With one of the most competitive housing markets our nation has ever experienced, paired with student loan debt on an unpredictable pause, there’s a lot of uncertainty and confusion circling around.
If you’re one of the 3.49 million student loan borrowers in America, an impending restart date for student loan repayments – averaging payment of $393 a month for borrowers – leaves many wondering, “should I be allocating a monthly payment toward my student loan debt repayment, or use that chunk of cash to save for a home?”
The answer? It depends. Before you make a decision, there are a few key factors and scenarios to consider. Read on as the Finance Opinion team helps you weed through the noise and decide on the best financial move for you.
This can leave a lot of borrowers wondering – should I be allocating a monthly payment toward my student loan debt repayment, or use that chunk of cash to save for a home?
The answer? It depends. Before you make a decision, there are a few key factors and scenarios to consider.
Pay off Student Loan Debt
Aside from being debt-free, the biggest argument toward paying off your student loan debt before buying a home is the amount of cash you’ll save on interest. The faster you can pay off your student loan debt, the more you’ll save in accumulating interest charges down the road.
Additionally, student loans impact your debt-to-income (DTI) ratio, which measures the ratio of your total debts in comparison to your pre-taxed income. In order to qualify for a home, you’ll need a DTI of about 36% or less. So, the sooner you pay off those student loans, the better your chances for qualifying for a mortgage since you’ll be lowering your overall DTI percentage.
If your debt-to-income ratio is higher than 50%, you probably should wait to make a home purchase and focus on repaying your debt first. In reality, there’s nothing wrong with making a responsible decision to put off buying a home for a year, and you’ll land at a better rate when your finances and DTI ratio are in order.
Save for a Home
While most experts would agree that paying off your student loan debt before saving for a home is the right move, there are some situations where prioritizing homeownership can make sense.
To start, rising real estate costs can mean purchasing a home might actually help lower your housing costs on an ongoing basis (once the down payment is out of the way). This means you’d be able to save on monthly housing bills, thus helping you allocate more funds each month to pay off your student loans.
Additionally, it’s worth noting that student loan debt is considered healthy debt, so it’s a good idea to take a look at your interest rate if you don’t know it already. If your interest rate is relatively low (6% – 7% or below), then there’s no harm in paying the minimum on your student debt, while putting more money aside toward a down payment fund.
Both? It’s Possible.
Instead of thinking about the situation as an “either/or,” borrowers should consider paying off student loan debts to buy a home. As Experian suggests, with the right planning and budgeting, it’s possible to do both at the same time.
Create a solid budget and stick to it to avoid overspending and help increase your savings. You can also consider opening a high-yield savings account and automatically put a portion of each paycheck into that account to earn cash through interest while your savings grows.
Finally, remember that every financial decision is unique to each borrower, and the risks and rewards depend on your own financial and personal goals. Do your research, and, if you need help, consult with a student loan and/or financial advisor before making a decision.
The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, we advise you to consult with a licensed advisor.
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