You’re not alone. Nearly two-thirds (65%) of today’s college students graduate with student loan debt. And as they enter the workforce, get married, and have children, sooner or later they ask the same question: Should I pay off student loans or buy a house?
Some financial gurus blindly say you should always pay off debt before buying a house. But 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, keep the following in mind when deciding whether to pay off debt or buy a house.
What Is Your Return on the House?
Purchasing a home represents the largest financial decision most people ever make. When considering if you should 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 to own a home. When calculating your ROI, also consider maintenance and repair costs that inevitably are associated with owning a home. Roofs need fixing, toilets break. Unfortunately, many things break and need repairs, which can be extremely expensive. If you find a home that you can comfortably afford but there are several repairs that need to be completed, is it still a good investment?
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, it costs more to own than it does to rent a comparable home.
Bear in mind that you take 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 same.
House Hacking 101: Free Housing
Surprisingly enough, there are several ways you can score free or reduced housing. 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).
Do it right, and your neighboring tenants pay enough rent to cover the entire monthly mortgage payment. Check out how one first-time homebuyer house hacked with a duplex for free housing.
If you think that this could be a good option for you, take a look at 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 may 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 has rented out storage space in her garage before. She never encountered the renters, who had their own access to the garage.
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 also rent out parking spaces if you have room, whether to cars, boats, or RVs.
Speaking of RVs, if you have one you could spend a few nights there when you rent out your entire home on Airbnb periodically. Even a few nights a month could cover most of your mortgage!
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, it damages your credit, and 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 start planning to buy your first home.
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.
Reasons to Prioritize Paying Off Student Debt
Everyone’s personal finances are unique. For some, it makes more sense to pay off student loan debt before buying a home. For others, it makes more sense to buy a home before tackling their student loan debt with the debt snowball method or a similar technique. 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 gives you the option to change courses in your career, travel, or move to a new city. You can up and leave whenever you want.
Owning a house does not offer you that luxury. If you are still in a place in life where you aren’t sure where you want to settle for at least three to five years, buying a house doesn’t make financial sense. While you can indeed sell your home if need be, 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 is going into 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 to not 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 Repairs & Maintenance
Buying a house is never just the cost of the house or the monthly mortgage payments. You need to consider if you have enough cash saved to put a down payment on the house.
5. You Don’t Have an Emergency Fund or Savings for Irregular Expenses
Home ownership 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, it can make more sense to buy sooner rather than later.
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 Have an Emergency Fund on Top of a Down Payment
Everyone needs an emergency fund, and property owners need more than most.
If you have enough cash “saved for a rainy day” for unexpected costs, such as repairs and damages that happen when owning a home, buying could be a great investment.
3. You Make All Monthly Payments on Time & Can Afford the Mortgage
Do you make every single payment on time, every single month?
If you cannot afford to pay the monthly mortgage of a home, you should strongly consider renting or choose a house hacking tactic that works for you and your home. Going into an investment 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.
4. 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 all of the money you would have spent on housing toward paying off your student loans fast.
Bottom Line: Should I Pay Off Debt Before Buying A House?
There is no right or wrong answer to this question.
Write out a list of reasons why you should buy a house or should pay off student loans. If you find yourself identifying with several reasons above that specify why one should focus on paying off debt instead of buying a home, you have found your answer.
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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About the Author
Emma Dudley is a data marketer by day and financial writer by night, early on her journey to financial independence. She lives in Baltimore but loves international travel, and enjoys the challenge of cutting-edge fashion on a cut-down budget.