Due to the rising cost of a college tuition, more and more people are graduating with as much as 6 figures of student loan debt. Putting money toward debt first is a smart financial decision because every day the debt accumulates even more interest. These new graduates are putting off getting married, having children and even buying a home in order to pay down their student loans more quickly.
But it doesn’t have to be this way. Many people successfully pay off their student loans while saving for a home. What are some of the ways that people have achieved these two financial goals simultaneously?
This number is used by banks to determine whether or not you are a good candidate to take on even more debt. Typically, you are in good shape if your debt-to-income ratio is less than 40 percent. Calculate your debt-to-income ratio by adding up all of your monthly payments (auto loan, student loans, rent) and divide that number by your total monthly income. If your debt-to-income ratio is very high, you will definitely need to consider paying down your debt before you apply for a mortgage.
Saving up for a down payment for a home is not an easy task, and splitting your money between student loans and home savings can make it an even more daunting process. Keep in mind that the minimum down payment needed for a home is now only 3 percent! Try to decide how much money you can realistically dedicate to savings and debt repayment. Also, look at homes prices in an area where you might want to purchase a home. This will help to give you an idea of how much money you will need to save for your 3 percent down payment.
The next step is to come up with a monthly savings plan to achieve your goals. Consider using a graduated savings plan where you start out with a steady flow of payments towards your student loans while still saving for a home. As your loan balances start to shrink, you can slowly move more money for your home and put less money towards your student loans. Early on, you might want to put 40 percent of your discretionary income toward student loans and 25 percent toward your future down payment. The remaining 35% is up to you. Within a few years, there should be no reason why student loans would hold you back from purchasing a home.
Remember: the down payment is only 3 percent for a home. Align that with consistent, manageable student loan payments, and you will be in a great spot.