Dear Savvy,
My fiancé and I are thinking about buying a house in the next year or two, and are starting to put aside savings for a down payment. I have quite a bit of money in student loans (about $35,000), and we're not sure if would be more beneficial to be putting any extra money into a fund for a larger down payment or paying off a larger portion of my loans. Which would be better when we are ready to buy our home?
To see my answer just read more
When considering a financial plan of action, the most important factor to look at is the interest rates on your debt. If you have any debt that comes with high interest, like credit card debt or private student loans, you should pay that off before you start full force saving for your down payment.
There's not much of a benefit to accelerating student loan repayment if you'd be sacrificing saving for your goal, unless of course your loan comes with high interest. If you have more than one federal student loan, consolidating your loans could be an option for you to lower your monthly student loan payments. That would make it easier to manage your student loan debt while paying off other higher interest debt (if you have any) and saving more for your down payment.
And since it's tax season, just a reminder: If you meet the income requirements you can deduct up to $2,500 in student loan interest, and the deduction applies every year for the life of your loan. Happy saving, and remember to use a high-yield savings tool for your down payment fund.
Evans
Carrera
Christian Louboutin
thanx for the tip
1Federal student loans have a fairly low interest rate and the interest is tax deductible, so if that is your only loan - then saving would make more sense.
Private loans however, usually have much higher interest rates that is not tax deductible, so those you would want to pay off sooner rather than later.
2I don't know if I'd wholly agree with your advice, Savvy. I've read a few of the Suze Orman books and she always advocates getting rid of debt first, even if it is low-interest "good" debt like student loans. The fewer debts you have, the better it looks for your credit to debt ratio. In theory, this would help translate to better credit score and better mortgage rates.
But there are lots of reasons for wanting to stash away for a home. Interest rates overall are quite low and housing prices have dropped. It's a buyer's market right now, and it is sure nice to have a place to really call your own!
3I knew somebody'd quote Suze.
4I would get rid of the debt first, always. Do not add more debt to your already pre-existing one. It overall is just a bad idea since you can never really gauge what future emergencies you may encounter - medical, job lost, accidents, etc. Then, you'll end up trying to pay off what seems like endless debt.
5There is good debt and bad debt, student loans are good debt. I would continue to save for the home and just make sure the student loans are paid monthly on time. It's low interest usually so I would follow Savvy's advice....I've also heard Suze give this same advice BTW.
6In many areas, there are programs for first time buyers that require a small down payment or none at all. This is another incentive to continue to pay down those student loans without having to save too much for the house.
7Whatever you do, make sure you continue to pay those student loans. Don't miss any payments as that will hurt your credit and make it tough to qualify for a decent loan. My wife and I worked on paying off student loans first and establishing an emergency account. The emergency account is just what it's called. An account for new car tires, loss of employment, or dental bills. Life happens and you need a plan.
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