If you have student loan debt, that doesn’t necessarily mean that your dream of owning a house is out of reach. You’ll just have to figure out how to prioritize your financial goals.
When to Focus on Your Student Loans
If you have a high interest rate, that means a significant amount of each payment goes toward interest charges, not principal. In that case, it can be wise to focus on paying off your loans as soon as possible so you can minimize the total amount you’ll pay in interest.
When you apply for a mortgage, a lender will look at your debt-to-income ratio. That’s the sum of all your monthly debt payments, divided by your gross monthly income. If you have a high DTI ratio, you might only qualify for a mortgage with a high interest rate, or your application might be rejected outright. Reducing your total debt load can lower your DTI ratio and raise your credit scores. That can improve your chance of getting approved for a mortgage with a competitive interest rate.
When to Focus on a Down Payment
Consider your student loan terms and debt level. If you have a competitive interest rate, a relatively small balance, and manageable monthly payments, you don’t have to rush to pay off that debt before you buy a house.
The cost of buying vs. renting can influence your decision. In some areas, owning a house is more affordable than renting. If you currently have high rent payments, prioritizing a down payment can be a smart move. The sooner you buy a house, the sooner you’ll be able to start building equity.
Ways to Reduce Your Student Loan Payments
If you’re struggling to manage your student loan debt, or if you just want to free up funds to put toward another purpose, you can explore ways to reduce your monthly payments. That can give you more financial breathing room and make it easier to save for a down payment.
Refinancing to a lower interest rate can reduce your monthly student loan payments and the total you’ll pay in interest over the life of the loan. If your student debt payments eat up a substantial chunk of your monthly income, you might be able to switch to an income-based repayment plan.
How to Pursue Both Goals at Once
You can work on paying off your student loans and saving for a down payment at the same time. Depending on your circumstances, you might choose to make your required minimum student loan payments and save as much as possible for a down payment, or you might prefer to pay off your student loans ahead of schedule while also setting aside money for a down payment each month. If you receive tax refunds, bonuses, and gifts, you can put those extra funds toward one or both goals. Look at the numbers and figure out what makes sense for you.
