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Note: home equity isn't the only reason I'm thinking about buying. I'd like to have control over my own living environment, more space, not have to worry about annoying the apartment unit upstairs if I'm playing music, and real estate in my city is in a very positive trend right now. Home equity is just one factor.

Background: I graduated university roughly 1.5 years ago and have been teaching English in France since. I don't make a lot of money, about $30,000/year gross. I have about $67,000 in student loans at the moment. I am currently on an income-based repayment plan for my loans, resulting in a $0/month payment (so essentially, they're deferred). I'm currently accruing about $1,200 per year in interest based on my loan statements from this year. I have great credit, about a 750 score.

Edit: my primary job is freelance programming, which I am doing in tandem with the teaching position until May 2019, at which point I will go back to full-time (freelance) programming. I’m not worried about paying back my loans yet, as I’m taking this time in France as a “vacation” of sorts, using the teaching position as an excuse to have a long-term visa in Europe.

I'm going to return to the U.S. in May and need a place to live. For the time being I'm going to rent, but let's assume that a loan servicer would give me a home loan for a principal balance of $200,000. Let's also assume my income jumps to $50,000/year gross and that I have no problem managing my money. I'm trying to figure out whether it is wiser to rent and pay off my student loans before buying, or to buy and pay off the mortgage and student loans at the same time.

Using a rough calculator, I'd be paying about $200/month toward the principal of the mortgage, which is more than the interest I'm accruing with my student loans. If I understand the basics of renting vs buying, by renting I may "save money" by not dealing with property tax, maintenance issues, etc., but I'm not accruing any home equity. By buying, even if I'm paying a lot in interest, I would still accrue roughly $200/month in home equity, which would increase over time.

So if my math is right (perhaps it's dead wrong), $200/month in home equity is greater than the $100/month interest accrued from my student loans, and that difference of $100 would increase over time as I pay off more of each loan (and thus have lower interest payments on each). Does it make financial sense to rent and pay off the student loan (and then buy), or buy and pay off the student loan?

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    How much of a down payment will you have by the time you want to buy a place. If you were to make $50K a year how much would your required student loan payment be?
    – mhoran_psprep
    Jan 9, 2019 at 11:01
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    Is your interest rate ~1.8% on your student loans? Which income-based repayment plan are you on? Would you be teaching in the US or working another job that would qualify you for public service loan forgiveness?
    – Hart CO
    Jan 9, 2019 at 15:51
  • Interest rates here are important. Lets say you get a mortgage at 4.5% is that less or more than your student loans. As a default I would say you want to pay off highest interest rate
    – Mark Monforti
    Jan 9, 2019 at 18:35

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I agree with Pete, but you do have one calculation wrong.

You do not compare the loan interest to the equity you're building - building equity is just converting one asset (cash) to another ("equity"). You would be better off putting that "equity" toward the loan (since it will reduce interest going forward).

You need to compare the rent you'd pay to the interest and other home expenses that you won't have when you rent (property taxes, PMI, maintenance, etc.). That difference is how much you could be putting towards the loan instead of wasting it on interest.

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  • You're assuming that rent is going to be less than mortgage payments & expenses. This is not necessarily the case, unless you find a pretty cheap rental (roommates &c). Even if it's the case in the beginning, rents are almost certainly going to go up, while a (conventional) mortgage is fixed.
    – jamesqf
    Jan 9, 2019 at 19:35
  • @jamesqf: It doesn't matter whether rent is more or less. It matters that it is the opportunity cost (opposite sense because it is actually a liability) to balance against in the rent-vs-buy decision.
    – Ben Voigt
    Jan 10, 2019 at 3:02
  • @Ben Voigt: I don't understand your logic. If a decent apartment rents for say $1000/month where you live, but your mortgage (plus taxes, insurance, and so on) is $900, it would seem that buying is the better deal from the beginning. Then you have (neglecting tax increases) a fixed payment on a probably appreciating asset,. vs rent payments that are just gone, and probably will increase with time. Even more so if the student loan is really at 1.8% - why would you want to pay that off faster than you must?
    – jamesqf
    Jan 10, 2019 at 5:56
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Using a rough calculator, I'd be paying about $200/month toward the principal of the mortgage, which is more than the interest I'm accruing with my student loans.

To start, if you have the $40,000 to put down on the property you calculated in your link, you might want to crack off a chunk of that to pay down your existing student loan. Really, that should be your question. "I have $40,000 should I pay 66% of my student loan or buy a house?" Your calculator example calculates a $160,000 loan not a $200,000 loan as your question indicates. If you don't put the 20% down, you'll be required by the lender to carry something called Private Mortgage Insurance which adds about another full percent to the cost.

If you double down and buy a house, you're basically walking a tight rope of two major obligations over $100 a month. You're ratcheting your annual interest obligation from $1,200 to $8,700 so that under the most favorable scenario you have $1,200 of equity in a property ($2,400 of equity less your existing $1,200 of student loan interest expense). And really, using a $200,000 zero down loan, you'd be closer to $13,000 in annual interest and PMI charges.

If you rent, it's unlikely your rent costs would be equal to your purchase costs. In a rent scenario you will likely have more cash each month to more aggressively pay your existing debt load and ultimately spend less than the $1,200 each year in interest. Don't over burden yourself with debt particularly because your mortgage lender isn't going to defer anything if you want to take a "vacation" again.

Don't obligate yourself to debt servicing. With these numbers (that are likely wrong considering the $160,000 loan in your math) you're guaranteeing 17.5% of your gross income to interest.

There are very good posts here about debt in general, I'd advise you read some of them, pay particular attention to questions about "should I pay my student loan or invest in the stock market." Your question isn't materially different than that, just swap stock market for house.

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  • I’ve read a lot of posts here about debt repayment, student loans, etc. But I guess I never made the connection that a house an investment like any other (maybe just with more interest). I don’t actually have $40k for a down payment though, that was just part of the assumption of the question’s calculations. If I did have $40k I definitely would have already used it to bring my loan balance down ;)
    – Chris Cirefice
    Jan 10, 2019 at 7:17
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Does it make financial sense to rent and pay off the student loan (and then buy), or buy and pay off the student loan?

As you would suspect the answer to your question is: "Rent".

While purchasing home is a worthy goal and leads to much financial stability, there is a good chance that what you are suggesting would lead to some negative outcomes.

As you said, when you rent, things like property taxes and maintenance issues are not a concern. Those maintenance issues can be a big deal. If you do buy, in your situation, how do you pay for a new HVAC system?

There is also a bigger issue of obtaining financing. You have not shown the best history in earning and an equal consideration to credit score is an income sufficient to pay back a loan. While I feel that banks are overly lenient in that regard, will they loan someone 200K that already has 65K in debt that has a history of making 30K? Probably not.

Another issue that might "step on your toes" a bit would be the decision you made to teach, at a low salary, when you had such a high student loan balance. I apologize if this hurts your feelings a bit but it seems like that decision was foolish. Sure it would be great to teach in France but not for someone who cannot pay their bills. In your case it would have been wiser to teach in the US, and work an extra job so you can have your student loans paid off in about 18 months. Then go teach in France!

Along those lines, although not required, did you make interest payments on the student loans to keep the balance from growing? Not doing that was doubly foolish.

Doing what you are suggesting is fraught with risks that you do not seem to be properly accounting for. It would be my advice to come back to the US, work like crazy, pay off these student loans (again, the goal should be about 18 months), save up a small down payment and then buy a home or even reevaluate. Teaching somewhere exotic might be a whole lot more fun when not burdened with this massive debt.

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    renters do pay property tax through their rent, they just don't see it as a separate item. Changes in property taxes is one reason why rent may increase each year.
    – mhoran_psprep
    Jan 9, 2019 at 12:56
  • Sorry, I didn’t make it clean in my question that my actual primary employment is freelance programming. I edited to make that apparent. I’m not worried about my current salary, I’m basically on vacation and have been for the last year and a half. That’ll change in May when I go back to the US.
    – Chris Cirefice
    Jan 9, 2019 at 18:09
  • Paying off $67,000 in 18 months will require a net income of approx $45k, in excess of living costs. OP is anticipating a gross income of $50k. The second job you recommend would basically have to provide for all of OP's living costs, because the first $50k would all be going to loan repayments and income tax. While not impossible, this could be a very difficult transition for someone who likes the occasional vacation. A 36 month timeline might be a bit more realistic for this individual. That way they can work hard and pay off the loans quickly, while still getting to enjoy life.
    – CactusCake
    Jan 9, 2019 at 19:34
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    +1 I always try to offer a "Devil's Advocate" alternative answer to whatever Pete suggests.
    – JTP - Apologise to Monica ♦
    Jan 11, 2019 at 14:47
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    To be candid, it's not for me, either. But, for a college grad who is used to roommates, it might very well be a way to live virtually rent (and mortgage) free. Imagine he finds 2 good roommates @$750/mo each, and just adds that to the mortgage payment. Mortgage-free in 6 years....
    – JTP - Apologise to Monica ♦
    Jan 11, 2019 at 16:24
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I would first want to understand the real choice. Put the loan aside. As much as it would be great to pay it off (although if it's really 1.8%, I wouldn't), I'd look at the buy/rent decision, stand alone.

What is the market like where you are going? Is a nice apartment $750, or is it $1500? Part of the issue with rent/buy is that people aren't buying (typically) a house that is equal to what they would rent. The house often has far more than what you really need.

You mention being a recent graduate. If you bought the house, will it be a size that would allow you to rent the second or even third bedroom? This turns the numbers upside down, and might offer you the chance to have 2 roommates pay the entire cost of the monthly mortgage.

I could go on, but my answer is simple - "We don't have all the details. Details that can push the advice one way or the other."

Edit - Given the cost of rents, and the willingness of OP to rent out to roommates, I'd run the numbers based on that scenario. 5 years ago, I wrote Student Loans and Your First Mortgage in which I show how the monthly payment of the loan fits into the gap between 28% and 36%, the typical percents for housing loan vs total debt servicing. This is a great opportunity for a recent grad to use his ability to rent the space potentially covering the entire monthly mortgage payment.

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  • A nice apartment where I live for a single-person household would be around $1,200/month. A livable place would be $750/month. I would indeed have roommate potential (up to 3 depending on the actual house bought). It’s definitely a factor to consider. I guess the whole thing is that a mortgage is roughly the same price as the kind of apartment I’m looking for currently, but buying a house would afford me a lot more options. My student loans are about 4% on average across the 23 of them, if it were 1.8% I wouldn’t even be asking this question ;)
    – Chris Cirefice
    Jan 10, 2019 at 7:10
  • @ChrisCirefice - the reason people are assuming your student loans are at 1.8% is because your questions states you currently owe $67K and it accrues $1200 in interest per year, which equates to about 1.8%. If it's 4% then you should be accruing about $2680 of interest per year... maybe check those numbers.
    – TTT
    Jan 10, 2019 at 18:28
  • Yesterday I was thinking about answering this question (but didn't have time) and I came to the exact same conclusion as you: rent/buy is an independent decision. I was going to take it a step further in that if the scale leans towards buy, then the next question is: should any of the down payment money be put towards the student loan instead? Most likely no, but the answer to that requires more info (such as all loan rates and cost of PMI). I particularly like your second paragraph as it translates to many aspects of life: "If I'm committing for the long haul, I want something great..."
    – TTT
    Jan 10, 2019 at 18:37

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