Is home equity worth taking out a mortgage when I have k student loans to pay?
Note: home equity isn't the only reason I'm thinking about buying. I'd like to have control over my own living environment, more space, not have to worry about annoying the apartment unit upstairs if I'm playing music, and real estate in my city is in a very positive trend right now. Home equity is just one factor.
Background: I graduated university roughly 1.5 years ago and have been teaching English in France since. I don't make a lot of money, about ,000/year gross. I have about ,000 in student loans at the moment. I am currently on an income-based repayment plan for my loans, resulting in a [CO]/month payment (so essentially, they're deferred). I'm currently accruing about ,200 per year in interest based on my loan statements from this year. I have great credit, about a 750 score.
Edit: my primary job is freelance programming, which I am doing in tandem with the teaching position until May 2019, at which point I will go back to full-time (freelance) programming. I’m not worried about paying back my loans yet, as I’m taking this time in France as a “vacation” of sorts, using the teaching position as an excuse to have a long-term visa in Europe.
I'm going to return to the U.S. in May and need a place to live. For the time being I'm going to rent, but let's assume that a loan servicer would give me a home loan for a principal balance of 0,000. Let's also assume my income jumps to ,000/year gross and that I have no problem managing my money. I'm trying to figure out whether it is wiser to rent and pay off my student loans before buying, or to buy and pay off the mortgage and student loans at the same time.
Using a rough calculator, I'd be paying about 0/month toward the principal of the mortgage, which is more than the interest I'm accruing with my student loans. If I understand the basics of renting vs buying, by renting I may "save money" by not dealing with property tax, maintenance issues, etc., but I'm not accruing any home equity. By buying, even if I'm paying a lot in interest, I would still accrue roughly 0/month in home equity, which would increase over time.
So if my math is right (perhaps it's dead wrong), 0/month in home equity is greater than the 0/month interest accrued from my student loans, and that difference of 0 would increase over time as I pay off more of each loan (and thus have lower interest payments on each). Does it make financial sense to rent and pay off the student loan (and then buy), or buy and pay off the student loan?
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Does it make financial sense to rent and pay off the student loan (and then buy), or buy and pay off the student loan?
As you would suspect the answer to your question is: "Rent".
While purchasing home is a worthy goal and leads to much financial stability, there is a good chance that what you are suggesting would lead to some negative outcomes.
As you said, when you rent, things like property taxes and maintenance issues are not a concern. Those maintenance issues can be a big deal. If you do buy, in your situation, how do you pay for a new HVAC system?
There is also a bigger issue of obtaining financing. You have not shown the best history in earning and an equal consideration to credit score is an income sufficient to pay back a loan. While I feel that banks are overly lenient in that regard, will they loan someone 200K that already has 65K in debt that has a history of making 30K? Probably not.
Another issue that might "step on your toes" a bit would be the decision you made to teach, at a low salary, when you had such a high student loan balance. I apologize if this hurts your feelings a bit but it seems like that decision was foolish. Sure it would be great to teach in France but not for someone who cannot pay their bills. In your case it would have been wiser to teach in the US, and work an extra job so you can have your student loans paid off in about 18 months. Then go teach in France!
Along those lines, although not required, did you make interest payments on the student loans to keep the balance from growing? Not doing that was doubly foolish.
Doing what you are suggesting is fraught with risks that you do not seem to be properly accounting for. It would be my advice to come back to the US, work like crazy, pay off these student loans (again, the goal should be about 18 months), save up a small down payment and then buy a home or even reevaluate. Teaching somewhere exotic might be a whole lot more fun when not burdened with this massive debt.
I would first want to understand the real choice. Put the loan aside. As much as it would be great to pay it off (although if it's really 1.8%, I wouldn't), I'd look at the buy/rent decision, stand alone.
What is the market like where you are going? Is a nice apartment 0, or is it 00? Part of the issue with rent/buy is that people aren't buying (typically) a house that is equal to what they would rent. The house often has far more than what you really need.
You mention being a recent graduate. If you bought the house, will it be a size that would allow you to rent the second or even third bedroom? This turns the numbers upside down, and might offer you the chance to have 2 roommates pay the entire cost of the monthly mortgage.
I could go on, but my answer is simple - "We don't have all the details. Details that can push the advice one way or the other."
Edit - Given the cost of rents, and the willingness of OP to rent out to roommates, I'd run the numbers based on that scenario. 5 years ago, I wrote Student Loans and Your First Mortgage in which I show how the monthly payment of the loan fits into the gap between 28% and 36%, the typical percents for housing loan vs total debt servicing. This is a great opportunity for a recent grad to use his ability to rent the space potentially covering the entire monthly mortgage payment.
Using a rough calculator, I'd be paying about 0/month toward the principal of the mortgage, which is more than the interest I'm accruing with my student loans.
To start, if you have the ,000 to put down on the property you calculated in your link, you might want to crack off a chunk of that to pay down your existing student loan. Really, that should be your question. "I have ,000 should I pay 66% of my student loan or buy a house?" Your calculator example calculates a 0,000 loan not a 0,000 loan as your question indicates. If you don't put the 20% down, you'll be required by the lender to carry something called Private Mortgage Insurance which adds about another full percent to the cost.
If you double down and buy a house, you're basically walking a tight rope of two major obligations over 0 a month. You're ratcheting your annual interest obligation from ,200 to ,700 so that under the most favorable scenario you have ,200 of equity in a property (,400 of equity less your existing ,200 of student loan interest expense). And really, using a 0,000 zero down loan, you'd be closer to ,000 in annual interest and PMI charges.
If you rent, it's unlikely your rent costs would be equal to your purchase costs. In a rent scenario you will likely have more cash each month to more aggressively pay your existing debt load and ultimately spend less than the ,200 each year in interest. Don't over burden yourself with debt particularly because your mortgage lender isn't going to defer anything if you want to take a "vacation" again.
Don't obligate yourself to debt servicing. With these numbers (that are likely wrong considering the 0,000 loan in your math) you're guaranteeing 17.5% of your gross income to interest.
There are very good posts here about debt in general, I'd advise you read some of them, pay particular attention to questions about "should I pay my student loan or invest in the stock market." Your question isn't materially different than that, just swap stock market for house.
I agree with Pete, but you do have one calculation wrong.
You do not compare the loan interest to the equity you're building - building equity is just converting one asset (cash) to another ("equity"). You would be better off putting that "equity" toward the loan (since it will reduce interest going forward).
You need to compare the rent you'd pay to the interest and other home expenses that you won't have when you rent (property taxes, PMI, maintenance, etc.). That difference is how much you could be putting towards the loan instead of wasting it on interest.
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