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Should I pay down my student
loans or buy a house?
Dear Money Matters,
I am finishing medical school in May
with about $80,000 in subsidized and unsubsidized loans. I am single.
My salary for the next three years will be about 40,000 a year.
I would like to know if it is better to pay off the loans first,
then invest in buying a house later. I have learned that some people
in my field would defer the loans and buy a house during their residency.
Would you recommend that? Are there any other options?
Thanks.
Joel Student
Dear Joel,
Believe it or not, you may be getting off lightly with regard
to the size of your student loan. I've heard of med students, law
students and others hitting the professional bricks carrying loan
debt in excess of $100,000.
Though you're not as deep in debt as some, I would
recommend holding off on the house. There are several compelling
reasons.
The first has nothing to do with your school loan
debt -- rather, it hits on the nature of your situation. Since you're
single and just landing your first job, what are the chances of
staying where you are for any extended period?
The rule of thumb is that it's important to stay in
a house for anywhere from three to five years at a minimum so you
can recoup the expenses of buying the house -- closing costs, loan
expenses and other costs that routinely run as high as several thousand
dollars. Anything short of that, and you're laying out money you're
never going to see back.
The other central reason against buying is the value
of home you're going to be able to afford.
Here, I used Bankrate.com's "How
much house can you afford?" calculator.
Starting with your $40,000 gross annual salary, the calculator showed
that you'd be able to swing a $124,000 home with $933 in monthly
mortgage payments. Not bad on the surface, but that assumes absolutely
nothing else in the way of expenses. From there, I tossed $400 a
month in property taxes. That brought your affordable home down
to $104,000. From there, say you pay $200 a month on a credit card.
Down your target home goes to $77,000. Toss in a car payment of
another $200 a month, and your dream home shrinks to nap size: $51,000
or so.
I think you get the idea. It may seem like all
the money in the world, but $40,000 doesn't command a lot when it
comes to swinging a decent home. And, remember, I was just tossing
in numbers at random -- your ongoing monthly debt load may be even
greater than that, not to mention that I didn't even include a down
payment. So, on the surface, I'd suggest you get your career going,
start paring down your debt load and, if you can, start setting
money aside for a house down payment. That way, when you're better
situated to buy a home, you'll be in a better position to afford
one you'll genuinely enjoy.
-- Posted: March 14, 2002
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