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Refinancing Student Loans to Buy Your First Home

So, you’re ready to buy your first home? Look at you all grown up and wanting to be smart with your money. The truth is, you were smart enough to invest in your future by working hard for your degree(s), and now you want to double down and dig in some roots. But you may be wondering how you’re going to juggle both a mortgage AND a burdensome student loan payment every month. In fact, 41% of college grads with student loan debt hesitate to purchase a home because of the sizeable amount of student loan debt they have.

 

Note: This blog was previously published in March of 2018, but has been updated to be current for our readers.

 

Purchasing your first home is a massive decision, and you’re wise to not take it lightly. But it doesn’t hurt to dream, right?

 

Picture yourself parking in the driveway of your first dream home. As you slowly walk up to the front door, everything has this wonderful soft glow and your peripherals are a bit cloudy because, well it’s a dream and that’s what they do in the movies. Anyways, you reach out for the door handle and are pleasantly surprised to find it has the perfect form, as if it were fitted for your hand alone.

 

You squeeze the latch, crack the door open and take the first step inside. It’s perfect. Everything is just as you imagined. You take another step towards the living room and brush against something with your foot. You look down to find a pile of old mail. “That’s strange,” you think to yourself. “This home doesn’t have any previous owners. This is MY dream home.” Perplexed, you shuffle through the stack and are horrified to find they’re all bills…. And they’re all addressed to you.

 

An eerie feeling crawls up your spine about the same time you hear a chilling voice say, “Stuuuudent Loooaaans.” The front door slams behind you, presumably by the Ghost of Student Loan Future. To your dismay, the living room begins to shrink and warp into a strangely familiar studio apartment. It’s at this moment you realize your dream has just become a nightmare and you have descended to the basement of Homeowner’s Purgatory, known as, “Oh Yeah, I Have Enough Student Loan Debt to Buy a Mid-Sized House. Maybe One Day I’ll Be Able to Afford It. Maybe.”

 

Fortunately, this is only a dream, and a fake one at that. More relieving, perhaps, is that this blog was not written to encourage or discourage you from purchasing a home; chances are you’ve already made up your mind on that. Besides, there are plenty of other blogs out there that can take you down that rabbit hole. What we’d like to do is help you understand how your student loan debt can and will affect your eligibility for homeownership, as well as ways to improve your chances of approval by offering ways for you to possibly pay off your debt faster and reduce the amount you’ll pay in total, such as refinancing your student loans.

 

Graduated Savings Plan

First and foremost, paying off student loan debt and purchasing a home are not linear. With a graduated savings plan, you can pay down your debt and save for a home at the same time. Start out by putting the majority of your discretionary income towards your debt and set aside 10% for down-payment savings. Next year, decrease your student loan payments to 75% and increase your savings to 25%. The following year, aim for a 50/50 split and continue the trend until you’ve paid off your student loan debt and can finally allocate 100% of your discretionary income towards your down payment.

 

Lower Your Monthly Payment

Before approving your mortgage, lenders are going to be looking closely at how much other debt you owe. Your student loan debt will likely be the heaviest hitter on that roster. They will also take into account car loans, financed furniture, etc. Your best chance for approval is to aim for a debt-to-income ratio of about 25%. Technically the cut-off is at 43%, but you’ll likely borrow at a much higher interest rate and require you to have mortgage insurance. That’s going to really ramp up your monthly payments. While your overall debt-to-income ratio will certainly play a role in your eligibility, it may surprise you to learn that mortgage lenders are not so much concerned with the overall balance as they are with your monthly payments going towards the debt.

 

One of the best things you can do to get your financial house in order is to lower your monthly student loan payments by refinancing their student loans. While this will not remove the reality of student loan debt, consolidating your multiple student loans into one loan will eliminate the hassle of keeping track on your slew of different rates and terms. You can lower your monthly payment even more by extending the repayment term of your loan by few years, though this will affect the total amount of interest you end up.

 

Lock-In Your Rates

Over the past several years, variable interest rate loans have hovered around historical lows. However, you may have noticed that the prime rate has been on the rise, and this will surely affect anyone with variable rate loans. When you consolidate loans, you have the opportunity to lock-in a fixed interest rate for all of your student loan debt, eliminating any variable rates that could prove problematic when the economy improves and interest rates follow suit. Locked-in rates mean locked-in payment, and it’s comforting to know exactly how much you’ll owe every month for the rest of your loan term (the bank will like it too). If you are even thinking about refinancing as a way to get one step closer to purchasing your first home, now is the time to take advantage of your good credit score and get the lowest rates you can qualify for in the event they continue to rise.

 

Opening Doors to a New Life

In the end, purchasing your first home while simultaneously paying down student loan debt is more than simply crunching the numbers. Keep in mind that homeownership is far more than a mortgage payment. It’s also furniture and renovations, not to mention general upkeep, which tends to average more than one percent of the total cost of the home per year. You need to weigh very real costs against your invaluable personal happiness – both present and future. As no one can help you with this formula, it’s best to follow your gut.

 

Remember, your student loan debt and your first home purchase are both investments. Get creative with this abstract equation by having a roommate or utilizing online vacation rental websites, as either option may cover the majority of your mortgage. If you buy in the right neighborhood, you might even earn a couple hundred bucks, which, being the smart and financially responsible adult you are, will go directly towards paying down your student loan debt. It’s a great way to have your cake and eat it too until the day comes when you can reach out and cut a little slice of heaven out of that pie in the sky.

 

All that being said, take a serious look at refinancing student debt. If you are able to get in on a home purchase more quickly by reducing student loan payments now, you may also enjoy a lower rate on your mortgage loan. ‘A dollar saved is a dollar earned’, especially when it comes to student loan debt. Find out home much you can save with ELFI.*

 


 

*Subject to credit approval. Terms and conditions apply.

 

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Renting vs. Buying a Home

In the past, becoming a homeowner was regarded by most as a long-term goal and benchmark for financial success. However, with the cost of owning a home on the rise, according to a recent Bloomberg article, the national homeownership rate has dipped to its lowest since 1965. Renting is now seen as a more feasible and smarter financial decision for many, especially millennials and individuals in their mid-to-late 30s. Still, those seeking to buy or rent a home want a clear-cut answer as to which is the better option, but it is not that simple — there are many factors to consider. If you are currently weighing the pros and cons of buying a home versus renting, consider these factors in making the housing decision that is right for you:

  1. Your Numbers

As with any large financial decision, it is important to assess your budget and overall financial situation to determine what you can afford to pay for your housing. A great rule of thumb to follow is the 30 percent rule, which states that your housing costs should not exceed 30 percent of your income. With that, you need also consider your other monthly obligations — such as health insurance, student loans, auto expenses, food, clothing, utilities, etc. — when budgeting an amount you are comfortable spending on housing each month. One mistake many people make when deciding whether to rent or buy a home is comparing monthly rent payments to mortgage payments. There are several additional liabilities that come with homeownership, like property taxes, monthly maintenance costs, and homeowner’s insurance, that factor into the monthly payment. Gauging every potential financial obligation that comes with purchasing a home, versus renting, can help you get the most accurate estimation of what you can afford.

  1. Your Area

Depending on the area you are looking at, the costs of renting and buying a home can differ. In some areas, renting is the cheaper option because purchasing a home is simply too expensive. However, in other areas, the cost of purchasing a home may be lower than monthly rent. Try using this calculator from Realtor.com — it will show you the cost of renting versus buying a home, based on your area.

  1. Your Future Plans

One of the main advantages of renting is flexibility. With a mortgage, you are more “tied down,” which means it will be harder to move, if needed, due to the obligation of selling your home beforehand. Renting is more beneficial for those who knowingly plan to move in the near future, as renting affords more mobility in the event of major life changes like marriage or new jobs in different areas. On the other hand, if you foresee yourself staying in the same place for a while, purchasing a home may be the right move for you.

  1. Other Important Factors

Along with considering your finances, area, and future plans, there are other components of renting and buying a home that may be important to you. With owning a home comes more customization — you are free to paint the walls, add a room to the house, replace the carpet with hardwood flooring, and whatever else you see fit. Renting can be more restricting. Maintenance is another factor to consider. When you own your own home, you are entirely responsible for the maintenance of your property, and cannot simply call a landlord to make repairs, as you could with renting. One last thing to consider: Until you fully own your home, it is technically owned by the bank; thus, you are susceptible to foreclosure and completely losing your home if you fail to make mortgage payments.

Decide What is Right for You

Deciding whether to buy a home versus renting is a complicated decision. With all the factors involved, it is impossible to simplify. In some situations, it can be smarter to rent, while other situations and times may prove that purchasing a home is more favorable. Ultimately, the correct decision is the one that is right for you.

 

Top 5 Barriers Stopping Millennials from Being Homeowners