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Being in your 20s is probably one of the most exciting times of your life. This is when you finish school, get your first steady job, meet a few boyfriends / girlfriends and potentially meet the right person for you. This is also when you learn about the cold hard truth about paying off your debt and when you start thinking about home ownership at the same time. Some people prefer to pay off all their student loans first before thinking about a mortgage. I suggest an open-minded approach where you analyze your personal situation in-depth before deciding to take on a mortgage while having student loans; it may actually be to your advantage, having both at the same time. Permit me to explain.
Check Your Overall Financial Situation
If you’re young and finally earning an income, the very first step is to look at your overall financial situation. If you are drowning in debt, you probably want to get your head out of the water before contracting the biggest debt of your life (by securing a mortgage). However, if you can afford to continue your student loan payments while putting money aside, it may be a good thing to think about buying your first home.
On Interest Rates and Loan Amortization
If you still have important student debts, you should take a look at their interest rates and amortization. You want to know how much you pay in interest and for how long you will be making those payments. If your student loans have special low interest rates and are not too costly, you can still pay a small monthly payment and try to buy your house sooner than later.
But you may be wondering: why take the risk of buying now while you still have student debts?
A key point will be the interest rate charged on your student debt. If it is low, there’s a good chance that your future house will increase in price faster than you can put money aside. For example, if you are looking to buy a property at $200K today and decide to wait another 5 years to pay off your debt instead, the very same house could be worth $255K if its price has increased by 5% annually. So while you paid off $20K-$30K in debt, that house may end up appreciating an additional $55K more… making it even less out of reach. Of course, this assumes that real estate valuations do recover over time, and I look at this as a valid consideration.
Can You Pay Off Your Student Loans While Carrying A Mortgage?
As mentioned, it depends on your particular circumstances, but buying a house while you have some existing debt can have its advantages. You can certainly explore the strategy of paying off your student loan faster, by getting a mortgage. This can work, but you’d have to evaluate your situation carefully and weigh the risks involved.
As a prerequisite, if you can’t put money aside right now, then forget about buying a property. But if it’s something you can manage, then taking the additional financial load (risk) may be worth it, because buying a house early in your 20s can help you pay off your student debts faster. How? By using the equity built in your property.
Suppose you have 10 years to go with your student loans and you buy your property tomorrow. There’s a good chance that the equity that you will build in the next 5 years will be enough to pay off your student loan completely. But don’t be fooled, while your student loan may be dealt with, you will still owe this money within your mortgage. However, with a mortgage, know that you can consolidate your student debts with a lower rate of interest secured by your home and this is how you can pay down your debt faster 
.
A Debt Management Lesson From My Own Experience
I bought my first house at the age of 24 with minimal cash down. It’s now 5 years later and I was able to use the equity built in my property to consolidate my debts and pay them off. I now have just 1 debt (my mortgage) at a very low rate. Personal finance management and debt elimination has become much easier as I just concentrate on making the biggest payments on my only debt.
I bought my house for $255K back then. Today, my house is worth about $325K. Therefore, waiting 5 years to buy my property while paying down my debt would have been more expensive, as I had about $25K in debt 5 years ago.
So while, I can appreciate the stress related to student debt, I still think that buying a property at a young age is a very good financial move!
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{ 17 comments… read them below or add one }
You raise some good points, but I think readers should also consider that:
(1) The return on paying down student debt is guaranteed. There is no guarantee on the return from buying a house.
(2) In your example the house appreciated, but as many have discovered over the past few years that house prices can actually drop substantially. Since most houses are bought on margin, your entire investment could be wiped out and you could easily have negative equity.
(3) The appreciation in your example (255 to 325) is basically the same as the extra interest you’d pay over the same time frame. I.e., for a 6% mortgage rate on 250k, you have to pay about 75k in interest over 5 years. To figure out if you actually lost or gained money you would also need to factor in tax deduction benefits, maintenance costs, cost of alternative housing, and the lost opportunity cost of investing in other assets.
Just some other things to consider.
I like Mike’s article and I agree that potential buyers should not wait to pay off their student loans before getting into the real estate market. You can do both and many do. But I am bullish. As Stephen points out, home ownership is not the guaranteed sure thing or solid investment that it once was thought to be. The bottom line is that buying a home should not be entered into lightly. It is probably the single largest financial investment you may make in your life. Careful thought should be put into weighing all the factors, including the security of your job, and how home ownership and costs will fit into your budget. The demise of the housing market has been so significant that it has some advising people to rent and invest the money that would have been paid on a house. If I was in my 20′s again, I would listen to Mike’s recommendation, but only after consulting many opinions and doing my own independent research, because buying a home is not a slam dunk winner, and a blog post can only begin to point out the pros and cons.
I think it is okay to have both if you can manage it financially. While I understand the points the writer makes and his situation seems to have been positive, there is a lot to consider when buy a home. When owning a home there are a lot of intangibles that can come up – such as a new water heater, new roof, new air conditioner unit, etc. The list is endless. You need to be able to handle these expenses too. If you are stretched too thin you could rack up massive debt on credit cards or worse yet, miss payments, which will hurt your credit. You do not have to worry about any of this if you rent. Just something to consider.
And who says the property market is bad? Mike made 27% in the worst economic downturn in our lifetimes! Congrats!
Best,
Sam
Property is always a good investment, especially if you look at t from a long term perspective. Whilst prices are low and the going is good I would suggest investing as early as possible in your life. There is something to be said for having a paid-off property in your early 40′s (looking at a 20 year bond)
I totally understand what you’re saying but that’s also assuming that you secure a good job first, which many college students just coming out of school are seemingly struggling with. I’d really have to agree with BasicMoneyTips because honestly, many young adults just coming out of college probably aren’t looking to invest in a home but if they really can, then good for them!
I plan on purchasing my first home and I’m 24. I have some miscellaneous debt here and there but I plan to close sometime in May. keep your fingers crossed for me.
This is actually really helpful for me. I’ve been renting ever since I graduated and now that I’m married and kids are a definite possibility in the future it getting a house is high on my list of priorities. I’ll probably end up holding out for a couple more years so I can put a bit more down and lower the mortgage and have enough saved up in the event of an unexpected emergency.
Good luck to James who is going to buy his first home and is only 24. I bought my first home in my 20s too. I will say this. It really made things tight at first. It cost me an extra $6,000 a year in carrying costs versus my apartment and there were a lot of hidden costs related to maintenance of the house and yard. And of course utilities. Factor this all in. As others have written, don’t stretch yourself too thin financially.
I also like Financial Samurai’s point about the return on the investment that Mike made on his house. If only this was true all the time! Keep your expectations reasonable to low in this housing market is my recommendation
The idea of taking one debt to pay off another makes me nervous. I understand what you are trying to say, and how this may work out for some people, but it is still a good rule of thumb to pay your debts before incurring more.
Agreeing with ConsumerMiser on the all the added costs. It is a major lifestyle change from renting to a house. You highly dependent on your job and give up flexibility and freedom. Specifically you give up geographic flexibility, so in the event you lose the job you are so reliant on, it is very hard for you to take a job in another part of the country. If you are paying down debts you are on the road to freedom, if you incur more, you give some up. Real estate is still very speculative. Your house may go up 5% annually, it may not. However, you know how much interest you are paying on your student loans and how much you will save by paying it off early.
One thing the housing downturn should have taught us is that a home is not an “equity factory” — it is a place to live. Counting on increased equity (and a HELOC or equity loan to tap into it) to fund other debts is a speculative move, and had a huge downside. Better to accelerate the student loan payments and purchase the house when you can afford it.
Student loan, just like any other loan, can be a burden if it’s not being handled properly. I’m glad to hear that you’ve made an excellent decision to buy a house at such a young age. Hope that more people will be inspired and get rid of their debts and live their life without worrying about money.
great article. interesting perspective, too….& honestly nice to see! my husband & i have a LOT of student loan debt (thanks to my medical school education…) AND we are planning on buying a cheap, fixer-upper, we-can-stand-this house during my 3 years of residency. we’ll be making *just* enough to still save, make payments on the loans, & pay for the house maintenance/monthly payments. it IS a little nerve wracking….BUT the area we are moving to offers VERY affordable homes. in fact, we haven’t found a home to rent that is cheaper than the monthly mortgage payment on those we have considered buying. even the apartments’ monthly rent parallels the cost of a smaller home in the area we are moving to…withOUT the potential equity we’d get from home ownership. we’ve got a down-payment saved, too.
so thanks for this article…everyone has different situations, obviously, but the overall cost of a home versus renting WITH student loans is certainly something to consider. i guess we’d rather be OWNERS with the potential for a little bit of return on our investment instead of just renters with a guarenteed NOTHING.
My fiance and I bought a duplex this year while he is in grad school. We have student loans but right now I only have to pay $30/month and his are all deferred (and subsidized) and by having a renter and roommate we are paying less than we were renting (even with the extra costs).
Great Points. When I graduated from college I was deep in credit card debt and student loan debt. I had a part-time job when I was in college but the reality was that, a part-time job alone was not enough to pay for my schooling. As time progressed, my part-time job was necessary to make my cc payments. I am not 24 and am still paying off student loan debt but purchasing a home is at the bottom of my TO DO list. Primarily because of all the college debt. I took a much different turn however. Even though I had a lot of student debt, I decided to become an entrepreneur and started my own internet business. This is now what most people would do. But I was blessed enough to find an entrepreneurial venture that would allow me to make significant income to pay down my debt. Of course, it was not easy and I had to work very hard to ensure my business success. but the reality is that I rather work hard at my business and ensure my success rater than work hard a job that will allow me to pay minimum on debt. I am still paying but have made significant dents in my student loan debt and am on a plan to pay it off completely by the end of next year. What normally takes people 20 years to do I will do in 3. Starting an internet business is the way to go!
With the current job market and prospects available for graduates, I do not envy anyone in the situation described here.
Great Article! I have my own personal blog which helps generate some money for me whilst I pay off my Uni debt. Earning money online is the easiest way to make easy money if you know what your doing. Anyway, check out my site if you want! See whilewereyoung.com.