You don’t have to choose between paying off your student loans or buying a home. With the help of first-time home buyers, and if you are able to build up enough emergency savings, you may be able to do both at the same time.
Here are three ways to decide if it’s possible for you.
1. Calculate your deposit
The biggest barrier to buying a home for many student loan borrowers is making a down payment. But many states offer programs for first-time homebuyers which will subsidize the deposit. Many lenders also offer mortgages that require much less than the traditional down payment of 20% of the price of the home.
Consider these options before you despair that it’s impossible to save tens of thousands of dollars while paying off student loans. You may find that this is more doable than you think, especially when choosing a home that you can afford.
2. Develop an emergency savings plan
At the same time, you will probably need to save more than you expected for items beyond the down payment. These include closing costs – which are typically 2-5% of the price of your home – and maintenance of the home, furnishings, and appliances. Plan to save 2% of the value of your home per year on repairs and maintenance only. Plus, you’ll need emergency savings to cover non-residential expenses that might arise, like medical bills and car repairs.
Use a closing costs calculator to help you determine the additional budget to plan. Add three months of your minimum spend to that amount, and that’s the amount you should expect to save on top of the down payment.
If you’re feeling overwhelmed, try budgeting using the 50/30/20 plan, which encourages you to spend 50% of your income on necessities, 30% or less on wants and 20% or more on savings. . This will give you a framework to save and help you determine how long it will take.
3. Consider refinancing your student loans to save more
To give you more flexibility to save, consider refinance student loans, which could lower your interest rates and potentially lower your monthly payment. Refinancing turns several loans into one, at an interest rate based on your financial history. To qualify, you’ll need a credit score of at least 600, solid income, and a history of on-time debt repayments.
Getting a lower monthly payment can mean extending the time it takes to pay off your loans, which could eat into your interest savings. Make sure you are comfortable with this before you refinance so that you pay less per month.
If you can meet these goals while paying off loans, go for it. Buying a house while paying off student loans is not necessary, however. There is nothing wrong with renting longer and taking longer to pay off debt. The decision, ultimately, depends on your personal purchasing schedule and how much you can save up front.