We are preparing to sell our home and purchase a new one. The equity in our current home will pay off the majority of our student loan balance (loans are at 5.25%), but we will only be able to make a 5% down payment on our new home if we pay off the loans so we would have PMI with this option. The new home loan will be around 4.25%. The other option is to use the old home's equity as a 20% down payment in the new home and not have PMI; but we will have higher debt obligations if we do this between our new home loan and our student loan payments. I am thinking it makes sense to pay off the student loan balance and make the smaller down payment. We can save more money this way, both to pay down to 20% equity more quickly and to boost other savings accounts. Is this a good idea? I appreciate any thoughts/feedback.
Great question, investquest22!
I am not a financial expert, but we do have a team here at USAA that will be able to answer any unanswered question for you.
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I agree that it probably makes a lot more sense to pay the student loan off first. Here's an equation you could use because I'm a nerd like that:
Yearly PMI = x
New home cost = y
Student loan amount = z
Yearly added cost (if you choose to pay down your student loans first): .15*y*.0425 + x (The cost of owing interest on an additional 15% on your home plus PMI)
Yearly added cost (if you choose to put all the money towards a down payment): z*.0525 (The cost of your student loan interest)
Pick whichever option is less.