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Down payment vs student loan payoff

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  • Down payment vs student loan payoff

    I am planning to buy in the near future and looking for advice. We have enough for a 20% down payment but I also still have a reasonable amount in student loans. I’m currently debating between using a conventional loan with 20% down vs using that 20% to make a large dent in my student loans. I currently have federal loans at a 0% interest rate. Once the federal forbearance is done in May, my interest rate will go to 6%. I could pay off about 50% of my federal loans with what would be my down payment and then refinance the remainder to a lower interest rate. OR I could do a 20% down payment and refinance all my loans to a lower interest rate. Thoughts?

  • #2
    Financing student loans and mortgages have 2 different rate setting underwriting processes. You will find that a mortgage has a significant amount of closing costs. You may also be "required" to have a Efund reserve that is more than you anticipate. Without have details, there is no way to tell which is better. The 20% down is primarily to avoid MIP, avoidable with a physicians loan.
    You might be underestimating the additional front end costs of moving into a home. Things like decoration and furniture etc.

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    • #3
      Can you not get a physician type loan with 5-10% down? Probably need more info to better answer the question.


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      • #4
        Adding more info -

        We are pre approved for a physician loan and I spoke with one of the lenders we are vetting to get info on both conventional and physician regarding rates/fees/etc. We do have additional funds set aside for other moving costs such as the closing costs, etc. We have quite a large amount of furniture/decor already and am not anticipating replacing the majority of these but regardless, do have additional funds outside of the down payment set aside for housing expenses. Mostly just trying to decide if it makes more financial sense to pay off part of student loans and use a physician loan or if it makes more sense to do a conventional mortgage and continue trying to aggressively pay off my student loans.

        hopefully that helps

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        • #5
          Debt is debt. Interest rates count. Once you pay off SL debt, there is no way to cash out refi or heloc if you do decide. I would refi SL and see what mortgage rate is. Pay down the highest interest rate debt. Actually, some would say consider investing since you also get a tax deduction on mortgage interest. Many layers of the onion.
          Sorry, there is no right answer. Emotionally, some say payoff student loans. Doesn’t make sense to replace it with a higher mortgage loan. Both allow prepayments.

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          • #6
            How soon are you planning to buy? If you are buying soon, you could keep the strong liquid cash position for now, see what kind of mortgage rate you qualify for with diffferent down payment amounts, and compare that to the rate on your student loans. Whichever loan has the lowest rate could be kept at a higher debt level.

            Once you get past the closing, you can pay off the higher rate interest loan fastest. Just remember, if you take the bigger mortgage loan, be sure to use the excess funds to pay down the student loans, rather than going out and spending those extra funds on lifestyle items.

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            • #7
              You do not mention your age or income level. More info brings you better responses. I would suggest you fund your retirement plans first. The money you invest now will be very valuable in the future. I am a big believer in splitting the difference. Pay a chunk of the SL off and still put a downpayment down with a physician loan.

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              • #8
                I do think that comparing rates of the loans would be helpful. However, the other thing to consider is that you can sell your house, but you can't sell your student debt. If you anticipate being the house for a long time, this is less relevant. We favored student loans initially, which helped us to pay them off more quickly. We also locked in a great rate on our mortgage, so there was less desire to funnel all of our money into the house.

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