new town are lower than they are here, my goodness!

We’ve only got about 4% of the amount I think we’ll need saved before we can realistically consider buying (I’m thinking it’s close to $20k that we’ll need to come up with, if not more). BUT I think we’ll be able to get the full amount in maybe less than 2 years. I hope.

Living in an apartment with a baby is fine. Babies don’t need much space, but their stuff sure does! Definitely look at apts that have a storage locker or decent closets or something. Or see if you can store stuff at the grandma’s. They probably bought it for the kiddo, anyway. Heh.

I think we’ll stay in our current place until we’re ready to buy, so maybe 1-2 more years. Even if we have another baby in the meantime, I think we can make it work.

It stinks that we don’t have our own space for Johnny to roll around outside, but we’re close to parks and indoor play places (mall and Chick Fil A).

Moving with a baby kind of sucks a lot, since it’s hard to pack and you can’t really move stuff yourself. So just get lots of helpers and park yourself in a chair, pour yourself a glass of water and supervise :)

OK I’m just being rambly now. Anyway, what I’m trying to say: Go ahead and start saving for a house. As long as you leave your emergency fund alone, I don’t think you should necessarily have to wait until all that debt is paid before getting a mortgage.

It might help you get better terms on your mortgage if you have less debt, but you’re already doing as much as you can do about it, so don’t sweat it.

I’m confident that when you guys buy, you’ll get something affordable.

Also, you guys will be great parents! I can’t wait to swap poop stories with you.

xoxo
.-= Kacie´s last blog ..Using my credit card feels bad =-.

6 Karen July 22, 2009 at 10:58 am

Kacie – Thanks for all the info! I followed your process on your blog when you were considering buying. I had no idea that all those expenses end up lumped in with the close of purchasing a home, but now I do! We’ll be sure to budget accordingly.

At this point, I think we’re in the same boat as you. We’re trying to save about $20,000 before we buy a house, and we definitely don’t want to dip into our emergency fund for that. We’ve got a long way to go, but I think if we continue to focus on savings we’ll be able to do it.

I’m not so worried about living in an apt with a baby, I just want space of our own! More than that, though, I was to feel settled, ya know? I’ve lived in dorms and apartments for my whole adult life, and it’s just so temporary. We’ve been in our current apartment for 2 years now, but it still just doesn’t feel permanent. Next year we’re moving back to the Midwest, and even if we weren’t, they could hike our rent or something like that and we’d have to move again. I just want a place of our own where we feel settled for the long-term because we’re SICK OF MOVING! Plus, it would be nice to have a yard for the dog.

7 Vicky July 22, 2009 at 3:17 pm

My son just bought a house at age 31 and before he could get a mortgage, they made him pay off half of his studen loan. I think most loans factor in debt, salary & downpayment. He did not have any debt except student loan debt. He was able to get his $8,000 first-time homebuyer credit! But, you also have to factor in for insurance, maintenance, insurance, new purchases such as w/d, yard equipment, all those items that you need to run a household that are done for you when you are renting. Those can be purchased used but still $ to consider. You might check out some mortgage company just to see what you might need to save given your husband’s starting salary and what you might think you will have saved.

Best Wishes.

8 Jennifer July 22, 2009 at 5:50 pm

Did you work the debt snowball? I would take the minimum you were paying on the credit cards and add that to the minimum on the student loan and then save extra towards a house. The quicker you can get the loan paid off the better. Good luck!

9 Patty July 22, 2009 at 9:01 pm

Hi, I just happened on your blog. I’m a budgeter – have been my whole life – and I love seeing you get started off on the right foot. You’ll never regret it.

10 Laura September 15, 2010 at 1:21 am

It is not smart to keep student loan debt around for years on end. Why not work a couple of jobs temporarily and get them paid off sooner? Having that high of debt increases risk. Just think, if you paid off the loans, you could save to buy the house you want. Patience is worth it. My family and I stayed in an apartment for 6 yrs while paying off $150000 in debt. We are so glad we did, as we can now live like we truly want to live. Debt free!

11 Jessie February 1, 2011 at 2:16 pm

It’s good that you have your credit card debt paid off, but that’s an awful lot of student loans for a starting teacher’s salary, especially if you’re looking at a baby too. I agree with the post above that commented that mortgage payments are deceiving for first time home buyers in that they do not take into account all of the other expenses you’ll have to pay like taxes, unforeseen repairs, insurance, etc. Also, it sounds like even if you can afford the down payment, monthly mortgage payments, taxes, and student loan payments, you don’t have much in the way of savings or investments to cushion the blow if your husband loses his job. And then you want to add a baby? Add college savings, time off work, and thousands in expenses for the baby.
If I were you, I’d spend at least another year on birth control, take advantage of the two incomes and kid-less free time to save, pay off loans and be financially stable before thinking about a baby or buying a house. Don’t you want to set your child up for success? I don’t know how a parent could do that when they are still so saddled with their own debt and bills that they can’t even begin thinking about saving for their kids’ future.

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