The following is a post by MPFJ staff writer, Derek Sall. Derek is the owner of the blog, LifeAndMyFinances.com, where he teaches people how to get out of debt, save money, and become wealthy.
When college students graduate, they typically have three things on their mind: (1) they need to find a job, (2) they’d like to reward their achievements with a new car, and (3) they want to buy their very first house. Now, even though college graduates have learned much in school and may have graduated with honors, most of them are still quite financially illiterate at this stage in their lives. What they might think they deserve or need could actually hurt them financially for many years to come.
While I don’t disagree that many students should be looking for their first job, I certainly disagree with the purchase of a brand new car. But what about this notion of purchasing a house? Is this a wise choice for recent college grads?
Buy vs. Rent for the College Graduate
For starters, quite a few college graduates probably won’t qualify for a home loan because of their large student debt. However, as the economy continues to recover, banks are becoming more and more relaxed on the requirements to qualify for the home loan. This means that more students will have this decision to make: “Is it wiser to rent an apartment after college or buy a house?”
The Arguments For Buying a House
Here are the popular arguments for buying a home instead of renting:
- You’re building equity with each mortgage payment
- A house will appreciate in value and is a good investment
- By purchasing a house, you are avoiding the cost of rent, which everyone knows is just like throwing your money down a rat hole
- Buying a house will give you further responsibility and will mature you
- You need a house if you want to start a family
The Arguments For Renting an Apartment
- You can find a rental for cheaper than a mortgage, which provides more cash flow
- A rental means fewer unexpected expenses, as all the issues should be fixed by the landlord
- Apartments provide greater flexibility in your life, should you want to travel or just have a more flexible life
- By renting, you take on less debt (since you probably have enough as it is from those student loans)
The arguments both for and against buying a house sound like reasonable ones, but which option makes the most sense for the great majority of the time?
In my opinion, a new college graduate should find a cheap rental after graduating and finding their new job, especially if they have college debt to pay off (which almost everyone does these days).
The typical college grad has about $25,000 in student loans when they graduate. If they rush out and buy a house, their debt load could quickly grow to $200,000, all before the grad even understands how debt works and what they are signing up for. Sure, they understand that their student loan will take 10 years to pay off, and that their home mortgage will take 30 years, but do they realize how long that actually is? I highly doubt it.
It is my belief that college grads should first pay off their student loans before even looking at house properties. By avoiding the home purchase right away they can pay off their student loans much faster. Plus, this gives them a respect for debt and how difficult it can be to just pay off a small amount (when compared to a home loan). Even though that house will most likely appreciate in value, it is of greater financial significance for young adults to pay off their debts and mature prior to taking on a property of their own.
How about you all? Do you agree or disagree? Do you have a pro or con that I did not mention?
Share your experiences by commenting below!
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