Ask Money

Student loans vs. buying a home

Chris Farrell Sep 7, 2011

Question: I currently have $33,000 in student loans at 2.4%APR. I also have $40,000 from stock sales (after taxes).

Would it be wiser to pay off my school loan or take advantage of low interest rates in the housing market and use the $40,000 for initial payment on a house?

As far as my living situation, I have a self-imposed spartan budget and have about 12 months of emergency cash reserves and an additional $3,000 in emergency medical reserves. I’m in good health, and my work productivity is high -yes, I have a very good job. Thank you so much. Manuel, Houston, TX

Answer: I almost always think it’s a good choice to seize the opportunity to be debt free. I know the rate on the loans is extremely low. Still, if you pay them off you could live a less Spartan lifestyle and still have a healthy margin of financial safety.

But that’s only one approach to money. Perhaps you really want to own a home. It’s a lifestyle decision. In that case, it’s key to evaluate your finances and your desire to own.

The housing market looks increasingly attractive–at least looking nationwide. No, I’m not crazy. I know that the market is still struggling and I don’t know where is bottom. Yet a number of financial signals suggest the worst is over, from the rent-to-price ratio to a lack of new home construction.

I don’t want to suggest at all that speculators will be rewarded and that prices are poised to come roaring back. There’s no reason to rush. The money maestro Warren Buffet once defined investing as laying out money now to get more money back in the future, after taking inflation into account. That’s all. He didn’t say how much of a gain. By that yardstick, odds are in your favor that you could get a place of your own at a reasonable price and earn a positive return on your investment over time.

Ah, time. It’s critical. Forget about owning if you think you might need to move within the next 5 years, and you may have to adjust that figure depending on conditions in your local market. The real lesson of the real estate boom isn’t that homeownership is bad. It’s that buyers need stable jobs, solid finances and a long-term time horizon.

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