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I am 22 years old, I live in Atlanta, Georgia and I am a recent graduate. I approximately owe 22,000 dollars in student debt (all federal student loans at a fixed rate). My job pays me around 50,000 dollars annually. I am currently living with my parents, however, I will like to own a home soon.

My question is, if it is better to live with my parents until I can pay off my student debt and collect enough money for a down payment on a house or should I go about paying my student debt monthly for the next ten years or so and go ahead and purchase a home when I am able to save up enough money for a down payment?

I am hesitant in going with the former because 22,000 dollars is a lot of money and hard work. However, I don't think it will be in my best interest to pay 250 dollars every month for the next ten years.

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Two years ago, I wrote an article titled Student Loans and Your First Mortgage in response to this exact question posed by a fellow blogger.

The bottom line is that the loan payment doesn't lower your borrowing power as it fits in the slice between 28% (total housing cost) and 38% (total monthly debt burden) when applying for a loan.

But, the $20K is 20% down on $100K worth of house. With median home prices in the US in the mid-high $100Ks, you're halfway there.

In the end, it's not about finance, it's a question of how badly you want to buy a house. If I got along with the parents, I'd stay as long as I was welcome, and save every dollar I could. Save for retirement, save for as large a downpayment as you can, and after you buy the house, pay the student loan aggressively. I moved out the week after I graduated.

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I think there are two questions here:

(a) Is it better to continue living with your parents while you save up for a bigger down payment on a house, or to move out as soon as possible?

(b) Is it better to pay off a student loan and make a smaller down payment on the house, or to keep paying on the student loan and use the cash for a larger down payment on the house?

Regarding (a), this is mostly a personal priorities question. You don't say if you're paying your parents anything, but even if you are, it's likely a lot less than the cost of your buying your own home. It is almost certainly ECONOMICALLY better to stay with your parents. But do you like living with your parents, and do they like having you around? Or are they pushing you to move out? Are you fighting with them regularly? Do you just like the idea of being more independent? If you'd prefer to have your own place, how important is it to you? Is it worth the additional cost? These are questions only you can answer.

Regarding (b), you need to compare the cost of the student loan and the mortgage loan. Start with the interest rates of each. For the mortgage loan, if your down payment is below a certain threshold -- 20% last time I bought a house -- you have to pay for the lender's mortgage insurance, so add that in if applicable. If you are paying "points" to get a reduced interest rate, factor that in too. Then whichever is more expensive, that's the one that you want to make smaller. If one or both are variable rate loans (well, you say the student loan is fixed), than you have to guess what the rates might be in the future.

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Yes, one is certainly better than the other. Which one depends on your priorities and the interest and tax rates on your student loan, your savings, and your (future) mortgage plus how much you can afford to save and still enjoy the lifestyle you want as well as how soon you want to move out.

Basically, you havn't given enough information.

  • Hmm, as a general question which is better? Paying off student loan or using that money for a downpayment on a house? – Robben Dec 16 '15 at 2:50
  • As a general answer, a youngster probably shouldn't be buying a house -- you have no idea where your career will take you in the next few years and a house is a big financial anchor. – keshlam Dec 16 '15 at 7:52
  • @keshlam So in other words I should keep living with my parents until I am completely stable. That might take a few years. – Robben Dec 17 '15 at 1:13
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    There is nothing wrong with renting. You could even rent a house, if you can justify the finances. Buying primarily "to get out of the house" means you haven't thought about the implications and alternatives. – keshlam Dec 17 '15 at 1:22

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