Pay Off Debt vs. Down Payment

Chris's house is going to be small for his expanding family. He and his wife can save $50,000 toward a down payment on a new home or for the student loan debt. Which option should they pursue?

QUESTION: Chris in Boise and his wife are expecting their second child in February. Their house is going to be small for their expanding family. They have $40,000 in student loan debt left. They can save $50,000 between now and the end of the year toward a down payment on a new home or for the student loan debt. Which option should they pursue?

ANSWER: I would get your student loans cleaned up before you move up in house. We’re not talking about a 10-year program here. We’re talking about a two-year program. If you can save $50,000 by January, then by the following January you could do it again. Which means you’ll be debt-free with a $50,000 down payment a year from January. We’re talking about 18 months here.

Clean out the extra bedroom and paint it up as a nice nursery. Then when the baby is six months old or a year old, you’ll be ready to move. But a baby can certainly live in a small bedroom. They do that all the time and there’s nothing wrong with that.

I lived in an 1,100-square-foot home until I was 16 years old with my sister and my parents. That was fairly normal a generation ago. Nowadays that’s considered a small home. But when I was growing up, it really was a middle-class home. So when we are talking about a year for you, I don’t think anyone will be psychologically damaged by that. I’m going to get out of debt and then save my down payment if I were in your shoes.

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