If you have student debt and want to one day buy a home, you may wonder what to focus on first — paying off student loans or buying a house? If you wait until your student loans are paid off to buy a home, you may be renting for a very long time. If, on the other hand, you buy a house before you pay off your student loans, you may be stretching your finances too thin. Which goal should you focus on first?
There’s no one right answer for everyone. Whether you should pay off your student loans or buy a house first will depend on your priorities, time frame, and financial situation. Ideally, you want to work towards both goals at the same time, making progress on your debt while also saving up for a down payment on a home.
Here are some things to consider when deciding whether it’s better to pay off student loans or buy a house.
Reasons to Pay off Your Student Loans Before Buying a House
Depending on your financial situation, it may make sense to pay off your student loans before you buy a house. Here’s a look at some reasons why you might want to prioritize student loan repayment over saving for a down payment.
The Longer You Wait to Pay off Student Debt, the More Interest You’ll Pay
If you want to save money on interest, it’s a good idea to prioritize student loan repayment over buying a home. By paying more than the minimum payment each month, you can reduce the principal balance. This, in turn, will shorten the duration of the loan period — and the interest accrued. Just make sure that your lender puts any extra payments you make towards your principal (and not future payments).
Another way to speed up repayment is to refinance your student loans. Refinancing can fast forward repayment by helping you obtain a lower interest rate, a shorter repayment period, or both. You can refinance private or federal student loans. Just keep in mind that when you refinance federal student loans with a private lender, you forfeit certain federal benefits, such as forbearance and forgiveness programs.
💡 Quick Tip: Ready to refinance your student loan? You could save thousands.
Your Debt-to-Income Ratio Is High
When you apply for a mortgage, lenders will look at your debt-to-income (DTI) ratio, which shows how much of your monthly income goes toward debt repayment each month. The ratio is expressed as a percentage, and mortgage lenders use it to determine how well you manage monthly debts — and if you can afford to repay a loan.
To calculate your current DTI, simply add up all of your monthly debt payments, then divide that number by your monthly gross income (before taxes and deductions). Take that number and multiply by 100. This is your DTI.
Ideally, mortgage lenders like to see a debt-to-income ratio lower than 36%, with no more than 28% of that debt going towards a mortgage or rent payment. While some lenders will allow you to go up to 43% (and sometimes higher), this may not be wise, since it can stress your finances and make you “house poor.”
You Don’t Have Enough Saved for a Substantial Down Payment
A standard rule of thumb is to put at least 20% down on a home’s purchase price. While you may be able to get a conventional mortgage for as little as 3% down, making a smaller down payment on a home purchase generally means paying a higher interest rate on your mortgage. On top of that, you’ll likely need to buy private mortgage insurance (PMI).
Also consider that the more you put down on a home, the more equity you’ll have in your home right away — and the lower your monthly mortgage payment will be.
You Might Move Within the Next Five Years
Renting provides more flexibility than home ownership, as you aren’t necessarily tied down to your property. If you think you may want to relocate in the next five or so years, it may make sense to pay off student loans before buying a house.
A common rule of thumb is that it takes around five to seven years to break even on a house, meaning you have enough equity to recoup that amount of money you put in the house (including closing costs, mortgage payments, and maintenance expenses). That’s why experts typically caution against buying unless you plan to live in the home at least that long.
Reasons to Buy a House Before Paying off Student Loans
In some cases, it makes more sense to buy a home before you pay off student loans. Here are some arguments for putting any extra funds you have towards a down payment on a home over paying down your student debt.
Student Loan Debt Is Not as Bad as Other Types of Debt
Not all debt is created equal. Student loans generally have longer repayment terms and typically feature lower interest rates than many other types of debt, such as credit cards and auto loans. Since your down payment will lower the overall cost of your mortgage, it may be smarter to save up money for a home than to pay off a low-interest student loan.
If you have $12,000 in credit card debt, you would want to make paying that off as quickly as possible your priority, thanks to double-digit interest rates. If you have $12,000 in student loans with a low interest rate, it’s a different story. Paying only the minimum to free up funds to buy a home can be a sensible idea.
Also keep in mind that your student loans may entitle you to a valuable tax deduction — with the student loan interest tax deduction, you may be able to deduct $2,500 or the amount of interest you paid toward your loans, whichever is less.
Recommended: Which Debt to Pay Off First: Student Loan or Credit Card
You Have a Low DTI
If your DTI is 35% or less (meaning a max of 35% of your gross monthly income will go toward your overall monthly debts, including the new mortgage payment), it’s a sign that you can manage home ownership and student loan debt repayment at the same time. With a low DTI, you may be able to comfortably afford your mortgage, monthly student debt payments, and likely still have money available to put into savings and retirement each month.
You Have a Lot in Savings
You’ll need to have access to a sizable amount of cash to purchase a home. In addition to making a down payment, you’ll also need to have funds to cover closing costs and moving expenses. Also keep in mind that when you own a home, you’ll be responsible for all of the home’s maintenance and repair expenses. A general rule is to have1% to 4% of the home’s value set aside for upkeep and repairs.
If you have enough money saved in the bank to cover those costs, you’re in good shape and can likely afford to buy a house before you pay off your student loans.
Buying a Home Is a Top Priority
When deciding whether to buy a house before you pay off student loans, you’ll also want to consider your priorities and personal goals. For example, if you want to have children (or expand your family) in the near future, you may need a larger space. Or, if you’re working at home (or plan to transition to remote work), you might require a home that allows you to set up a dedicated office. Perhaps you want to get a pet, but your rental doesn’t allow them. In some cases, prioritizing a home purchase over paying off student debt may be important in terms of your quality of life.
Options to Consider for Those Trying to Manage Student Debt and Buy Property
If you’ve decided that you can manage paying down student loans while also saving for a home, here are some tips that can help you focus on both goals at the same time.
• Take an inventory of your debts: A good first step is to write down all of your current debts, including student loans, car loans, credit cards, and any other debt you hold. Make note of the interest rate, remaining balance, and minimum payment for each.
• Knock down high-interest loans: Next, you may want to funnel any extra money you have towards the debt with the highest interest rate, while continuing to pay the minimum on the rest. Once that debt is paid off, focus on the debt with the next-highest interest rate debt, and so on. Eliminating expensive debt frees up funds that go towards a mortgage payment. It can help improve your DTI, which is helpful when qualifying for a mortgage.
• Open a dedicated savings account: Consider opening a high-yield savings account specifically for your down payment and home-buying expenses. This will help you track your progress and ensure you won’t spend the money on other things.
Recommended: Student Loan Debt Guide
Saving Strategies
The more you can put down on a home, the less you will need to borrow. A solid down payment can also help you qualify for a lower interest rate on a mortgage and lead to lower monthly payments. These tips can help you reach your down payment savings goals faster.
• Pay yourself first: Consider setting up an automatic transfer from checking to savings each month to take place right after you get paid. This can help you get used to managing living expenses with what looks like a smaller paycheck, when actually you’re building up your own savings.
• Take advantage of windfalls: If you receive a lump sum of money, such as a work bonus, gift check, or tax refund, consider funneling it right into your down payment savings account. This will help you meet your down payment goal faster.
• Reduce expenses: Take a look at where your money is going each month and see if there are any places to cut back. You might decide to cook a few more times a week and spend less on take-out, get rid of a streaming service you rarely watch, or finally cut the cable cord. Anything money you free up can now go into savings.
• Pick up a side gig: Income from a part-time job or freelance work can be dedicated to savings, helping you reach your goal quicker. You might also consider asking for a raise at your current job or volunteering to work overtime.
💡 Quick Tip: It might be beneficial to look for a refinancing lender that offers extras. SoFi members, for instance, can qualify for rate discounts and have access to financial advisors, networking events, and more — at no extra cost.
How Refinancing Could Potentially Help Prospective Homebuyers
Buying a home and paying off your student loans may seem like competing goals, but that’s not necessarily the case. You can pay down your debt and save for a down payment at the same time by putting more money into savings each month and looking for ways to lower your student loan payments.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
About the author
Julia Califano
Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.
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