You’ve graduated from college. You have a job. And now you are considering buying a house. Owning a home just seems like the next logical step on your journey to achieving the American dream.
But there’s a problem. A large debt looms over you. It is the same debt that follows many of your friends and colleagues. In fact, It is a debt that the majority of college graduates must deal with long after they are handed their diploma. You have student loan debt.
So you are wondering, “Should I buy a house or pay off my student loans?”
Don’t worry, you are not alone. This question is asked by many young adults. It is a question of competing wants. You want to be debt-free, to be free of the student loan burden. But you also want a house, some place to call your own.
What do you do?
Allow me to answer the question first and backfill with the “why” next. For most cases, I recommend paying off the student loan debt before buying a house. Now the why.
1. First of all, you might not have a choice.
Desire does not get you a mortgage. Getting approved for a loan is not always easy for those with significant amounts of student loan debt. The banks consider your debt-to-income ratio (DTI). Your DTI is calculated by dividing your total monthly debt payments by your gross (before taxes) monthly income. If the ratio is too high, the bank will not lend you the money you need to buy a home. A high DTI is a clear sign that you need to get rid of your debt first.
2. Buying a house will unnecessarily extend the stay your student loans.
This is really the key point. Student loans can end up like an unwanted guest that decides to stick around way too long.
Let’s say that you graduate with $37,000 in student loan debt, approximately the national average. Assume a 6% interest rate. If you take fifteen years to pay off your loans, you will pay over $19,000 in interest. That is a lot of money.
However, if you pay off the same amount with the same interest rate, in five years, you will pay $6,000 in interest. That’s still a lot of money, but significantly less than $19,000. The longer the loan lingers, the more expensive it becomes.
The next two points discuss why homeownership can extend the stay of unwanted student loans.
3. Renting provides financial predictability. Homeownership does not.
Often, purchasing a home only further delays the elimination of student loan debt.
Consider this scenario—the air conditioning in your rented townhouse goes out. What do you do? You call your landlord and he has it fixed. And you don’t pay a dime for it. The landlord will also replace your hot water heater when it breaks, patch your roof when it leaks, and fix your dishwasher when is stops washing dishes.
Now consider this scenario—the air conditioning in the home you own goes out. What do you do? You figure it out. And you pay for all of the costs to get the unit fixed. You pay to replace your hot water heater when it breaks, patch your roof when it leaks, and fix your dishwasher when is stops washing dishes.
Owning a home is not like renting. The costs associated with homeownership extend well beyond the mortgage payment. You pay for all of the maintenance and replacement needs. You pay for the homeowners’ association fees. You pay for it all.
Renting can provide the financial predictability needed to pay down your student loans quickly. Homeownership cannot do this for you. The surprise costs delay your ability to pay off your loans.
4. You will buy more to outfit the house
Especially if you are moving from an apartment to a house. The move to a new home usually increases your living space. And, more than likely, you will want to fill that living space in your new home. You will want it to feel like a home and not a cavernous void. You will want the home to “feel like you.” So you purchase a new sofa, ottoman, and rug. You buy some paint for an accent wall. And you purchase a few new wall-hangings.
The amount of money spent on outfitting a new home can be costly. And, again, dollars that could have gone toward the loan are redirected, delaying the pay off.
5. Student loans create stress
There are financial reasons for paying off your student loans quickly. But there are other reasons. Among working professionals, the weight of student loans is often cited as a cause of stress. The Bible says that the borrower is a slave to the lender (Proverbs 22:7). Those with student loans feel the burden of this undesirable relationship. Though they desire to use the money for something else, they must pay.
The presence of student loans has been connected to delays in marriage, parenthood, vacationing, and, of course, homeownership. Understandably, this frustrates loan holders. So reduce the stress by knocking out the loans as soon as possible.
Purchasing a home is a good thing. But that does not mean renting is a bad thing. In fact, sometimes renting can be the wiser financial decision of the two options. If you have student loan debt, consider delaying homeownership until that debt is eliminated.
This article was originally posted on relevantmagazine.com.