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Should I pay extra on student loans each month or put that money towards a downpayment for a house?

I have approximately $70,000 of student loans after graduate school. Most of the loans have a 6.8% interest rate (a couple have 7.9% and one has 5.6%). My monthly payments are about $900 minimum for the loans. My fiance and I are currently also paying for a wedding. I have approximately $500 extra every month to go towards either paying off my loans faster OR towards saving for a down payment for a house. We are not quiet sure what makes most sense at this time. Any feedback would be great!
  • May 08 2014 - Bridgewater
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Answers (8)

I believe it has a lot to do with how comfortable you are with your jobs and where you live.  If you know that is where you want to be for at least 5 years then I would put buying a home at the top of your priority list.  Owning a home can be a create investment because of current interest rates and tax benefits.  Make sure your debt to income ratios will be acceptable to your lender when you have saved up your down payment (can be as little as 2-5% of your purchase price).  If you are still a little unsure about your job/location, put that extra $500 toward your student loan for a year or two.  Paying down debt is a great feeling and you'll benefit from the lower loan principal.  Congrats on the degrees, jobs, and engagement!!!  
  • May 08 2014
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Profile picture for LS225
We are in a similar situation with 65K in loans at 6.8%.  We're considering refinancing with either SoFi or DRB, which offer lower fixed and variable interest rates than federal grad loans. (to qualify for DRB, you have to have an MD, JD, MBA, or Ph.D in engineering.) Though our debt is high, our monthly DTI ratio under the standard 10 year plan would only be about 7.78%  We do not have any other debt besides student loan debt.  I know we could save up a 10%, and possibly even 20% down in 2-3 years if we pay the minimum on the loans.  The problem is, if we only pay the minimum at 6.8%, we would end up paying $24K in interest.  That's highway robbery!  If we put all our savings and as much income as we can into student loans, we would pay off the loans in 3-4 years, and then we would have to start saving from scratch.  Saving 20% on a starter house here would take us an additional 3-4 years, so we would be in our 40s by the time we could afford our first home.  We've been told to avoid PMI at all costs, so less than 20% is not an option, and homes here are expensive because everyone buying works in the tech industry and has high salaries. There is also a shortage of homes for sale, and the city is expected to grow by at least 10% over the next five years.  It would really help if the feds would allow us to refi at lower interest rates.
  • May 08 2014
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Profile picture for IanQuinn1
Student loan debt is odious and can be deferred or dodged indefinitely - what you should do is accumulate a nice sum of cash for the down payment and have a third-party cosign on the mortgage (ie parents, inlaws, etc) then you give some of that cash to them and the rest to the GD bank.  In any case stop paying that $900/mo to sallie mae et al. 
  • May 08 2014
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That's a good amount of debt and it may prevent you from getting a good loan for a home.

I am a huge fan of the debt calculators on www.bankrate.com. I just plugged in some numbers, and if you put an extra $500 to your monthly payment, you can pay it off in just five years, give or take. If you put that money aside for five years, you'll have 30k in your bank account.

Now, let's say you want to buy your forever home in ten years -- you can either pay off your loan as is and save as you go, or pay off your loan in five years and then apply that money to savings. The first option gets you $60k, the second gets you $84k.

That's just food for thought. What you do depends on your goals in life.
  • May 08 2014
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I agree with Robert.  Everyone's situation is different and we would need some more information to give you a more accurate answer.  It really depends on how much you have saved already, what price range you are looking for, and your total debt to income ratio.  If you are paying down your student loan debt but your required minimum monthly payment does not change than it will not affect your debt to income or qualification for a mortgage.  I am seeing your situation be more and more common for home buyer's, it will be interesting to see how the industry/market react.  Good luck and congratulations on your engagement! 
  • May 08 2014
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I would take care of your student loan debt first, then start saving for a house! Your debt to income ratio may complicate things during the mortgage process. It's better to put less money down on a home, than to not meet the requirements for your mortgage due to debt. Good luck!
  • May 08 2014
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Profile picture for robertncook
Well, congrats, first off, on both graduate school and your engagement. 

If you haven't already, you need to talk to a local Realtor (have a nice, long sit-down meeting) to determine the pricing of the kind of home that meets your needs. I say "Talk to a Realtor" instead of "Browse Zillow" because Zillow's computers have a problem comprehending just how high NJ property taxes are, and because a local agent also tends to know about niches that aren't obvious to people who don't do real estate for a living.
While you do that, you also need to talk to a local mortgage specialist (if you like your bank, I'd recommend starting there) to determine how to fit that pricing into your budget, or to determine the kind of pricing your budget allows.
It might be decided for you right there, as your maximum monthly mortgage payment is determined by your debt/income ratio.

Once you have that information as a point of reference, you and your fiance need to sit down and discuss what your priorities and long-term goals are. 
If you're any good with Excel or numbers in general, or know someone who is (a relative or friend, maybe? I've also known some mortgage guys to do it for clients.), it is very easy to chart the amount of money you would save/accumulate by either building up a down payment or snowballing your debt... or both. 

So go ahead, chart it out, if you can, and see which approach best suits what you and your fiance want for your future. If you're not up for charting it out, you'll still have the cost and payment information from the Realtor and mortgage specialist to point you in the right direction.
  • May 08 2014
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I had $65k in student loans when I married. We both have excellent credit but due to the high debt we could not get a home loan. I would put all your extra money towards getting your debt down first.
  • May 08 2014
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