According to MarketWatch.com, in 2016 there was a total of $1.2 trillion in total U.S. student loan debt. As you may have read in my article back in October of 2015, Student Debt is Hindering Home Buyers; it can have effects on graduates wanting to buy.
I was part of that $1.2 trillion dollars. Once December of 2010 came along, six months after I graduated college, my payments kicked in. And on top of that, they were unsubsidized loans, meaning that they started accruing interest while in college, not after. So once I had to start paying, it was the principal plus the built up interest.
I made my monthly payments, even occasionally paying a large chunk at a time. But then, in 2015, I had money saved up and a choice to make: be debt free or buy a condo. I weighed the options and decided to buy a condo.
I work in real estate, therefore it would be hard to advocate for home ownership when I didn’t even own a home. This wasn’t my primary factor in making my choice. There was more to my decision, however, and my personal financial wellbeing was more important than what others may think of me.
The first thing I looked at was the rental rates in Los Angeles. From there I compared it to what I would be paying for a mortgage, taxes, insurance, and homeowners association dues. After running the numbers, I realized that I would be paying the same, or more in rent as I would in ownership. In addition, after tracking the condo market over the previous five years, I saw prices going up quickly. This meant that even if I paid off my student loans, I would need to save up even more towards a down payment than if I bought when I did. And because prices were going up, I would be back to chasing the market. I also knew that if I rented, and waited another year, then it would be risking low inventory, higher prices, higher interest rates, and then being stuck paying the ever increasing rents.
So now that I have owned my condo, what has happened? Well, I rented out my second bedroom to a friend, and since I refinanced to remove the mortgage insurance payment, his rent checks cover more than half of my bills. This means I am paying less to own rather than renting a small studio in the area. And, should I want to rent out my place completely, I would make a profit. That is after only putting 10% down to begin with, fixing it up, and just living there. Because for every year of ownership, my mortgage payment stays the same, but rents everywhere are going up. In addition, every month that I make a mortgage payment, a portion reduces the amount owed and my net worth goes up. At the present pace I will own it free and clear in 28.5 years at the age of 57. If I lived to the age of 97 I will own it mortgage free for 40 years. If necessary or desired I could let the condo pay me monthly in retirement by taking out a reverse mortgage
The value of my condo has also gone up. Based on recent sales and past appraisals, my condo has appreciated 20%-25%. This is important because should I need to sell on my two year anniversary of owning the condo, I could do so and make a profit tax free. Also, if the numbers made sense, I can even take out a loan against my condo to pay off all other debts, or even put it towards the purchase of another property. I have more financial freedom now than I ever did before.
What about my student loan? Because of the money I saved by not renting, I just paid off all my debts. With the exception of the mortgage, I am officially debt free.
And it appears my clients are doing the same thing. I have been recently representing first time home buyers that are jumping on the homeowner bandwagon, even though they have student debt. They are tired of chasing the market, and want to own to better manage their expenses, so that they can put their savings towards their other debt.
Of course every situation is different, and you need to consult the right people to make the best decision for you. But this is my story, and it came with a very happy ending.
Photo credit: “Hand And Money Staircase,fingers Walking Up On Stacks Of Coins,f…” by jk1991
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