Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

06/06/2004
Would it be best to use my savings to buy a condo, invest in retirement, or pay off student loans?
I am 32, single, in a stable, yet grant funded position that pays 56,000/yr. I have no credit debt but have $15,000 left in consolidated undergrad/grad student loans (3.4ish% interest) (I'm paying $400/mo but am only required to pay $336) and a $12,000 in a car loan (1.9% interest, $250/mo but I'm paying $275). I take out $3200/yr pre-tax for non-reimbursed medical expenses, and I recently started getting $200/mo deducted pre-tax into a retirement fund at work. I have no other retirement money aside from a public employees retirement board account (which looks like will contribute little in the end towards my retirement), and whatever I might get in inheritance.

I have saved up $14,000 and am trying to figure out what the best use of it would be.

I have been thinking of investing some of it into a condo. There seems to be so much buzz around how the home loan rates are at unprecedented lows, and just started rising, and it worries me that I might not be able to afford a home at all if I don't buy now and instead keep saving. I live in an area where the costs of owning a single-family home is completely out of the question at this point in my life. My hope is that in 5 years I could have built some equity, benefitted from being in a lower tax bracket than I am now based on the interest deduction, paid off my student loan and car loan, after which I'd be able to put more towards retirement, and in the end have more income available to buy a home that will appreciate better and in which I would want to live for a longer period of time.

If I were to go with this option, I'd need to put all of my non-emergency savings into the down payment and closing costs. I have met with a lender and discussed the various loan options, and it is feasible to do. I just don't know if it is the right path given my other debts.

Would it make more sense to put this money towards paying off my student loan, as well as investing in a Roth IRA or other vehicle to make the money grow? I know that homes around here have consistenly appreciated and are expected to continue to do so, between 4-10 percent per year. I have not been able to get a figure on how much condos appreciate, and I have heard it's slightly less than homes. But the appreciation might be better than paying off my lower interest rate loans sooner.

I guess my main question is that of wondering what the best course of action would be in the long run. Would it make more sense to buy a condo and pay off my loans slowly and increase my retirement contributions later, or to pay off my loans first, invest more in retirement, and then buy a home later?
Gail V. Marquet:
expert info »
You are to be congratulated on so little debt. Given your current salary, purchasing a condo could be a good investement. Your monthly payment (including taxes, ins, etc.) should not be more than 1/3rd your monthly salary. This should allow you to continue paying down your student loan and car. The $3200 annually deducted for medical expenses seems high, but if you incur that much annually it would be in line. You might consider cutting back a bit on that and investing the difference in a Roth IRA.

Another option would be to take a very hard look at where you're spending the bulk of your salary and get very serious at paying off the student loan and car. With your income (and I assume you are single), you could have these paid off in 12-15 months with some sacrifice. Then you would be completely out of debt, could purchase a condo or other housing option and chunk quite a bit into retirement funds.

The options are open to what you feel most comfortable with.
Carrie Bailey Morey:
expert info »
There are a few factors, I don't know, such as:
~Do you or will you have a roommate? (that can help you with your mortgage)
~Will your new mortgage payment be the same as your rent payment is now--in effect not changing your budget?
~Most importantly, are you planning on staying in this condo for at least 5 years? If so, I'd say go for it. If not, I wouldn't buy a house I wasn't going to stay in for at least 5 years, b/c you don't want to risk not making a return. The rates are great to buy a house, but also, it's a great investment. Some say the best investment you can make. You will have equity in your house, which can help you with a temporary emergency fund--until you are able to build one back--which you need to start doing!

You do have debt, but with the continued regular overpayments, it will disappear faster than you think. Also, in case you don't already have one, you need a credit card in your name for emergencies.

Buying my first home was the best investment I have made, I say go for it, and enjoy being a homeowner!
Christina Gears:
expert info »
With an income of $56K and no write offs you are paying a lot in taxes. (Federal and State) Unless you live on the West Coast of Calif, N Y or a very high end area, condos can be a higher risk. If you are a first-time buyer, you can get a home with no money down. If you are in education, you can utilize the "teacher next door" program with no money down and half the mortgage is subsidized by the government. Your debt is small with very low interests. If you don't buy a home, increase your pre-tax retirement to the maximum and enroll in a ROTH. If you do buy, increase your pre-tax to 10% and enroll in a ROTH also. You'll be able to do this and still have decent cash flow because with the write off from the house you'll be able to increase your number of allowances on your W4 and they will withhold less tax each month. You do not want to get a refund.
Frank Wells:
expert info »
Thanks for your inquiry. In considering all of your comments, it seems that
you are well aware of your options and your situation, as well as the importance of saving for retirement as early and as often as you can.

Given that you are most likely paying rent to live somewhere, it makes a lot of sense to look for something to buy. Otherwise, if you are living with family, you could maximize your retirement savings and compounded growth.
Gary Aalen:
expert info »
1)what part of town do you want to live (maybe some cross streets)?

2)do you plan to get married and/or have children anytime soon?

Followup:

R. H. from Washington:
I would like to live in the Queen Anne part of Seattle (most of the condos are along Queen Anne - I'm not sure of the cross streets, though), although anywhere north of downtown up to Northgate is fine. I don't plan to get married or have children soon.
Gary Aalen:
expert info »
Given all you've stated, I would recommend you purchase the condo.
 

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