If you are considering buying a home for the first time, you likely know that having debt from school can be a burden during the process. You might wonder if you are better off using the resources to pay off the loans faster or putting it into your home. You have a few options and strategies to identify and manage debt the right way for you and your goals.
The Best of Both
It is possible to pay off debt as you are saving for your down payment. It can certainly take a bit of effort, but it is possible with a few guidelines in place. You should start by listing out all the debts you currently have. That includes your student loans, of course, but also car payments, credit cards, and any other obligations. Then list out the interest rate and how much you need to pay each month. That way, you can pay off the things that have the highest interest rate.
Consider your assets and things you may no longer need. For example, if you have a life insurance policy, you may find you no longer require the coverage. In that case, you may want to think about selling it through a life settlement so you can use the funds for your financial goals. If you are thinking of going this route, you can review a guide with everything you need to know about the process.
Prioritizing the Down Payment
Another option is to continue making the minimum payments on your student loans while saving for a home. It’s sometimes less expensive to own a home than rent long-term. Rent costs can go up when putting off home ownership in order to pay your debt. You might wonder if student loan debt can stop you from getting a mortgage.
The good news is that it is not as bad as you might think, since this kind of debt usually has a longer repayment term and a lower interest rate. Your down payment can reduce the amount you pay on the mortgage, so it can be to your advantage to save for a home instead of putting that all into your loans. And depending on the situation, you could qualify for loan forgiveness or other programs that can help you get rid of them even sooner. Plus, you can often deduct the interest from your taxes.
Also read: Your Mortgage Application Guide: What is a Good Credit Score?
Prioritizing Student Loans
On the other hand, there are several reasons you might want to pay off your school debt first. Of course, one of the biggest reasons is that waiting to pay it off means you will end up paying quite a bit of interest. And when the interest rate is higher, you can save more by paying it off sooner. If you have a variable interest rate, it can go up even more quickly, causing you to spend even more. Once you get these loans paid off, the debt will no longer be on your credit report. Of course, it does not impact your score a great deal, but it can still have a factor. Purchasing a home without debt might make it easier to qualify for a mortgage at a desirable interest rate.