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Old 03-20-2011, 11:37 PM   #1
Join Date: Feb 2008
Default School loan debt vs. house down payment question

So I finished school with around 20k in school loan debt, 10k of which is at 6.7% interest and 10k at 2.75% interest rate, consolidation yields 20k at around 4.7%. My wife and I are looking to buy a house in 1 year, so far we have come up with two plans for dealing with my school loans:

1) Consolidate them and pay them over time, since 4.7% is still pretty damn low. Instead of dropping huge lump sums to pay off my school debt, we now have that money to put on the down payment of the house, which will definitely be at a higher interest rate than 4.7%.

2) Drop 10k on the high interest portion of the loan and pay the low interest portion off over a long period of time. Paying off half my loans now will look better when applying for a home loan and might get me a lower interest rate, saving me more money in the long run.

Both arguments make some assumptions that neither of us are sure about, and we are scheduled to meet with a real estate consultant at the bank. Since the bank consultant might have some other motives, I was hoping to get some of your opinions.
Andrea is offline   Reply With Quote
Old 03-20-2011, 11:38 PM   #2
Join Date: Jan 2011

If you don't have 20% to put down on the house, you're going to have to get PMI or a second mortgage ("piggy back loan") to cover the difference. Second mortgage may run 7.5-9% (ie, more than a first mortgage rate), which will make your 6.7 percent look a bit better.

I know that's not an answer, it's just something else to consider. Good luck on the house.
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Old 03-20-2011, 11:38 PM   #3
Join Date: Jan 2011
Location: Israel

Here's a mock up I just finished working out based on the following information. Interest was compounded annually and the years for the student loan payout can be adjusted, as can the mortgage amount, rate and length.

$10,000 - 2.75% - 6 years = $150.67/mth - Total Interest: $848.24
$10,000 - 2.75% - 12 years = $81.45/mth - Total Interest: $1,728.80
$20,000 - 4.70% - 12 years = $181.01/mth - Total Interest: $6,065.44

Calculated with 150,000 Mortgage
150k Mortgage - 6.75% - 25 years - $1,017.48/mth - Total Interest: $155,244.00
140k Mortgage - 6.75% - 25 years - $949.65/mth - Total Interest: $144,895.00

Option 1)
10k Student loan plus 150k Mortgage is $1,168.15/mth for the first 6 years then $1,017.48/mth for 19 years (or less if you increase the payment)
Total Paid: $316,092.24

Option 2)
20k Student loan with 140k Mortgage is $1,130.66/mth for 12 years and $949.65/mth for the next 13 years or less.
Total Paid: $310,960.44

Option 3)

10k Student loan over 12 years with 150k Mortgage is $1,098.93/mth for 12 years and $1,017.48/mth for 13 years or less.
Total Paid: $316,972.80

Option 2 will pay the smallest amount in the long run and is second highest monthly payment for the first 6 years then it becomes the cheapest at year 13.
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Old 12-11-2013, 10:27 AM   #4
Join Date: Dec 2013

what a great work.
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Old 12-11-2013, 10:31 AM   #5
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