What’s the Interest Rate on Your Student Loans?
If you’ve landed a steady job and have a good handle on your day-to-day expenses, you might be considering taking the leap into homeownership. But if you’re still paying off your student loans, does it make sense to buy a house before you’ve paid off your debt?
Getting into a home can be a good way to build savings and to pay yourself rather than paying someone else for the cost of your housing, says Matt Ribe, senior director of legislative affairs and corporate secretary for the National Foundation for Credit Counseling. [But] given the interest rates that are typically associated with student loans, it’s not unreasonable to want to prioritize paying those when you’re just starting out.
The bottom line? Limit your debt to what you can afford to pay. Here are some questions to ask yourself before making this important decision:
Typically, subsidized government loans are in the 6.5 7% range, says Ribe. Private loans can be even higher. Even with refinanced loans, you’d be extremely lucky to get less than 5%. The higher your interest rate, the greater your incentive to pay off your loans before you buy a home.
Are You Making Progress on Paying Down Your Loans?
It’s possible with some of the income-driven student loan repayment plans to achieve a very low monthly payment, Ribe says. But if that payment is not covering the amount of interest that’s accruing every month, then you’re not making progress on repaying your student loan, which means you may have longer-term affordability issues. Don’t conflate your [lower] monthly student loan payment with room in your budget without doing a more thorough analysis.
What’s Your Debt-to-Income Ratio?
To qualify for a mortgage, your debt-to-income ratio (DTI) should be less than 43%, but many experts recommend it be no higher than 36%. The lower your DTI, the lower the stress of monthly payments. (more…)
