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My wife and I have been working on debt for the last year and a half. We've knocked out $50k in car loans, credit cards, etc. Our only debts left are student loans.

Would it make more sense to begin saving 20% for a new home or pay off student loans first.

Our student loans are a hefty 50k (70% @ 3.375%, 30% @ 4.21%)

It'll be about 2-3 yrs to save for the house, 3-4 yrs to pay off student loans.

  • Great Question! – Alex B Apr 4 '11 at 16:51
  • Presumably this is US student loans. UK student loans work slightly differently. – uɐɪ Apr 20 '11 at 9:25
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You're halfway done with the debt elimination. Keep up the good work.

The student loan debt will get in your way a couple of ways when you look to finance a house. First, your debt to income ratio will be higher than without the debt, so you'll be able to qualify for a smaller loan with the debt than without. Second, you'll have the student loan payments in addition to your mortgage. This may wear on you.

I'd look for ways to make extra money to knock out those student loan debts ASAP. The rates aren't horrible. That, and I think there is still some time before the housing market bottoms out, so you don't need to rush into the house.

If you can handle the entire debt load (student loans + mortgage) then if you save up for the down payment, that money isn't being used to pay down your student loans, and paying your students loans off won't get any easier when you get a mortgage on top of that.

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    +1 for the complete answer. I would only like to add that the cost of a house isn't only comprised of the mortgage - those little "surprise repairs" can really derail your finances, too. – Timo Geusch Apr 4 '11 at 14:46
  • @Timo: Excellent point. – mbhunter Apr 4 '11 at 15:19
  • Though depending on DTI, paying the student loans will likely not be harder either. In my case, I decided getting a low interest loan now (well 2015) was worth more to me than taking an additional 2 years to pay off student loans. I'd be risking ~$100k of additional mortgage (not to mention the growth in purchase price of the same home) interest to save less than $10k of loan interest and increase cash flow that I did not anticipate needing (as in my savings rate after accounting for the mortgage was still in line with recommended amounts). – iheanyi Jul 13 '17 at 22:53
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By paying off 50K in debts now, you'll have 50K less to invest in your new house. That means that you'll have a mortgage that's 50K higher. So, it's trading one debt for another.

This means you should be comparing the T&Cs for the two. The most obvious is the interest rate. That's slightly tricky for your future mortgage, as 20% money down may affect the mortgage interest rate. The easiest way is to calculate the raw $ interests you'd pay in both cases.

Besides interest, there are more conditions. Some debts may include life insurance, which has a definite value in your case. It would be hard to compare those here, you'd have to do so yourself

  • I agree. One needs to look at the total picture. How does the student loans affect DTI? What would your savings rate look like with student loans + mortgage (if DTI is low enough, you having the student loans paid off would only provide benefit under catastrophic emergency cases)? What are the savings in interest between locking in a rate now on a mortage at housing prices now vs potential increase in rates and price for the same home in the future? – iheanyi Jul 13 '17 at 22:59
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I don't know much about how student loans work, so there might be some caveats (e.g. does the interest rate stay constant, do you get a discount if you pay off early etc.). Ignoring those caveats:

The interest on you student loan looks quite small. Depends a bit where you are in the world, but it seems very likely that you can get more interest than that on a 100% guaranteed investment form, e.g. term bank deposits. So, it seems a no-brainer to not pay back you student loan and invest the money securely for a higher interest rate instead.

Similar situation when you think about taking the money as a down-payment for a house. More factors come into play here:

  • What is the impact of an existing student loan on your mortgage conditions?
  • Do you earn enough to comfortable make your repayments? Even when emergencies happen?
  • How do you think real-estate value will go in your area? Will you make/save more money by buying early?
  • If the above don't add up to make pure financial sense, wow much do you value owning your own home?

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