Q: I recently received what some may call a small inheritance from my aunt, but this is a lot of money to me. I live paycheck to paycheck, and I want to make sure I do the right thing with this money. I am a single mom and currently my 2-year-old daughter and I live in a one-bedroom apartment. The rent is $500 and covers all utilities. The place we are in now is safe and clean, but it's very small and there is no yard to speak of, so we have to go to parks for her to play outside. I'd love to buy a home and am considering using part of this money as a down payment and use the remaining amount to help me meet monthly expenses. I could also buy a home with no money down and have a bigger cushion for expenses. I love to garden and work in the yard. I'd also like my daughter to grow up in a place in which she will have good childhood memories. I've found a little place I think I could get for around $100,000. My mom says my aunt would want me to pay off my student loans, which, coincidently, are about the same dollar amount as my inheritance. My questions: 1) should I pay off the $40,000 in consolidated student loans that have an interest rate of 6.5 percent or should I buy a house, and 2) if I should buy a house how much money if any do I put toward a down payment?
Owning a home is a lifestyle and has always been the American dream, but the numbers have to work or your dream will turn into a nightmare.
After the recent/current housing bust, we are all aware that not everyone should be a homeowner. Buying with no money down and getting approved for a loan that stretches the budget can lead to disaster.
If you're living paycheck to paycheck with a $500 rent payment, the stress of making a mortgage payment may take away all the enjoyment of owning a home.
In addition to the principal and interest payment, you will need to budget for property taxes, insurance, repairs, utilities and perhaps homeowners' dues. If you don't make a 20 percent down payment, you will also pay private mortgage insurance or PMI.
At a minimum, most lenders require a 5 percent down payment. Making a 5 percent down payment on a $100,000 home, will add $63 of PMI to your monthly mortgage payment.
If you put 20 percent down, you won't have PMI but your principal and interest payment (assuming a 30-year mortgage at 5.5 percent) will still be $454.
If you buy the home and put 20 percent down, the $20,000 you have left from your inheritance could either be used to help with monthly expenses or to pay down your student loan. Even with a consolidated loan, you probably have unsubsidized, subsidized or multiple loans with various interest rates.
If you decide to pay down your loan, let the lender know that you want to pay off the unsubsidized loan, or if you have multiple loans pay off the one with the highest interest rate. Ask for the loan to be "redisclosed," which will lower your monthly payments based on the reduced loan amount.
If you use your inheritance to pay off all of your student loans, you won't be living paycheck to paycheck. The extra money could be saved for a future home purchase or used to enable you to rent a larger apartment, townhome or house. Many investors have been buying distressed properties to have as rentals.
You may be able to find a lovely townhome/home to rent for around the same price as your current apartment. Let the landlord know you will improve and maintain the yard and you may get a reduction in the monthly rental. Also, look for rent to own opportunities.
