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Dear MarketWatch,
My husband and I recently moved to Virginia. We are renting a house.
We start repaying a student loan this month of $157,000. We have $45,000 in cash in the bank and $45,000 in a 401(k).
We make $121,000 a year before taxes. I am hesitant about buying a house and going into debt for another $250,000. We are both 57 years old.
What is your advice on this?
Sincerely,
Renting in Virginia
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at TheBigMove@marketwatch.com.
Dear Virginia,
I can’t blame you for feeling overwhelmed making as major of a decision as buying home when you’re already grappling with a large amount of student debt.
I think it’s important to reframe how you think about your existing debt, to start. Here’s some advice from Holden Lewis, a mortgage and housing expert at personal-finance website NerdWallet: Those student loans were an investment in yourselves, or your children if they were loans you co-signed on. It’s easy to feel a sense of regret about taking on that debt if it seems like it might get in the way of other financial milestones, so keep in mind why you took out the loans in the first place.
Buying a home is also an investment — and not just because it’s value will likely grow over time.
“It’s a hedge against rising rents,” Lewis said. “Your monthly payments will remain stable compared to rents.”
In that sense, owning a home might make budgeting easier. And that’s important for you and your husband since you’re not too far off from your retirement years. Having stable, predictable expenses will be useful in terms of mapping out how much more you need to save before retirement, and how much you can afford to spend once you stop working.
From a mortgage perspective, a large student-loan load can make things a little trickier, but hardly impossible. Mortgage lenders do factor in your debt-to-income ratio when considering whether you will be able to repay the loan you’re requesting. But they’re not looking at the total amount of your debt — instead they’re calculating that ratio by comparing what you spend in monthly payments on your debt versus your monthly take-home pay.
“Mortgage lenders look at your monthly loan payment when calculating your debt-to-income ratio.”
The payment pause on student loans has made this a little more complicated. Many student-loan borrowers, like yourselves, haven’t needed to make their payments on their student loans amid the COVID crisis. Depending on the type of mortgage you receive, lenders have different options about how to calculate your debt-to-income ratio. For a Freddie Mac loan, they could calculate it by using 0.5% of the loan balance in lieu of the monthly payment amount, whereas it would be 1% for an FHA loan.
You could also contact your student-loan servicer to find out what your payment will eventually be, and provide that information to your mortgage lender as they determine whether you’re qualified for the loan you want.
There are a few things that might give me pause before buying a home. For starters, compare what your housing costs would be — including mortgage payments, taxes and maintenance — to what your current rent is. In many parts of the country, renting is the more affordable option, particularly if you invest the money you save. If owning a home will cost you more, it could be worthwhile to delay that move until more of your debt is paid off.
Additionally, make sure that owning a home won’t prevent you from being able to save more toward your eventual retirement. The two of you have some catching up to do, according to financial experts. According to Fidelity Investments, by age 35, you should have saved up twice your salary in your retirement accounts. You can begin contributing even more to your 401(k) once you’re in your 50s.
Keep in mind, until you own your home outright, you won’t be able to tap its full value to fund your retirement. And there are risks to take out home equity lines of credit or reverse mortgages, too.
All of this is to say that owning your home could be a strong financial move on your family’s part — but be sure to do your due diligence in the process. Talk the decision out with one another, and make sure you’re on the same page in terms of how you will approach your household finances in the future. I wish both of you the best of luck as you consider these momentous decisions.
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