what's better, no debt or cash in hand?

Discussion in 'Real Estate' started by EvilBetty, Aug 17, 2015.

  1. EvilBetty

    EvilBetty Member

    Sep 7, 2012
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    within the next year i'd like to buy a house (first time). i have nearly the exact same amount in my savings as i do in student debt (10k). is it better to pay off the debt and have a small down payment? or is it more beneficial to maintain the student debt and try and acquire more money for a larger down payment?

    i have very good credit. the only debt i have is student loan debt.

    i know nothing about this process.
     
  2. OPButtrey

    OPButtrey Active Member

    Nov 21, 2010
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    Will you have anything for a down payment on the house if you pay off your student loan debt? Most lenders require a minimum of 5% down for a house.
     
  3. Clonehomer

    Clonehomer Well-Known Member

    Apr 11, 2006
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    Don't worry about student loan debt, it doesn't matter nearly as much as stuff like credit cards. Cash on hand is much better in that situation.
     
  4. keepngoal

    keepngoal Jobless Jerk
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    Jun 20, 2006
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    How soon could you replenish the $10k ... either for student load or the down payment?
     
  5. jl112481

    jl112481 Member

    Jul 25, 2007
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    My wife and I have had this conversation before. There are a few factors that you need to consider. What's the interest rate that you are paying on your student loans? What's the interest rate that you would be paying on your mortgage (approx.)? Will you need to put down 20% to avoid PMI? Our mortgage provider charges PMI until we have reached 20% of the principal paid off. I'd have to do the math, but it was more beneficial for us to pay off the PMI than it was for us to pay down the student loans.

    Also, (this is where my wife and I disagree) I would rather throw extra money in an investment that will get me a 6-8% return, than pay down a debt that is charging me a 4% interest rate. That said, there are plenty of people that will tell you the opposite.
     
  6. Rather

    Rather Member

    Jul 21, 2014
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    I can't speak to every situation, but I generally agree with you. With today's interest rates it makes more sense in most situations to invest your extra money rather than pay down low interest debt. Not only will you be better off in the long run, but you will maintain better liquidity in the mean time in case you needed it to, for example, start a business, buy an investment property, upgrade homes without needing someone to close on your current one, etc.
     
  7. brianhos

    brianhos Moderator
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    Jun 1, 2006
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    Keep the cash for a downpayment. PMI is an insane thing to pay, it is a total scam.
     
  8. SCNCY

    SCNCY Well-Known Member

    Sep 11, 2009
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    This is the correct answer. The thing you need to ask yourself is what is the biggest bang for your buck? If you pay your student loan debts down to save 4% in interest as opposed to using that money and getting a 5% return in an investment is not the biggest bang for your buck.

    Depending what your student loans are. If you believe you can get a higher rate of return investing that money in another asset than what your current student load interest rate is, then you should invest. If you cannot get a higher rate of return on another investment pay down the debt.
     
  9. ISUAlum2002

    ISUAlum2002 Well-Known Member

    Apr 11, 2006
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    This. You have to figure out how much it will cost you to use the cash in one way or another. However, for PMI, the OP needs to remember that they'd have to put 20% down to avoid that nonsense joke of a wast of money. That would mean a house worth $50,000 or less, which is doable in these parts I suppose.
     
  10. Rhoadhoused

    Rhoadhoused Well-Known Member

    Apr 27, 2010
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    Generally yes, but you can't make a blanket statement.


    The correct answer is what is the interest of the loans, how much can you expect to make investing, and is there anything you absolutely need cash to purchase like a down payment on a house.

    So if you are saving for a down payment, you're probably better off keeping the cash. 10k in student loans is not much at all.

    But if your interest rate is like 6% or higher it might be a good idea to prioritize that depending on how badly you want the house and how soon.
     
  11. CarlHungus

    CarlHungus Well-Known Member

    Feb 19, 2012
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    I'm a big fan of getting out of debt, however it is important to have a nice rainy day fund if you want to be a homeowner. If you can put at least 5% down, that is the best way to go. You can get an FHA loan with 3% down and some conventional programs allow this as well, but FHA loans are a ripoff because you have to pay the mortgage insurance for the whole loan. Also you need to pay for closing costs on top of your down payment, so keep that in mind.

    Just out of curiosity, where are you thinking of getting a home at? There is a loan program called GRH that allows no money down, but there are income restrictions and they are only available in more rural areas.
     
  12. twojman

    twojman Well-Known Member

    Jun 1, 2006
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    I have heard all the stories about good debt bad debt. The truth is there is not such thing as good debt. You are slave to the lender. When you buy a house, especially one at the lower end, something will go wrong. Do you have money to cover it? Can you pay taxes and insurance?

    With the easy money policy of the last few years, everyone feels like an investment expert. There is risk invovled though. THe market may end up down 20% this year. Your $10k is now $8 and you still have $10k student loan debt and want to buy a house.

    How about getting rid of house fever, pay off your student loan and pile up cash for a year? As much as you can. Don't get a car loan or credit card. I really wish I would have done all that when I was younger. I paid on the stupid student loan for 13 years and just paid it off about a year ago. I was also dumb and thought car payments were just normal. Had I done things different several years ago I would be way ahead of where I am now. We finally have all of our debt except the mortgage paid off. I feel much more freedom because of this.
     
  13. EvilBetty

    EvilBetty Member

    Sep 7, 2012
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    I'm looking in Nashville. I'd love to wait and pay off student loans then save cash for a year but I fear I would lose in the long run by waiting too long because this place is blowing up. Houses seam to be reproducing like mad and people are moving here in droves. I fear in just a few years, any housing in decent locations will be unattainable.

    sounds like the best option is to make my minimum payments on my low interest student loans and try to save up 20% of my max budget for a down payment to avoid having to pay mortgage ins.

    i guess I need to drink less then
     
  14. jj-cyclones

    jj-cyclones Well-Known Member

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    Full disclaimer, I'm not an expert on PMI insurance and it probably is a 'scam' but I came out ahead when I bought my first home.

    I was fresh out of college paying $800 or so in rent a month. Bought a home with just 10 percent down (so I had to have the PMI insurance) and my mortgage was $750 a month. We ended up selling not quite two years later (moved for a job) and basically it was a net wash AFTER commission was paid. So in my cases it was better to pay the PMI insurance and buy a house with 10 percent down than it would have been to throw $800 down the drain in rent and never see that money again.

    Sure it would be better to save up 20 percent and buy a house then if your are rent free (living with parents or something) but that is easier said than done fresh out of college.
     
  15. Gossamer

    Gossamer Active Member

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    There are a lot of opinions stated above...and most are true, simply because it's all subjective. In your case, I'd keep your money because you may not qualify for the type of loan you need without it. Contrary to what some people think, having some debt can be good when buying a home...you must have "tradelines" on your credit report to illustrate the ability to manage your money. Having debt can be a good thing, if done correctly.

    That being said, cash is king in any major transaction. If you don't have it, you'll have a hard time doing anything. You'll need so show "reserves" and those amounts vary depending on the loan your banker helps you find. Very few programs, if any, exist for someone with no cash and no debt.

    Your financial situation is similar to your health in that it's specific to you. Keep your money and talk with a professional. It's free to talk with a banker to discuss these things. Get a couple of opinions. I guarantee, few will tell you to spend your money paying off your debt until they've reviewed your entire financial position.

    All that being said, until you're signed on the mortgage and note, don't buy anything major. No new car, no big screen tv, no boat...as tempting as it may be. :)
     
  16. twojman

    twojman Well-Known Member

    Jun 1, 2006
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    It is simply not true that you need debt to get a mortgage. Lenders can do a manual underwrite without a credit score whatsoever. With you being in Nashville, Dave Ramsey advertises a place called Churchill Mortgage, they do manual underwrites.

    Sounds like you have house fever and are going to buy no matter what. I hope that nothing goes wrong with your house and that you can get out of debt as soon as possible. Just looking back over the years I could have done so many different things if I did not have debt, including getting a better house to start with.
     
  17. Gossamer

    Gossamer Active Member

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    Not sure where anyone said you HAD to have debt but that it can help. And, not having debt and not having credit are two very different things.

    Do you know what a manual underwrite means? Do you understand that it applies to certain programs and parameters and often times, specific lenders who sell to the secondary market? Please don't spout about things you clearly aren't educated in. Reading a few lines from Dave Ramsey doesn't give you his qualifications.

    I've seen thousands of loans...and without fail, people with a more established credit history obtain mortgages more easily than those who do not. Likewise, those with cash succeed in buying a home more easily than those who do not. And, having some equity is a good thing to begin with.

    I still stand by my original post...go talk to someone who will take the time to get to know more about your situation. If it happens to be Churchill Mortgage, then so be it.
     
  18. IowaRealEstate

    Oct 15, 2012
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    No debt is better. That is the firm foundation on which you can build a financial empire. Other than a mortgage, most other debt sucks. However, overall, if you only have $10,000 to your name, my honest opinion based on 10 years of selling homes is to wait to buy until you have more. You will eat up a good portion of that on a down payment, furnishings, etc. Then if you have to buy an AC unit, new roof, etc. down the road you will be screwed and will have to acquire more debt to handle that.
    Best advice I can give you. Eliminate all debt from your life, work hard to build a good pile of money and then purchase a home when it won't cause you stress.
     

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