This post is part of the Ask the M-Network series. If you have a question for the M-Network, feel free to ask via my contact form.
This week Katharine asks:
Hi, I will be graduating from college this May. I have about $47,000 in student
loan debt and about $15,000 in investment accounts (which are not retirement
accounts). With the new $15,000 first time home buyer credit, I am wondering
about the intelligence of sinking my investments into a downpayment on a house
(I have to move anyway, my job is in a different state). Since I will be
making a good salary (more than $50k a year), I have no doubt that I could
afford mortgage payments, especially since rent in the area is around $800 a
month.
What are your thoughts?
Gibble says:
My priority would be on paying off those student loans. Frankly, I would sell your investments, withhold enough for a decent emergency fund and put the rest against your student loans. I would then rent until the loans are gone, then start saving up for a down payment.
Remember, just because you can pay the monthly payments, doesn’t mean you can afford a home. Be debt free except for your mortgage and your life will be far less stressful.
Pinyo adds:
I agree with Gibble. I wouldn’t take unnecessary risk it in this economic downturn. Although the new $15,000 credit for home buyers is a very attractive deal, I think it’s better to use your money to build up an emergency fund and keep that in an online savings account. I know they are only averaging 2.5% right now, but I still believe they are the best place to keep your emergency fund due to how easy it is to get to your money and the relatively decent interest rate.
I would use the rest of the money to pay off your student loan. However, if the interest rate on your student loan is really low, you may want to consider saving the rest for the eventual down payment for your first home. In any case, it’s a good idea to save up so that you can afford to pay a 20% down payment for your home so that you don’t have to pay private mortgage insurance.
Whatever you decided. Good luck.
Plonkee advises:
I wouldn’t buy right away in any case – if you’re only just graduating from college, you don’t even know if you’re going to like this job and it would be most annoying to be tied down by a house, particularly if it’s in an area where prices haven’t reached rock bottom.
If you really want to buy a house, I’m guessing that based on rent levels you’re looking at places that are in the $200k plus price bracket. Which means that you’ll want a substantial deposit in order to get the best mortgage rates. If your student loan interest rates are relatively low, then save up some more money for a deposit if a house is what you really want. If you’re thinking about buying a house just because that’s what people do, then don’t; it’s no more or less of an investing certainty than the stock markets but it is significantly less liquid.
Finally, Patrick says:
Things have changed a bit since you submitted your question – the proposed $15,000 first time home buyer’s credit is now an $8,000 first time home buyer’s credit. That may make a difference in your decision to buy now.
Beyond that, I would recommend waiting a year or so to buy. Whenever you move to a new location, it is always a good idea to rent for awhile to get a good idea of which neighborhood you want to live in, locate the good school districts, etc. Even if you don’t have children now, good school districts will help the resell value of your home.
Waiting will also give you a better idea of your financial situation and career prospects. You may find this is the perfect career and location for you, or your company may decide to transfer you. In short, you probably just don’t know yet. A year should give you a good idea of where you are headed professionally. In the mean time, I would recommend renting, paying down your student loans, getting settled in your career, and having fun. After all, you will have just graduated college!
Readers: What do you think?
Photo by molajen.
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If you are going to stay in the home for a few years– not a bad idea.
The only iffy thing is the “huge” payments– watchout that you don’t bite off more than you can chew.
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Most student loans are limited to citizens or resident aliens of the US. You do not mention whether you are a US citizen living outside the US, or a citizen of another country.
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I would caution the letter writer to do a lot of homework if she is considering buying a home. I realize when you’re graduating from college that a salary of $50k seems like a lot, however, after taxes, student loan payments, car and insurance, food, clothing, entertainment, other expenditures, it doesn’t go that far.
She says rent is $800 a month. When looking at a house, you need to consider not only the mortgage payment but taxes, homeowner’s insurance, utilities, and Private Mortgage Insurance if you don’t have a 20 percent down payment. Not to mention that if you own, you are responsible for anything that breaks. It’s a huge financial move. It may be right for her, but it might be better to wait a bit and pay down some loans and save some money.
Plonkee is dead on. Starting a new job, most likely in a new city, has a lot of unknowns, especially in this economic environment. Take it slow. Try to find a reasonably priced apartment, close to work and sign a shorter term lease (6 months or less). That will give you a chance to settle-in to your new job and make sure that it is the correct fit. Worst case, you can always sign another short-term lease while you get your debt levels to a manageable level and save for a down-payment.
I say no and for a number of reasons. As a younger person ( 31) I can personally assure you that during the first several years after school, you will likely switch jobs several times. In fact, in today’s professional atmosphere, it isn’t unusual for younger professionals to switch jobs every few years. I’ve already been at 6 different jobs since I graduated, one requiring me to move across the country. So in many ways, renting gives you more flexibility.
Secondly, as someone else mentioned, 50k is really not all that much in today’s market, that is unless you’re living in the middle of nowhere. I’m not saying this to sound snobby. I started out making $8 an hour and working my way up to close to 100k. My Wife does about the same. Even so, we still rent because at least in our area ( Northern Cali) the cost of rent is signifigantly less than buying. Assuming that the homes you’re looking at are 200k, then you should really be making 100k, either by yourself, or if you have a significant other who also makes 50k. You should also count on putting down a 20% down payment, which is about what banks now require.
That brings me to my next point. If you aren’t married, then why buy anyway? Assuming you either get married or want to get married, buying a house as single person makes no sense to start with.
Next up is the very real prospect that home prices still have a ways to go downward. In my opinion, home prices are still grossly over-inflated in the majority of major US cities. Look at the median incomes of an area and compare it to the median price. In most cases the reality is that prices are still outstripping what real incomes can afford. The only reason prices got so high was the easy access to risky loan products and deregulated financial lending practices. Those two legs of the housing machine have been kicked out thus prices will likely fall until local income levels in a given area support the price. Additionally, if you’re moving to a new area, chances are you don’t know much about the area either. Perhaps there is a cute cottage at a too-good-to-be-true price. Seems tempting, but what if that house resides in an area with horrible crime or near a industrial waste site? Finding those things out takes time. Besides, it takes years to really know an area, and if you buy right off the bat, you’ll probably find that there were area in the town that were more to your liking.
Lastly, I realize that “the American Dream” is branded into most people’s skulls and that everyone thinks they have to buy a house. But my opinion is that the American dream is about having the realistic ability to save money, learn a profession, and ultimately live a life not hampered with debt and liability. Buying a home is a huge liability and most people buy homes with very little financial commitment. Save up so you can eliminate the liability and have fun while you’re doing it.
Good luck!
@ Bob
Most banks do not require 20% down. Granted, that is the best way to do things, but conventional mortgages are still widely available to those of us with good credit and they only require 5%.
Again, I’m not condoning the 5% route, I’m just emphasizing the fact that it isn’t “required”.
You have to have nearly perfect credit in order to qualify for a minimum down payment. But in any regards, if all you can afford it a 5% down payment, then you shouldn’t buy a house anyway. This low to no down payment business is where we got intro trouble, and if the FED were smart, they would make it a requirement to put down at least a 20% down payment. That would solve rampant over-inflation in boom times in housing and weed out people with actual money versus folks who don’t and are more likely to default.
The best rule of thumb is to always rent somewhere for a while before you choose to buy a house. What if it turns out to be the boss from hell? You don’t want to be trapped there because you bought a house. In order to make up the closing costs, you really need to live in the house at least 5 years. You can see what areas have the highest crime, most run down houses, best schools, highest water bill and taxes etc. Even if you don’t have children, being within walking distance or at least within the district of an accomplished school will make it much easier to sell later. You need to establish a credit history by making your student loan payments on time. Getting a credit card and paying it on time and in full every month will also establish a credit history. Do not think you deserve the good life and can afford everything because you got through college. Do not think you have to give into the flash and glamour of professional life and buy an expensive car either. You need an emergency fund with 3-6 months of income, some financial experts are now saying 9-12 months because of the bad job market. Most banks also will not deal with you unless you have 20% down payment. If you can’t put that much down, you have to pay private mortgage insurance which is $50-100 a month.
New job, new area, new lifestyle…
Wait til you get settled in and make sure this is where you want to be, and in what area you want to be. You might want that flexibility for awhile yet.
And – most lenders are going to want to see a year at least in the new job before they loan money out.
These comments are spot on. Unexpected expenses pop up regularly with homeownership – and the water heater always seems to die when you can least afford it. Renting can help you judge you housing cost comfort level and give you time to see where your life is heading. And keep in mind that it can take the average home buyer 5 years to recoup the closing costs. I see too many homeowners in our market basing their home sale price on what they need to make to break even after owning the home a year or two, instead of what the market will bear – and the houses can go unsold for months or longer.
I agree with everyone else — don’t do it yet! You are heavily in debt and your $50k salary is nice from first thing out of college, but it isn’t that much.
Taxes, health insurance and other deductions are going to eat a lot of that up. Your take home pay might be $3k per month, if that. If you follow the 25% to 33% rule of thumb for how much you can afford to pay in housing, then you’re looking at $750 or so. Unless you get a really cheapie house (under $100k), you won’t be able to swing that when you account for mortgage + PMI + taxes + insurance.
With the economy in the toilet especially, you aren’t guaranteed that you’ll still have this job a few months from now.
Get out of debt, build up savings, and don’t rush into this!
Renting isn’t so bad, I promise. This May marks 2 years since my college graduation and I’m still renting.
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I would absolutely wait.
Rent for a while and pay your debts down.
Owning a home is a long term commitment.
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