Pay down student loans or beef up our down payment? (foreclosed, renting)

[InfoSeeker52]

Hi all. I recently learned I've landed the "dream job" and my salary's about to double. H and I were living very comfortably prior to the salary increase and don't need the added income for day-to-day living expenses, so we are trying to figure out whether we should be using the extra cash to aggressively pay down my student loans (approximately $100K, from law school), or whether we should be setting that cash aside so we can make a more significant down payment on a home purchase sometime next year. (If we focused on the student loans rather than the down payment, we'd likely wait two years to buy instead of one.) I've run the numbers, and at our new income level, we'd likely be approved for a mortgage far larger than we'll actually need regardless of whether the student loans are paid off or not at the time we'll be applying for the mortgage (we have no other debt, as we both own our cars outright and have no consumer debt).

My personal preference is to pay off my loans, because they make me feel "stuck" and are a large, ongoing financial obligation that will impact our ability to make future changes to our financial situation (i.e. H deciding to go freelance or start his own business, or one or both of us scaling back to part-time employment when we eventually have a child, etc.), but H thinks we're better off putting the money towards a down payment so that we can purchase a home sooner and avoid PMI. Neither of us has ever purchased a home before, and our parents either have also never owned or own in eastern Suffolk (in a not-so-nice area where move-in ready homes can still be had for $150K), so they don't have any relevant wisdom to share with us, and we're basically just lost. Is this a "six of one, half a dozen of the other" situation, or is there a clearly better option?

[ClarkStreetKid]

Pay off your loans.

[newmommyq]

Pay down those loans! that balance on top of a mortgage would be a big burden.

[Pito_Chueco]

Pay off your loans.

[Apple juice]

Off with the loans!

[Zytos]

Well, the interest rate on the loans matters.

What is it?

[juppiter]

I say use it for the down payment. A mortgage is strict; student loan rules are more relaxed and you can defer them almost indefinitely.

Enjoy life, don't worry about a little debt.

[dman72]

Most likely the student loan interest rate is much higher than mortgage. However, if you don't have 20% of your down payment (plus closing costs, so more like 25%), you will have to pay PMI, which will effectively make your mortgage interest rate much higher until you reach the 20% threshold.

On one hand, it's strictly a numbers game. Do the crunching and see which saves you more money in the long run. Debt is debt, the only thing with the mortgage is you can be foreclosed on if you don't pay it...I'm not sure what the worst case scenario is for not paying student loans, but they probably can't take your house.

So on that side of things, all other things being equal, pay as much of the principal down on the house as possible, ie a bigger downpayment. You'll (truly) own your house earlier, and that makes everything else easier in the long run.

[InfoSeeker52]

The interest rate on the student loans is 6.8%.

If we aggressively save, we could probably have a 20% down payment plus closing costs ready to go by around this time next year. If we were to focus on the student loans instead, we'd have to save for an additional year to have the 20% down payment ready. My husband's had friends telling him we should be buying rightthisverysecond, because "the market will never be lower!" but I'm leery of rushing into home ownership when we still have a significant debt obligation in addition to any mortgage that might be added to the list. On paper, home ownership will only cost us $500 or so more than renting currently does, but I know all of the things that can go wrong in a home and add to costs, and I'm concerned we'd be getting in over our heads. My H disagrees, obviously.

[VanillaEps]

Put it towards the loan with the higher interest.