Change of Plans – From Student Loan Payoff to Buying a House

Buying a House

No, This Isn’t The House

We recently have felt like we had come down with a bad case of tunnel vision in regards to paying down my fiancee’s student loans. When we realized the fact that we had developed tunnel vision we evaluated our priorities and our future goals and decided that we needed to make an adjustment to our plans.

Change of Plans

We’re buying a house! There I said it. I know this decision won’t be very popular with those who advocated eradicating all debt as soon as humanly possible, but we live our life according to our personal priorities and our priorities have changed.

We aren’t buying those beautiful beach front condos that we considered just a month or two ago. The views were awesome but they just weren’t that practical. Instead we’re buying a house in town which is closer to both of our jobs and other places that we frequent.

Why We Decided to Buy a House

We always knew that we wouldn’t live in our townhouse that we bought on a whim forever. We originally had thought we’d live here for five to ten years but after living here for a year and a half we realized that we had two options. We could either renovate and update the townhouse a bit or move on to our next house.

The original plan was to renovate the townhouse after we paid off my fiancee’s student loans. If we completed our original goal of paying her student loans off by the end of 2013 that would mean we’d renovate the townhouse sometime in 2014. We would want to completely renovate the kitchen and both bathrooms.

As I’m sure you know, kitchens and bathrooms are some of the most expensive home renovations you can take on. They generally pay back decently, but it is unlikely you’ll get the full cost of the renovations back when you sell. The thing is, we don’t plan on selling the townhouse anytime soon, if ever.

We’d be able to enjoy the renovations for a few years but we knew we would move into town eventually. When that day came we planned on renting out the townhouse. I’m sure the renovations would make our townhouse highly desirable because none of the rental properties around it would have similar upgrades.

The problem with the renovations is that when we rent the townhouse we’d have to price our rental property much higher than the market for the surrounding area in order to recoup our remodeling costs. It isn’t likely we’d be able to pull that off and it was the main factor that drove us to buy our next house now rather than a few years down the road.

But What About the Student Loan Pay Off?!

The student loan pay off plan was the hardest part of our decision. We really wanted the student loans to be gone and we were on track to pay the off by the end of 2013 according to our February Debt Pay Off Update. However, in order to buy the house in town we’d need to (well… want to) put 20% down.

The down payment on the house would completely eat up my stash of cash that we had planned on using to pay down the student loans after we get married. So what did we do? We analyzed the difference between paying the loans off by the end of 2013 and the new likely pay off date, the end of 2015/early 2016.

The results were a bit surprising. While we delayed the payoff date by two years the total interest paid on the student loans only increased $3,000! Now I’m not saying $3,000 isn’t a lot of money, because it is… What I am saying is that in the big scheme of buying a house, paying an extra $3,000 to pay off student loans 2 years later could be well worth it. How do I figure?

Why Buying a House Now Makes Financial Sense to Us

There are two key costs in buying a house. The price of the house and the interest rate on the mortgage. I’m not as worried about the first cost as I am the second cost.

The media has been hyping the recovering housing market lately so it seems like prices are going to be on the rise sometime in the next couple years. I don’t expect any rapid price increase, but it only takes an increase of $3,000 in the price of a house to make our decision of delaying paying off the student loans to make financial sense.

Interest rates are where the true savings come in. If we end up with a $100,000 mortgage and rates rise just 0.25% our total mortgage cost will go up over $5,000 over the course of the loan. If we end up with a $150,000 mortgage and rates rise just 0.125% our total mortgage cost will go up almost $4,000 over the course of the loan.

We looked at the numbers and took emotion out of the equation. Overall, it just made more sense for us to buy a house now even though we’d love for her student loans to be gone. We’ll also be happier with the extra space we’ll have in the new home and we’ll save a ton of time and money in commuting and traveling costs.

What do you think of our decision to go ahead and buy a house now and delay the student loan pay off debt? Is your decision influenced by the fact that you hate debt, or did we miss something from analyzing the numbers of the situation?

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. Congratulations! I have been seriously considering investing in property in the US. With house prices and interest rates so low, it looks so cheap. Particularly when you compare it to the massively inflated prices in Australia.

    • Would you visit your investment or would it be purely an investment, much like you would treat a mutual fund? Investing in real estate in another country seems risky to me because you’re so far away and can’t keep tabs on it as easily.

  2. I think it’s smart that you guys are evaluating your finances and pivoting to make the best decision for you. Sometimes we can get so caught up in the fact that we need to reach a certain financial goal, that we don’t realize our needs, desires, wants, etc., are changing. I know you guys will stay dedicated to paying off the student loan in the future, and it is a really good time to take advantage of a low interest rate on mortgages.

  3. I’m surprised that you’ evaluated the remodels as getting less money than what you put into them. Is that because it’s a townhouse? In the homes I’ve had to do a kitchen remodel, we’ve come out WAY ahead.

    • I think we might recoup if we sold, but we wouldn’t if we rented. We only bought the townhome for 79k and it isn’t in an area with nicer homes. Mostly duplexes surround us so we would become the one of the nicer homes in the not so nice neighborhood which doesn’t necessarily always pay off.

  4. You evaluated your finances and that’s not a bad decision to make. You adapted and I think that’s a wise move. Congratulations.

  5. “What I am saying is that in the big scheme of buying a house, paying an extra $3,000 to pay off student loans 2 years later could be well worth it.” That’s a great point Lance! Sure, $3k is $3k, but in the long range scheme of things it really is not that much at all. Added to that it’s not like you’ve given up on paying of the student loans either, so I say congrats!

  6. You made the decision that was best for you and your money. No one could tell you which one was better, but you. I would have finished off the loans, but I hate debt. This would delay you in the long run to purchasing another house because you would need to save up the down payment again.

    • We ran the numbers and if we paid the debt off first we’d be looking at buying in early 2015 at the earliest. We could have done it but we aren’t complete debt haters so we can live with the loans a little bit longer.

  7. Buying a house makes sense if it fits your criteria. Do you have the 20% down payment? Is the payment equal to one week’s wages? Is the payment and real estate taxes less than a third of your income? Good luck.

  8. Congratulations on your decision! I think it makes complete sense. I’m NOT a big advocate of eliminating every last bit of debt before you make a big purchase. Sometimes life can’t wait. And as you can see from playing with the numbers, it will work out to your benefit over the long haul.

  9. Human beings can rationalize anything to get the desired outcome they want. I’m not saying you are making a foolish or bad decision, but I guess I don’t understand why you are so inclined to leverage yourself futher. Is the nieghborhood that condo is in so bad that you just can’t live there? Are you planning on having 3 kids right away and the space is too small?

    I guess I just don’t see the point of enjoy a little wedded bliss in a decent sized place and paying down some high rate student loans (which can’t be discharged in court without a lot of pain). I’m not even a person who is adverse to smart leverage. I just think you might have house fever and you think the only prescription is a new house.

    I just come from the angle where I have seen friends rush into buying a home and it prevented them from enjoying their early years of marriage.

    • We currently live in a townhouse that we never expected to live in for the rest of our lives. It is a 2 bedroom 1 and 1/2 bath 1150 sq ft 2 floor townhouse that works for now but we aren’t in love with it. We could live here for a couple more years but we know we don’t want to be here forever.

      The neighborhood isn’t the best but it isn’t horrible either. We could live here until we had kids at which time it would probably be time to move. We could raise them here but we wouldn’t feel comfortable letting them go out front unsupervised.

      The key to our decision is we had always planned on renting this place out, it was just a matter of when. The other key is that this new house is still well below any type of maximum payment we could afford. It won’t strain our budget at all even if we have to make both mortgage payments for a couple months due to vacancies.

      I can definitely see where your concern is coming from because I was worried about the same things when we first started looking, but what good is money if you never enjoy any of it? The new house will alleviate many of the frustrations we have on a daily basis with our current house and that alone will be worth the extra mortgage payment every month 🙂 (That and the gas savings and being closer to work, family, etc).

  10. I don’t think it’s a bad decision at all. If you have the down payment and can afford the payments, it’s a great time to buy real estate. As long as you don’t get carried away by all the stuff that often goes along with a new house before paying off the loans, you’ll do fine. That was our big problem, not the house, but all the stuff we thought we needed to go with it, and we still have student loans almost ten years later. I know you won’t make that mistake.

    • I definitely can see how you could fall into that trap easily. We’ll have to be careful but I think after just one or two tweaks (such as adding a fence for our dog) we should be OK and be able to tackle the loans full speed ahead again 🙂

  11. I made a handful of upgrades to my townhouse and then ended up renting it out. I priced the rent higher then what others were renting for in the neighborhood and found a tenant fairly quickly. I realized that people were willing to pay more for a nicer rental and also, that higher price gave off the perception that the house was better than the others. I’m sure the price deterred potential renters from not even contacting me, but don’t be too quick to assume that people won’t pay more than market price for a nice rental.

    • When the average rent is 700-800 a month I don’t know if a $15,000 kitchen reno could be justified… even if it raises rent $200 which would be a stretch it would take over 6 years to pay back.

  12. Congratulations on deciding to buy a home. Some people find it “flaky” not to offer the same advice to everyone but I highly disagree. I believe everyone’s situation is different and blanket set in stone policies benefit nobody. If I was in your situation I would have paid off the student loans first because I place a high value on decreasing my economic risk. The less I owe someone else the better, but then again that’s me. It sounds like you and your fiancée talked and planned this out thoroughly and have a great understanding of what you want to do. I hope it all works out!

  13. Congrats on your new house, Lance. Looks like you are doing what you feel is right for you. Rates are great right now and as long as paying off that debt is still a priority, you’re on the right track.

    • Paying the loans off will still be a priority, but mortgages are another story. I’m paying those back over the full length of the loan as of right now.

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