Use $ for down payment or SLs?

[Bob Loblaw]

Help me spend this money.

We have a large chunk of cash that has been earmarked for a down payment. We also have a substantial amount of student loan debt, much of which is at a higher interest rate than our mortgage would be.

We qualify for a mortgage program that would allow as little as 5% down, with no PMI.

I know everyone's all, "YOU MUST PUT 20% DOWN!" but I feel like this is obvious... Doesn't it make more sense to pay down the student loans that are at a higher interest rate?

Relevant info:
- The monthly payments would be affordable regardless of how much we put down
- This is probably a forever (or at least 10+ years) home, but you can obviously never be sure
- We get no tax deduction for the student loan interest, but we would get to deduct the mortgage interest

[grosnl19]

It would depend on the SL rate for me.

[Bob Loblaw]

Say the SL rate is 6% and the mortgage rate is 4%

[Susie]

For me it'd be a no brainer, keep the 5% to put down + closing costs, and put the rest toward the SLs.

How soon are you planning to buy? That would be my only reservation. I probably would PLAN to spend everything above & beyond closing costs + 5% on SLs, but not actually do it until after closing. Lenders would rather see you have larger SL balances + significant cash reserves than be cash-poor and have lower SL balances. Plus, I'd be leery of relying on a "program" to close with 5% down and no PMI, especially if you haven't found the house yet. Programs change.

I felt no compulsion to put 20% down (or try to), and we haven't put anything extra toward our mortgage for the reasons you gave: SLs with higher interest rates, and the fact that mortgage interest is deductible while SL interest isn't.

[pamela]

I'm in the same situation and we're holding it for downpayment/pay in cash. It's kind of a toss up financially, but we wanted the freedom to buy before current house sells if needed.

[cookies]

What's the difference in your monthly mortgage payment with 5% down vs. 20% down? Is it enough to conceivably pay down more on the student loan?

[sillygoosegirl]

Doesn't the interest rate on the mortgage go down if you have a bigger down payment? We're getting quoted more like 3.25% for a 30 year mortgage with 20% down right now. I'd want to lock in the lowest possible rate on the mortgage first, since you'll be paying on it a very long time regardless, and then start thinking about the SLs.

[SJ]

Given the conditions in your OP, I vote to pay down the SL's and have a smaller DP.

[ellipses84]

I think you should pay down the higher interest SLs, especially of it would pay them off and get rid of a monthly bill.

How soon are you planning on buying? You may want to save the money until then and if everything goes smoothly with 5%, then pay the SLs.