If you’ve recently graduated from college, you probably have many new responsibilities and tough decisions to make. One thing you will have to decide on is where you are going to live. You might be able to move back in with your parents, but if you’re unable to do that you’re probably deciding between either renting or buying a home. There are a few things you should consider before making this decision, especially if you’re also trying to manage student loan debt. Here’s what to keep in mind:
What’s the Interest Rate on Your Student Loans?
The average interest rate for student loans is about 6.8%. If your interest rate is higher than this then you should make paying off your loans a priority and may want to consider renting a property. If your interest rates are lower than the average, you may have more flexibility in your financial situation and be able to afford a home and the costs associated with it.
What’s Your Debt-to-Income Ratio?
To qualify for a mortgage your debt-to-income ratio should be below 43%, if not below 36% as some mortgage professionals suggest, before getting a mortgage. If your debt-to-income ratio is above 36%, you may face greater difficulty in applying and being approved for a mortgage. Under those circumstances, it may be best for you to rent a living space and focus on paying off your student loans
Are Your Student Loans Almost Paid Off?
If you’re only paying towards the principle on your student loans each month and can’t afford to also pay off the interest, then you may want to stay away from buying a home. You’ll probably be paying off these loans for a little while and would face difficulty taking on more debt in the form of a mortgage. Conversely, if you are making good progress on your student loans, it may be fitting for you to pursue a home purchase and take out a mortgage. Taking the time to buy a home and build equity on it may be beneficial for you in the long run.
Do You Have an Emergency Fund?
An emergency fund is money that you set aside in case of, well, an emergency. The recommended amount for an emergency fund varies, and is defined as how much money you would need to live off of for 3-6 months. If your student loan debt is already making it difficult for you to support an emergency fund, getting a mortgage won’t help either.
What About Your Retirement?
This may seem far off in the future to you coming right out of college, but it is still something to consider. Would the combined weight of student loan debt and a mortgage prevent you from making a reasonable investment in your retirement? If so, you may want to consider an apartment or home rental so you can reserve some extra money for your retirement. Cash invested in your 20s provides far greater returns than that invested in your 40s.
Of course, there are many lenders willing to work with you and your student loan debt in order to help you close on a home.
Always weigh all of your options before making a decision as important as this one and don’t be afraid to seek a second opinion on any deals you are presented with. Here at Garden State Home Loans, we are committed to helping our customers at every step of the way along the mortgage process, and we make good on this commitment through programs like our 1% Down initiative for millennials.