Debt Free

You get out of college, land your first real job and start earning good money. Now's the time to take on some of the trappings of success, like a mortgage. Now the fun really begins. According to the federal government, most of you will have some student debt. Sifting through the wealth of statistics provided by the gang in Washington reveals that almost 66% of undergraduate students leave school with student loan debt. On average, they're in hock about $16,000 worth; hardly peanuts. Graduate students, although they have greater earning potential, fare even worse in terms of the amount of debt, although fewer (only about 60%) have to borrow. The average graduate student debt hovers around $27,000 for those graduating with a masters, and $49,000 for those receiving doctoral degrees. If you went the doctor / lawyer route you'll be up over $80,000, on average.

So, it's likely that if you've graduated from college in the last couple of years, you'll have substantial debt to deal with. How do you balance that with the need or desire to buy a home? You'll have to take on a mortgage. Due to the recent, well (over??) publicized problems in the mortgage industry, especially the portion of it serving the more credit challenged in the audience, you may think getting a home may have to wait. It may, but you should evaluate your financial situation to determine if it is worth pursuing. There's a good chance that you'll find that purchasing your first home does make sense for you after all.

If your analysis reveals that buying a home is for you, and you can find someone to give you a mortgage, chances are you'll get a pretty favorable interest rate on it. Although many lenders are a bit averse to actually lending money at this point, when you can talk them into it, you'll probably get a pretty fair mortgage.

As an aside, it's a shame that so many lenders are so squeamish about actually doing business these days. There are still a tremendous number of people out there that want to borrow money, and are fantastic credit risks, yet lenders are reluctant to give them a mortgage. Too bad for the borrower, the lender, and the economy. Yes, they should shy away from those that legitimately have little chance of repaying the loan, but guide your lending with common sense, not fear, please.

So, if you have a student loan, or more likely a few of them, how should you proceed? First of all, if you have multiple student loans, you should look at student loan consolidation, especially now,with interest rates so low. It will make debt management a much easier task, and reduce your monthly payment. Not only will that help your cash flow and make life easier, but when lenders look at your financial picture, you will be a bit more attractive to them.

Okay, you've consolidated, now what? Since the days of zero down mortgages are behind us for the most part, you'll probably need to come up with a down payment for your house. Here's the question; if you have money for the down payment, should you use all of it as a down payment, or should you pay off some of your student loan?

If you're fortunate enough top be in the position that you can ask yourself this question, congratulations! You're doing something right. So, which is it? Pay off some student loan debt, or increase the down payment on your house? You'll have to look at the interest rate on both loans first. The rate on your consolidated student loan will be based on the results of the 91-day T-Bill Auctions and are set on July 1^st. You should not have to pay a fee for consolidating your loans, either. Your mortgage interest rate will, of course be dependent on many factors, such as your credit rating, lender, and so forth. I've done a few posts in the past on how you can improve your credit score, and how to get a better mortgage. Look at them for steps you should take before and during the mortgage process.

If the interest rates are similar on the the consolidated student loan and the mortgage, you'll usually be better served to pay off the student loan, and minimize the down payment on your home due to the tax advantages a mortgage provides. Remember your mortgage interest still provides a nice tax deduction, despite the efforts of some in congress to eliminate it. That usually swings the answer in favor of using as much of your money as possible for paying off student debt, which provides no such tax advantages. This assumes a fixed mortgage at a good interest rate. If you have some unconventional mortgage product with all sorts of schedules, rate adjustments and fees, you're probably still better off if you put your money toward paying off your student loan, but with something that complex, you're on your own.

Have a Merry Christmas, and Happy, debt free Holidays! I may make another post between now and Christmas, but with all the loose ends left to wrap up before then, there are no guarantees. Here's to family, friends, and all those in the world that are less fortunate. I hope you're having a great holiday season!