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Buying a home - lots of student debt

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samhedenberg
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Buying a home - lots of student debt  Reply with quote  

Hi all:
First post/new to the forum.

My wife and I are trying to buy our first house, and I am looking for some sound planning advice on how to get that done.

We are subscribers to the Total Money Makeover plan, but our situation prevents us from following the steps effectively.

We have about $11,000 saved for a down payment and are saving about $2500 a month. We have zero credit card debt and about $6,000 left on a car loan we have budgeted to pay off by September using the Debt Snowball method. We are both high school teachers and both have part-time jobs after school. We are both committed to living debt-free.

However, the next debts on our snowball are our college loans. My wife and I have three college loans with balances of $21,000, $52,000 and $79,000.

...yeah.

Dave Ramsey preaches becoming debt-free before buying a house, but it will obviously be many years before we will be able to pay off our college loans, even when attacking them with intensity. We are ready to have children, and if we wait until our college debt is paid to have a baby, it will be too late.

We are fine with living in our house, but we feel like our $2500 rent payment would be better served building equity instead of throwing it down a hole. We are looking for modest homes that would fall in the lower-end of the buying power listed in our pre-approval letter, and it looks like our mortgage would be at least a few hundred dollars less than what we're currently paying in rent.

Our plan is to pause the debt snowball, build our down payment to 4% and then continue to pay our college loans once we've got the house secured.

Does that seem like a good plan? Are there alternatives we haven't explored that we should?

Thanks in advance for the help!

--sam
Post Mon Mar 13, 2017 4:56 pm
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christcorp
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Well, I have a problem with how much student loan debt you have. A basic debt estimater for college loans, shows that for every $50,000 in college debt, the payment will be about $550 a month, and that you will need about an $85,000 annual income to make those payments comfortable. This allows for other debt like mortgages, cars, savings, investments, etc. The fact that you have approximately $150,000 in student loan debt, means you'd be paying back about $1,500 a month if paying on all 3 at one time. And to live comfortably, you'd need about a $250,000 annual income.

Obviously, you each decided that to get a teaching degree, it was going to cost you around $70,000 each in loans. Not sure if this was the total cost, or if you/your parents had money saved for your college; if you worked during college; etc. Bottom line is: No matter what I think about college loans, and most people don't need that much, you already have it; so that is what you have to work with.

As for Renting vs Buying a home, it isn't a firm fact that buying is always better. That totally depends on where you are in the country. There are some places where the rent is cheaper than the mortgage, because the houses are so OVER-PRICED. Many places in California are like that. In many of these places, the money saved renting, on lower rent plus no maintenance, water heater, property tax, new roof, insurance, etc. can be used in investments and easily make up for the equity you WOULD HAVE earned in a house. Also; people talk about HOME EQUITY as if it's a great thing. The only time equity is any good, is if you NEED MONEY and aren't good at saving it. Other than that, the EQUITY in the home isn't of much use to you. (Unless you live beyond your means). If you sell the home, you'll need all that money to buy a replacement home. You have to live some place. The equity is basically part of your inheritance to your children.

The main advantage of BUYING a home, (As your residence) vs renting, is that EVENTUALLY you are done making monthly payments. As such, that is when you'll start SAVING MONEY. But the monthly mortgage of a house isn't always better/cheaper than rent. Not when you include property tax, insurance, money set aside for repairs, etc.

Now, to get back to your original question. I'd have to say that I couldn't make a good opinion on your situation without knowing a lot more. Such as.
1. How much do BOTH you and your wife make each.
2. Does she plan on stopping work, even temporarily to have children
3. What city/state do you live in
4. Do you have any retirement accounts set up
5. How old are the two of you.

A lot of these types of answers will determine the type of advice or direction you might go. It might be best to PRETEND that the $150,000 in student loans IS A MORTGAGE and decide to PAY IT OFF within 10 YEARS. Yes, it CAN BE DONE. If you WANT TO. And depending on your age, you can then take ALL of that money you WERE paying on the student debt each month and put that into an investment account. Your savings would have grown a lot in the 10 years for the house you want to buy; and your RENT/Mortgage will be a wash.

So; if done correctly, in 10 years, you can be 100% debt free; a couple thousand a month going towards retirement investments; savings high enough for a good cushion; and your rent money for a mortgage. (Don't put any money down on the house if you don't have to). With mortgages, I believe in either financing ALL of it, or paying it ALL OFF. $20,000 for a deposit doesn't lower the payment much, and that $20,000 could have been used in much better places. But if you have to put money down, then you'll have it if necessary.

But depending on the answers to the questions above, will determine the final advice.
Post Mon Mar 13, 2017 6:42 pm
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samhedenberg
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Thanks christcorp for the detailed response.

I agree the college debt is overwhelming to say the least. I decided to attend an out of state university without really understanding how that would impact my financial health later in life. I unfortunately did not receive much financial guidance growing up and have had to learn on my own after many mistakes. But as you said, not much I can do about that now.

The minimum payments are as follows:
Loan 1 ($21,000) - $250/month
Loan 2 ($52,000) - $275/month
Loan 3 ($79,000) - $460/month
-----
Total minimum payments/month = $985

Answers to your other questions:

1) My primary income is $65,000 and my wife's is $68,000. We also both work part-time jobs that net me an additional $10,000/year and her $6,000/ year. Our total household take home is $149,000.
2) She will be out for 8-10 weeks, but she has enough paid leave for maternity. I also have about six weeks of paid leave saved up. We also have 10 weeks off in the summer, so depending on when the child is born, it may be a non-factor.
3) We live in Alexandria, Va, admittedly one of the more expensive areas of the country for cost of living. Unfortunately, because my wife is divorced and has children from her previous marriage, we are required to stay in the area for custody reasons. Moving out to the country is not an option.
4) We both have state and county pension plans that we contribute to each month. My wife also contributes to a 403(b). She has been contributing for 10 years; I for 6. Honestly, I don't know much about the details past that. Obviously something I need to investigate.
5) My wife is 37 this year and I will be 33.

Thanks to all for your time and help with this. We are both working 60+ hours per week to work toward our goals, but want to make sure we're making the smartest decisions so that we're not wrestling with our college debt the rest of our lives.
Post Mon Mar 13, 2017 8:14 pm
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christcorp
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Thanks for the additional info. The #1 greatest thing you have going for you is time.

One thing I'm confused on, is you list your income, but use the word "NET" of $149,000. Net, for this discussion would normally mean TAKE HOME PAY AFTER TAXES. If your take home, after taxes, is truly $149,000 then I would definitely crank up the payments on the student loans to about $4,000 per year. That would still leave you $100,000 TAKE HOME, and your student loan debt would be PAID OFF in LESS than 3 years.

If, your GROSS PAY (Before Taxes) is $149,000; then that would mean that your NET Take Home is probably in the area of $100,000 - $115,000. In which case, I would crank up the student loan payback to $2,000 - $2,500 per month. This would leave you NET, about $70,000 - $85,000. That would still be enough to live comfortably, and yet, pay off the Student Loans in about 5 years. (Think of it as one hell of a CAR LOAN).

If you can do this, you'll still be able to contribute to your work retirement plan. You should also be able to have enough money to save some towards the house down payment in 5 years; as well as be able to put more into an investment such as an S&P500 type fund.

Then, think of it like this. In 5 YEARS.

1. NO MORE DEBT.
2. Rent will replace Mortgage; thus a NET ZERO SUM.
3. The $2,000 - $2,500 per month that WAS going to paying off loans, is freed up and available.
4. You weren't use to the $24,000 - $30,000 per year that you used to pay off loan, so you can invest MOST of that into a retirement account each year, or maybe an educational fund so your kids don't have education issues when they are ready for college. (Me personally, I'd teach them to stay away from loans, and work towards scholarships and LESS EXPENSIVE SCHOOLS.) My daughter did 4 years of college and graduated, and the total cost was about $25,000
5. You'll be in your Late 30's and you'll be able to have your own home. And still have it paid off by the time you want to retire. Recommend a 15-20 year mortgage, not a 30 year.
6. You'll have your work pensions, PLUS Investments, (if you follow this path), which will set you up for a very comfortable retirement.
7. That extra $25,000 - $30,000 that becomes available in 5 years, will be MORE THAN ENOUGH, so you DON'T HAVE TO WORK 2 extra jobs. You can spend MORE TIME with your family/kids and vacationing.

If your NET INCOME was as originally stated; $149,000 AFTER TAXES then MULTIPLY all these benefits by X5 , pay off the student loans in 3 years; and bump up the investment/retirement accounts if you can. If the $149,000 is gross; then do as I stated above.

There will be some here and other places/advisors, who will tell you to not pay off the debt such as a mortgage. They want to suggest you maximize your capital and investments. That's great if your one major debt is a mortgage. But to have 2 major debts; basically a mortgage and $150,000 is student loans, is too much.
Post Mon Mar 13, 2017 8:57 pm
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littleroc02us
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I have been an avid Dave Ramsey fan for around 10 years. His plan allowed us to get out of debt and pay down on our mortgage. I'm also an avid listener of Bigger Pockets and Clark Howard. My beliefs are a combination of all three people along with books such as the Millionaire next door and Rich Dad, Poor DAD.
You had mentioned that you cannot follow Dave Ramsey's plan because it would delay having babies. Actually Dave addresses this quite openly in his book. He states that you should stop paying down debt and only pay the minium and to start stocking up every cent for a larger EF fund until you have the kids and they are healthy. At that point you go back to pounding out the debt.
As for buying a home when you have 150k in debt isn't very wise in Dave's opinion because a house can become quite expensive when the roof needs to be replaced or the furnace is shot. Would you be able to rent something cheaper like a duplex that would give your kids a yard to play in and give you more freedom then an apartment?
My personal thought is it would be wise save money by renting, work like the dickens to get those students loans down and then focus on buying a home. As Dave says there is a house on every block.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Mon Mar 13, 2017 9:09 pm
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oldguy
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quote:
Unfortunately, because my wife is divorced and has children from her previous marriage, we are required to stay in the area for custody reasons. Moving out to the country is not an option.


You might want to revisit that, usually there is a 'relocation limit' - such as within the state, within a 100 mile radius, etc.
In Alexandria, Va you would be paying Wash DC real estate prices - and in downstate VA that same house would be less than half price. One of the advantages for teachers is that there are schools everywhere, you may not be forced to live in DC.

quote:
We are both committed to living debt-free.


You may want to revisit this - not because it can't be done, but because it may not be necessary. If you buy a $550k house and add that to your $150k debt, your dream of debt-free in 15 years would require $5500/m plus $800/m for tax & insurance. Ie, >$75,000/yr to service your debt load. And to have $75,000 cash to pay that bill, you'll need to assign $125,000/yr of your gross pay to debt.

I'm not saying that it can't be done - but would you want to do it? Perhaps it would be better to develop your management skills, learn to live with debt (rather than 'hate' debt.). One plan would be to get max-term loans & pay minimums. When you've had the house for about 15 years, and it's grown to about a million (5%/y growth), refi it and remove about $250,000 of the equity. Then pay-off your loans (except for your new $750k mortgage) and keep the mortgage, probably for life. Meanwhile keep funding the 403b, try to grow it to a million. (My 401k reached a million at retirement - and it has continued growing after retirement)
Post Mon Mar 13, 2017 10:25 pm
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