A 45-second read by Nicholas Scheibner: Many young people face the dilemma of looking to purchase a home while still having student loan obligations. For example, you might question, is it better to pay off the student loan in its entirety and then work towards saving for a home purchase? Or continue paying off the student loan while saving for the home purchase?
Of course, the answer depends on your specific circumstance, but here are some ideas to consider:
The best way to handle the situation may be a balance of increased student loan payments and continuing to save for a home at a lower rate. You do not want to blow through your liquid cash and savings (by paying off all the student loans now), in case there is an emergency that comes up where you would need access to those savings.
A mortgage company’s main concern when deciding how much to loan a person is “does this borrower have the track record and ability to pay off this loan?” The mortgage company will look at different ratios to determine your ability to pay off a loan, including the very important one – “Debt-to-Income” Ratio. They want to know your monthly debt payments, versus how much you are earning in monthly net income.
The decision to pay off the student loan is also dependent on the rate of the loan. If the rate of the student loan is 5% or higher, it may make sense to work on paying it down faster.
There are many young people who do have a mortgage and carry a student loan, so do not feel alone in this situation, or that it can’t be done. Also, remember, there can be many sources of funding for a home purchase, whether it be cash savings, a mortgage, a family loan/gift or other loan options.
If you have any further questions, don’t hesitate to contact the Baron Financial Group Team.