Pay Off Student Loans or Buy a House – Making the Right Call

The Big Picture On Deciding to Whether to Pay Off  Student Loans or Buy a House:

• Carefully evaluate the return on investment of purchasing a home versus paying off existing debt, considering all related expenses such as maintenance costs and closing fees.
• Explore the possibility of house hacking by renting out portions of the property to help offset your costs and increase your savings rate.
• Understand how your student loan debt may impact your credit score and ability to qualify for a mortgage and develop a strategy based on this information.

You’re not alone. Nearly two-thirds (65%) of today’s college students graduate with student loan debt. As they enter the workforce, get married, and have children, they ask the same question: Should I pay off student loans or buy a house? 

Some financial gurus blindly recommend paying off debt before buying a house. However, such a simplistic approach doesn’t work for every would-be homebuyer and ignores creative tactics like house hacking. 

As you prioritize where to put your monthly savings, remember the following when deciding whether to pay off debt or buy a house. 

What Is Your Return on the House?

Purchasing a home represents the most significant financial decision most people ever make. When considering whether to become a homeowner, you need to calculate your return on the house.

Because sometimes, buying a house saves you money. The cost of a monthly mortgage payment, including property taxes, homeowners insurance, and possibly HOA fees or mortgage insurance, could prove lower than monthly rents in the same neighborhood. 

But your monthly mortgage payment isn’t the only cost of owning a home. When calculating your ROI, consider maintenance and repair costs associated with owning a home. Roofs need fixing, and toilets break. Unfortunately, many things break and need repairs, which can be extremely expensive. Is it still a good investment if you find a home you can comfortably afford but need several repairs to complete?

Factor in all costs of homeownership when comparing returns on renting versus owning in your area. Don’t assume that owning always makes more sense. In some cases, renting a comparable home costs more to own than it does, especially if you’re also trying to pay off student loans or buy a house with limited funds.

Remember that you incur an initial loss when you buy a home due to closing costs. When you go to sell, you take a second round of losses from your closing costs as a seller. It takes years of ownership for you to build enough equity to exceed those losses, which raises a crucial point: it only makes sense to buy if you plan to live in the home for at least a few years. 

Or rather, if you plan to own the property for a few years, which isn’t always the case. 

House Hacking 101: Free Housing

Surprisingly enough, you can score free or reduced housing in several ways. House hacking tactics have become more popular in recent years as more people realize they can invest and save simultaneously. 

Have you considered all of your house hacking options? 

Traditional Multifamily House Hacking

Multifamily house hacking offers a great way to affordably buy a home instead of renting. Simply put, you buy a 2-4 unit property and move into one unit while renting the other unit(s). 

If you do it right, your neighboring tenants will pay enough rent to cover the monthly mortgage payment. Check out how one first-time homebuyer’s house was hacked with a duplex for free housing. 

If you think this could be a good option for you, use a House Hacking Calculator to learn exactly how much you would be saving.

House Hacking with Housemates

Don’t want to live in a multifamily property? Alternatively, you can buy a single-family house and rent out rooms to housemates. 

If you ever get sick of them or have a spouse move in, you can always non-renew your housemates’ lease agreement. 

House Hacking with Vacation Renters

Similar to traditional house hacking, you can instead advertise extra units or rooms in your home to vacationers on Airbnb. 

While this strategy may come with its own risks (seasonal vacation fluctuation, property damage, vacancy), renting extra units to vacationers would offer you the option to choose when you want to share your space or maintain private occupancy. 

Storage Space, Foreign Exchange Students, RVs, & Beyond

You can rent out more than rooms or extra units in your home. 

Deni rented out storage space in her garage to people, and they rarely met each other as the tenants had separate access to the space.

Later, she even brought in a foreign exchange student whose monthly stipend covers most of her mortgage payment. (Here’s the exchange student placement service she went through if you’re interested.)

You can rent parking spaces for cars, boats, or RVs if you have room.

Speaking of RVs, if you have one, you could spend a few nights there periodically when renting out your entire home on Airbnb. Even a few nights a month could cover most of your mortgage!

More Ways to Monetize Your Home’s Unused Spaces

The opportunities are endless; you have to be creative. Below are some more examples.

How Do Student Loans Impact Your Credit?

Student loans impact your credit the same way any other installment loan does. 

If you make all of your payments on time, it helps boost your credit. If you have to default or postpone payments, your credit will be damaged quickly. 

While loan programs exist to help consumers with poor credit buy their first home, they tend to charge high interest rates and may require a high down payment. Start by improving your credit score as you plan to pay off student loans or buy a house.

Finally, consider your ability to make your payments now with no mortgage. Are you making all of your payments on time and in full? If not, buying a house only adds more financial stress to you and your credit score, given the irregular repair bills that homeowners face.

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Reasons to Prioritize Paying Off Student Debt

Everyone’s personal finances are unique. For some, paying off student loan debt before buying a home makes more sense. For others, buying a home before tackling their student loan debt with the debt snowball method or a similar technique makes more sense. Scrutinize your finances to decide which path offers the fastest route to building wealth.

1. You Don’t Know Where You Want to Live for the Next 3 Years

Renting allows you to change career courses, travel, or move to a new city. You can also move in and out whenever you want. 

Owning a house does not offer that luxury. If you have been unsure where you want to settle for at least three to five years, buying a house doesn’t make financial sense. While you can sell your home if needed, that also comes with cleaning, repair, transaction, and selling costs.

2. Your Debt-to-Income Ratio Is Too High You Struggle to Make Your Payments on time

Your debt-to-income ratio is the amount of monthly income that goes toward debt payments. Simply stated, if more than 15% of your income goes toward paying off debts, you may want to rethink buying a home.

3. You Struggle to Make Your Payments on Time

If you find it difficult to make ends meet each month to pay off your bills, consider it a sign not to go into further debt by purchasing a house. Not only do you not have the extra cash at this time, but you will be charged if you cannot make your mortgage payments on time.

4. You Don’t Have Extra Cash for a Down Payment or Other Acquisition Costs

Buying a house is never just about the cost or the monthly mortgage payments. You need to consider whether you have enough cash saved to put a down payment on the house. 

Down payments add up quickly, and taking out a seller-held second mortgage can just dig you into a deeper hole. (Although when you’re ready, you can try these down payment hacks to put down less.)

5. You Don’t Have an Emergency Fund or Savings for Irregular Expenses

Homeownership costs more than just the down payment and monthly mortgage payment. You also need extra cash for regular maintenance and irregular repairs or damages on the property. Owning a house may be all smiles until gutters leak, the roof needs repairs, you get mold in the walls, or the furnace breaks down in January. 

Are these daily occurrences? No, of course not. But do you have enough saved so that if—or rather, when—these happen, you are not in financial trouble.

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Reasons to Prioritize Buying a House

Not everyone needs to pay off their student loans before buying a house. For some, buying sooner rather than later can make more sense. 

1. Only Consider Buying If You Plan to Stay for 3 or More Years

If you believe that you will be in the same location for at least three years, buying a home may be a good decision. You do not want to create a situation where you purchase a home and then decide you don’t like your job and want to move across the country. 

Remember, you take an initial loss when you buy a home and take another loss when you go to sell. You could lose money on buying a home if you move out before building enough equity to cover both rounds of closing costs. 

2. You Need More Flexible Space For Changing Needs

Life’s changes often push us to seek out more living space. Growing families might need a cozy nursery for a new baby to give the little one a place. A bigger home opens possibilities and lets families adapt as they welcome new members.

If you’re an animal lover, a house with a yard can also benefit you. You can bring home your furry friend without worrying about landlord restrictions. The dog or cat has room to play, which makes for happier pets and owners.

In addition, remote work has become quite common,  and having a dedicated home office can be very beneficial—you can stay focused and keep work separate from your personal life (of course, given that you work remotely).

Again, you might even consider house-hacking a spare room for extra cash.

3. You Have an Emergency Fund on Top of a Down Payment

Everyone needs an emergency fund, and property owners need more than most. 

Buying could be a great investment if you have enough cash “saved for a rainy day” for unexpected costs, such as repairs and damages that happen when owning a home. 

4. You Make All Monthly Payments on Time & Can Afford the Mortgage

Do you make every single payment on time every single month? 

When deciding whether to pay off student loans or buy a house, assess if you can afford the monthly mortgage payments. If not, you should consider renting or choose a house hacking tactic that works for you and your home. Investing without fully developed financial discipline and habits will only lead you to greater debt. Defaulting on your payments ruins your credit score and leads to foreclosure and possibly deficiency judgments. 

5. You Have Affordable Student Loan Rates

Getting a house first might be smart if you snagged those low-interest student loans. That’s right; Federal student loans once offered rates as low as 2.75% from 2020 to 2021—substantially lower than credit cards and auto loans by a long shot.

The tax deduction can also reduce your taxable income by up to $2,500 of paid interest annually. Student loan repayment plans often come with more wiggle room than other debts, so graduates have a better chance of keeping their finances in check.

And hey, handling an $8,000 student loan balance usually feels more manageable than the same amount on a credit card, thanks to friendlier interest rates and stretched-out repayment options.

6. You Plan to House Hack

If you can score free housing by house hacking, then buying a home supercharges your savings rate. You can then pile the money you would have spent on housing to pay off your student loans quickly. 

Deciding Whether to Pay Off Student Loans or Buy a House Should Be Your First Priority

The truth is that there are no absolute right or wrong decisions about this matter, as it’s very situational.

The best thing to do is write out a list of reasons why you should buy a house or pay off student loans first. You’ll find your answer if you identify with several of the reasons above that specify why one should focus on paying off debt instead of buying a home.

Although buying a house can be a great investment, it could also put you into a financial crisis. Know yourself well enough to know if now is the right time—or if you’re better off paying off debts before buying a house.♦

Do you plan to pay off student loans or buy a house first? Why?

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