A student debt success story
July 30, 2014
Between 2004 to 2013, student loan debt in the United States ballooned by more than 400 percent, to around a trillion dollars. Talk about OMG.
Many experts—the ones who seem to get the most airtime—say this burden is going to repress first-time homebuyers’ urge to nest for years to come. Others say these numbers are misleading: the monthly burden of student loans has remained pretty much constant thanks to higher incomes and longer repayment terms. Meaning that aspiring homebuyers are being thwarted by other factors, like a weak economy and tight lending conditions.
Whatever the case, people saddled with student loan debt are buying homes. For inspiration, we talked to one first-time buyer who made all the right moves and is comfortably paying for a nice, equity-building condo in Boston right now—despite a double dose of both undergrad and grad debt in the household. It’s a case study in doing it right.
$80,000-plus in student loans
Meet Katie, 31, who with her husband, Alex, bought a condo five years ago in the part of Boston known as Jamaica Plain. Just married at the time, they were already more than $80,000 in debt between Katie’s undergrad loans and Alex’s grad school loans. Later, Katie would take out more loans to pay for her MBA.
That’s a pretty nice pile of student loan debt. Back to the big picture for a moment: In 2010, the New York Times reports, about 75 percent of youngish households (ages 20 to 40) carrying student loans owed $20,000 or less. Only 2 percent owed more than $100,000.
So how did Katie and Alex do it? Mainly, they got real about what they could afford and stuck to it, knowing that their first home would not be their dream home—but would help put them on the path to getting it.
Getting real about budget
“We scaled back our expectations,” says Katie. “I don’t regret any decisions I’ve made with my education, but we probably bought less house than we would have without the debt. For us it was about, we have this much money coming in, and so have this much we can spend. So we had a relatively low budget for Boston.” For Boston, “low budget” means anything under $300,000.
They also considered the shaky economy. “We wanted to be conservative and make sure one of us could definitely cover the mortgage if something happened to the other one’s job. It was 2009, and I worked in banking”—she can’t help laughing—“so we kind of wanted to be careful.”
Today, Katie is director of lending and impact investing at the Housing Partnership Network (Framework’s partner), and Alex is a marketing manager at Constant Contact. “We are fortunate in that we both make decent incomes,” she says. “It would be harder if we had all this debt and we were in lower-paying industries.”
“A lot of people I know who make similar amounts of money buy much more expensive homes,” Katie notes. “Brand-new condos that don’t need any work or anything. And I’m thinking, oh, that would be nice. It’s either because they don’t have student loans or they’re willing to cut back on travel and other things. We wanted to buy a home that fit into our life and didn’t force us to change our spending habits too much. We were willing to take something and slowly improve it over the years. It wasn’t going to be perfect right away.”
Consequently, she says, “There were really only a couple of neighborhoods in our price range, and then maybe only three places.” But one of those places fit the bill. “We moved pretty quickly. It helped that it was December. We were just really aggressive when we found the place we wanted.” (See our post on buying during the peak season versus off-season.)
Job one: build equity
Building equity was top-of-mind, says Katie, whose work life has always been real estate–related. For a while, she worked for a bank, making commercial loans. “I know other people who would rather live in the fancy part of town, so they rent. It’s just a personal decision. But I always felt that the ability to build equity in a home, especially in a city, was important.”
And build they are. “The rents have gone up in Boston so much since we bought that we could rent our unit now for $400 or $500 more than we pay on our mortgage,” she says.
The equity has already allowed them to refinance. They’d been able to save only a modest down payment, which necessitated an FHA loan and mortgage insurance. Now they have a conventional loan.
“We only had to pay that mortgage insurance for a couple of years, and then the market did the work for us,” Katie says. “You could probably make a valid argument that it’s not worth it to save up 20 percent. I’m sure it varies from market to market, but in a place like Boston, where it’s a relatively safe investment, it might be worth it to only put 10 percent down and then let the equity build up.”
Moving in and moving up
The day they moved into their condo, Katie says, “It was really, really exciting. I’d wanted to buy something as long as I’d been an adult. And I appreciate the value of owning even more now than I did then. Then, it was kind of a goal I had set, and I achieved it, and now I realize just how much better off we are financially because we bought the home. Hopefully it’s going to help us step up to a bigger home when we need it.”
That time may not be too far away: the couple’s first child is due in November. “We have a two-bedroom, so we’ll have space for the baby for now, but this home was always meant to be a five- to seven-year home. Then, something bigger in the city or right outside the city.”
Three years later... We checked back in with Katie and found that she and Alex had indeed traded up — and had just welcomed their second child. We talked with her about the five financially savvy moves that got them where they are.
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