Nate and Danielle answer a listener question about how to decide if you should save your money or pay-off debt when you want to buy a house in the near future.
Show Notes
Listener email:
Married with one child and another one on the way. Current make a combined income around $79K before taxes, so we are looking at a monthly income around $4,000 or so. In about a year they will be making $144K or about $8,000 a month in income.
They have two debts, a 0% car with $9K left and student loans around $30K. They have $47K in savings (awesome!)
They currently are living with one of their parents and when they do move out, the parent will be moving in with them. The do this, their research tells them that they are looking at about a $330K house in their area. (Which is totally in line with their income so there are no worries there)
“Now here’s my question… do you guys think that it’s more important to pay off debt OR save as much as possible? Or if the answer is both, how do you do both at the same time? What should the balance be? I feel like having less bills when we have a home will allow us to make bigger mortgage payments but having a big down payment is beneficial, too.”
We like having little to no debt because it’s less to worry about and it allows you to afford more.
Let’s run some numbers.
- Income: $144K
- Down Payment: $35K (bc of $15-20K closing costs and leaving 15K in savings)
- Monthly Debt: $800 estimate
- Can afford a $468K home
- Estimated payment: $1600+$800= $2400
If you pay off your car
- Income: $144K
- Down Payment: $25K
- Monthly Debt: $600 estimate
- Can afford a $457K home
- Estimated payment: $1800+$600= $2400
If you pay off your student loan:
- Income: $144K
- Down Payment: $17K
- Monthly Debt: $200 estimate
- Can afford a $452K home
- Estimated payment: $1800+$200 = $2000
So no matter what, we aren’t moving the dial a lot here. The big thing comes with interest rates. No matter what, it looks like you are going to have PMI.
So if we were you, we would write a check and write off the student loan debt and keep saving $1,200 a month. This would allow your monthly debt to be the $400 less a month vs. having a higher down payment.