Paying down private loan vs house downpayment

B

brandons87

250+ Posts
OK, so I'm in the situation where I'm looking to buy a house. I have $20,000 cash to spend for a possible downpayment.

I have a mortage lined up already with 0% down at 6.0% interest. This interest rate is the same whether I make a downpayment or not.

Ordinarily, I would use the 20k for a down payment. However, I also have a 70k private loan from school, with a high interest rate of 9.5%.

I'm considering going with 0 down on the house and using that 20k to pay down the principal on that private loan. The interest on that private loan is capitalized onto the principal every quarter.

Opinions? Assume that I'm going to stay in the house long term. Assume that the mortage interest rate is the same regardless of wehther I make a down payment. Is the equity buildup with the down payment worth paying the higher interest rate loan on a 70k principal?
 
Are you sure you are making the right decision to buy a house with 70k in outstanding loans @ 9.5%.

Questions:

(1) Are you confident your house going to appreciate a minimum of 9.5% p.a.?

(2) What is your property tax? What about estimated annual costs related to house maintenance (garden, plumbing, etc)? What is your annual amortized cost of purchasing a house (closing costs, any furnishings would purchase that won't have purchased if you hadn't bought the house)? Add all these: is it lower than your current annual rent?

If both (1) and (2) are no, you may have made a bad choice in purchasing the house. Back out if you can (and pay off the student loan first, then buy a house).

As for your questions: yes, it is always better to pay off higher interest loan, all things being equal. I assume that both loans are tax deductible. (Another thing is that you might want to watch out for is AMT with so many deductibles)
 
I'm buying a relatively cheap house. The total mortgage cost (including principal, interest, PMI, and property tax) is 15% of my gross monthly income.

I have no other debt (credit card, car payments, etc). The only debt I have is that 70k at 9.5% APR

I figured that its better to buy a house now in this suppressed market rather than throw money away on rent. My mortgage payment (including everything I listed above) is actually 10% cheaper than my current apartment rent. I'm moving from a high priced area on the east coast to a small Texas town.
 
how old is the house? if it is over 5-10 years old I would put the cash in a money market for 6 months or even a few years to see if something unexpected pops up.(roof, a/c, fence, termites, etc, etc)

That is unless the 20k is in addition to about 6 months of living expenses you have on hand anyway to handle unexpected expenses, etc.

keep your buffer money and as you add to it then pay down your debts accordingly while keeping your buffer at a sound and conservative amount. it allows for peace of mind.

you should be able to get a better rate for that private loan if you have a good job.
 
if your private loan interest is tax deductible, i'd lean towards using the cash as a down payment to ensure no mortgage insurance and to ensure instant equity in case you have to unexpectedly sell and don't have cash to bring to closing. if its not tax deductible, then i'd lean towards paying it down and acquiring a higher mortgage debt, which is tax deductible.
 
brandon,

congrats on the house. I am fairly debt averse, and would advise you to pay that 70K off as quickly as possible, assuming you have a very reliable income stream and therefore don't really need a cushion. 9.5% for a student loan seems crazy high. You say it's private, does that make it ineligible for consolidation?

I hope I'm not prying, but did you just finish a residency? I'm guessing this based on your post on the knee mri thread and the fact that you are moving from east coast city to small Texas town.

If so, you should find out who runs the private banking dept of whatever bank you use and talk to them. If your bank doesn't have one, change banks to one who does. I know Wachovia, Wells Fargo, and Capital One all offer this. I had some HEAL loans at 8.25 and 8.5 coming out of residency, and HEALs at that time weren't eligible for consolidation. I got a line of credit at prime which at the time was around 4.25%. Even though the fed was raising rates right and left, I still got it paid off before the rate got above 7.

I think right now prime is around 5.25% and I can't see it going up anytime soon, so you ought to look into that. You may even be able to work a couple of banks against each other and get prime minus 1.

pm me if you have any questions
 
i wouldn't use lending tree. they are just a lead generating source for banks and brokers, who have to pay them x dollars per lead and additional money if they close a loan from the lead. that fee is worked into the cost of your loan. just shop around the normal way.
 
For the sake of simplicity, assume that this house I'm buying is the one I'm going to stay in for the rest of my life, and that I will never try to sell it.
 
A) how cheap are you willing to live? In essence how much are you spending on your rent.

B) Is interest on any loan other than home loan deductible anymore?

C) figure out how much the tax deduction offset is worth if you buy the house, as nearly all your "rent" will then be tax deductible the first couple years.

D) will your house appreciate? This is always a guess but generally a fairly safe one in MOST markets OVER TIME.... You don't need 9.5% appreciation to break even with the offset for tax deductibility of interest.

It's a lot of things and only you can decide
 
You must log in or register to reply here.

Weekly Prediction Contest

* Predict HORNS-AGGIES *
Sat, Nov 30 • 6:30 PM on ABC

Recent Threads

Prediction Results Threads

2024 Schedules

Back
Top