Buying home not best step to reducing college debt

Personal Finance

January 02, 2007|By Eileen Ambrose | Eileen Ambrose,Sun Columnist

Charles wants to buy a house, but says $60,000 in student loans is holding him back.

The 37-year-old earns $39,000 a year working for the federal government and pays $420 a month for his Baltimore apartment. He has $6,000 in a savings account that could help with closing costs.

He says he wants a house because renting doesn't allow him to build up equity. But he's haunted by the student loans.

"To me, the one negative outweighs the positive. I keep seeing that $60,000 problem each time I look in the mirror. I still think buying the house is the right thing to do," he writes in an e-mail. "I just don't know what to do."

Given the numbers, Charles should consider postponing buying a house, financial planners say. But that's not necessarily bad.

It's a misconception that buying a house is always better than renting, says Timonium financial planner David Berman.

Mortgage payments in the early stages go toward paying interest on the loan rather than building equity, Berman says. And there are lots of expenses in owning a home: closing costs, taxes, insurance, maintenance and, later, the commission to sell it.

Charles is banking on selling his house for a tidy profit in five years or so. But there's no guarantee that housing prices will rise in the future. Prices have flattened here in recent months, and they can remain that way or even go down.

"There is a greater risk that this might happen in the current real estate environment and particularly in our region," where prices have risen faster than in most other parts of the country, says Lutherville financial planner Nancy Bryant.

Charles doesn't have to give up on his dream, though. One step he can take now is to investigate how much he can afford to pay each month in principal, interest and mortgage insurance given his income and expenses, Bryant says. (Stay away from interest-only or other hybrid loans, she warns.)

Plenty of online mortgage calculators are available, including one at www.bankrate.com, that can help him figure this out.

At the same time, Charles should aim to save enough to make at least a 10 percent down payment on a house, Bryant says. Getting a roommate to help share costs while renting could help Charles reach his goal faster, she says.

Meanwhile, Charles can take other steps to improve his finances.

The good news is Charles has $6,000 in the bank, money that can be his emergency fund, Bryant says. That puts him ahead of many others who don't have a cash cushion to tap when unexpected expenses pop up.

He pays $100 a month on his student loans but complains that the payment isn't enough to even touch the principal. He was hoping that if he bought a house and sold it later, he could apply $20,000 or $30,000 from the proceeds to his student loans. A big payment like that might lead the lender to forgive the remaining balance, he says.

But neither planner has ever heard of a lender doing that for student loans.

Charles appears to have unsubsidized student loans that accumulated interest even while he was in school, Bryant says. To make headway in eliminating this debt, he should contact his lender about putting him on a schedule to make bigger monthly payments, Bryant says.

Charles also asked about saving for retirement. His employer offers a thrift savings plan, similar to a 401(k). If he's not already doing so, he should contribute at least enough in the thrift plan to get the employer match, Berman says.

About forecasts

About this time each year, Business Week publishes stock market forecasts from dozens of Wall Street pros. How right on the mark are they? Not very, according to Seth Hammer, an associate professor of accounting at Towson University. Hammer reviewed the consensus predictions for the Dow Jones industrial average and the actual results from 1996 through 2004.

Five of the nine years, the prognosticators were off by more than 18 percentage points. The worst year: 2002. The pros predicted the Dow would go up 10.7 percent, but the index fell 16.8 percent. Best year: 2004. The Dow rose 3.1 percent, about 1 percentage point higher than predicted.

"The main point is not to adjust your portfolio based on the consensus," Hammer says.

Questions? Comments? Write personal.finance@baltsun.com

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