We recently have felt like we had come down with a bad case of tunnel vision in regards to paying down my fiancee’s student loans. When we realized the fact that we had developed tunnel vision we evaluated our priorities and our future goals and decided that we needed to make an adjustment to our plans.
Change of Plans
We’re buying a house! There I said it. I know this decision won’t be very popular with those who advocated eradicating all debt as soon as humanly possible, but we live our life according to our personal priorities and our priorities have changed.
We aren’t buying those beautiful beach front condos that we considered just a month or two ago. The views were awesome but they just weren’t that practical. Instead we’re buying a house in town which is closer to both of our jobs and other places that we frequent.
Why We Decided to Buy a House
We always knew that we wouldn’t live in our townhouse that we bought on a whim forever. We originally had thought we’d live here for five to ten years but after living here for a year and a half we realized that we had two options. We could either renovate and update the townhouse a bit or move on to our next house.
The original plan was to renovate the townhouse after we paid off my fiancee’s student loans. If we completed our original goal of paying her student loans off by the end of 2013 that would mean we’d renovate the townhouse sometime in 2014. We would want to completely renovate the kitchen and both bathrooms.
As I’m sure you know, kitchens and bathrooms are some of the most expensive home renovations you can take on. They generally pay back decently, but it is unlikely you’ll get the full cost of the renovations back when you sell. The thing is, we don’t plan on selling the townhouse anytime soon, if ever.
We’d be able to enjoy the renovations for a few years but we knew we would move into town eventually. When that day came we planned on renting out the townhouse. I’m sure the renovations would make our townhouse highly desirable because none of the rental properties around it would have similar upgrades.
The problem with the renovations is that when we rent the townhouse we’d have to price our rental property much higher than the market for the surrounding area in order to recoup our remodeling costs. It isn’t likely we’d be able to pull that off and it was the main factor that drove us to buy our next house now rather than a few years down the road.
But What About the Student Loan Pay Off?!
The student loan pay off plan was the hardest part of our decision. We really wanted the student loans to be gone and we were on track to pay the off by the end of 2013 according to our February Debt Pay Off Update. However, in order to buy the house in town we’d need to (well… want to) put 20% down.
The down payment on the house would completely eat up my stash of cash that we had planned on using to pay down the student loans after we get married. So what did we do? We analyzed the difference between paying the loans off by the end of 2013 and the new likely pay off date, the end of 2015/early 2016. Since the interest rate is lower than cash loans, it didn’t extend the pay off date very far.
The results were a bit surprising. While we delayed the payoff date by two years the total interest paid on the student loans only increased $3,000! Now I’m not saying $3,000 isn’t a lot of money, because it is… What I am saying is that in the big scheme of buying a house, paying an extra $3,000 to pay off student loans 2 years later could be well worth it. How do I figure?
Why Buying a House Now Makes Financial Sense to Us
There are two key costs in buying a house. The price of the house and the interest rate on the mortgage. I’m not as worried about the first cost as I am the second cost.
The media has been hyping the recovering housing market lately so it seems like prices are going to be on the rise sometime in the next couple years. I don’t expect any rapid price increase, but it only takes an increase of $3,000 in the price of a house to make our decision of delaying paying off the student loans to make financial sense.
Interest rates are where the true savings come in. If we end up with a $100,000 mortgage and rates rise just 0.25% our total mortgage cost will go up over $5,000 over the course of the loan. If we end up with a $150,000 mortgage and rates rise just 0.125% our total mortgage cost will go up almost $4,000 over the course of the loan.
We looked at the numbers and took emotion out of the equation. Overall, it just made more sense for us to buy a house now even though we’d love for her student loans to be gone. We’ll also be happier with the extra space we’ll have in the new home and we’ll save a ton of time and money in commuting and traveling costs.
What do you think of our decision to go ahead and buy a house now and delay the student loan pay off debt? Is your decision influenced by the fact that you hate debt, or did we miss something from analyzing the numbers of the situation?