After Graduation: Should I Buy a House?


You just graduated college and you're trying to decide whether to buy a house or rent an apartment...

There are many different factors that go into this decision. Do you have student loans? Do you have a giant car payment or credit card debt? How long will you live in that location? The list gets overwhelming. I am going to break down several factors in the simplest way possible to show you the options using estimated numbers.

Let's say you have a monthly income of $2500 and you are fresh out of college with $65,000 in student loan debt with a 7% interest rate. You are trying to decide on buying a house or renting an apartment in the new city you are living in. The house you want to buy is $150,000 and a fixed mortgage rate of 3.33% with a 15 year mortgage. The alternative is renting an apartment in town for $650/month. Here is the breakdown:

Option 1: Buy the house

The monthly payment on the house: $1060 for 15 years to pay off the grand total of $190,772 after interest.

Your living expenses:$300/month (this is a shot in the dark just to keep a consistent number for both options)

Student Loan Payment: $1,140/month (What's left of your original $2500)

This would take you about 6 years to pay off your student loans.

In 6 years, you have zero student loans, zero savings, $76,320 paid off on the house and $114,452 left to pay off the house, and you have been living off of $300 a month for the last 6 years. Here is what your categories are looking like:

Student Debt: $0
Savings: $0
Mortgage Debt: $114,452

Net Worth: -$114,452

Option 2: Rent the apartment

The monthly rent payment: $650 plus $100 in utilities = $750/month on a 12 month lease

Your living expenses: $300/month

Student Loan Payment: $1,450/month

This would take you about 4.5 years to pay off your student loans.

In 6 years, you have paid off your student loan debt and started saving for a house. Here is what your categories are looking like:

Student Debt: $0
Savings: $26,100
Mortgage Debt: $0

Net worth: $26,100

The biggest argument that people will have with this statement is that you are accumulating an asset by buying a house. Yes this is true! But timing is everything here. If you are able to save up the $26,100 over those 6 years, you could use $20,000 of that for a down payment on that same house. 


Here is your 10 year snapshot from that same starting point:


Option 1:

Revenue: $2500/month
No downpayment (unlikely)
4 more years have passed of paying $1060/month 
Total Cost of House: $190,772 
Monthly Mortgage: $1,060

Total Paid on House: $127,200
Amount left of house: $63,572
Years left: 5 years

Option 2:

Revenue: $2500/month
Downpayment of $20,000
Total Cost of House: $20,000 + $153,023 ($150k + 3.33 interest rate on 10 year mortgage) = $173,023
Monthly Mortgage: $1,275

Total Paid on House: $81,200
Amount left of house: $91,823
Years left: 6 years

Conclusion

With both options, you are completely paying off a house in almost the exact same amount of time. There is only a 1 year difference in the payoff time. Because you are able to save up for a down payment of $20,000 before buying, you are able to afford a 10 year mortgage instead of a 15 year mortgage for only a couple hundred dollars more each month. The big kicker is that at the end of all of this, the actual cost of the house is $17,749 less expensive if you are able to do the 10 year mortgage as opposed to a 15 year mortgage. But, as you can see below, at the end of the day the net income is slightly higher with Option 1 than Option 2 and the house is paid off one year sooner than with Option 2. With these starting totals, it makes more financial sense to buy a house before paying off your student loans. With other amounts, this may not pan out the exact same way. 


Option 1:

Revenue: $300,000

Student Loan Payments: $79,256
Living Expenses: $36,000
Rent: $0
House Payments: $127,200

Net Income from those 10 years: $57,544




Option 2:

Revenue: $300,000
Student Loan Payments: $75,569
Living Expenses: $36,000
Rent: $54,000
House Payments: $81,200

Net Income from those 10 years: $53,231










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