That’s the good news. You have a financial incentive to practice at the top of your game. But today, you’re sitting at the kitchen table, balancing your dreams as you balance your checkbook. You’re not alone if you’re managing the burden of student loans while wishing you could drive a sexy drop-top two-seater. The average law school graduate carries about $160,000 in student debt. Or maybe you’ve just started a family. Suddenly you need a more spacious home to accommodate those extra mouths to feed. If you find yourself wondering how you’re going to make ends meet, it may be time for a new financial strategy—one that lets you enjoy the lifestyle you crave more affordably. So what does that look like? Hint: it’s not the same for every recent law school grad.
First Things First: Managing Student Loan Debt
The global pandemic had a profound effect on credit markets. The rates for both federal and private student loans fell precipitously when the accompanying economic crisis hit, due in part to the Federal Reserve lowering its interest rate. Financial institutions could suddenly earn more money by offering low-interest loans. What does that mean for you? If you took out your student loans—both undergraduate and graduate—some years back, you should look into refinancing them. That’s particularly true if you’ve spent the last several years paying off your student loans on time and have a higher credit score to prove it. While rates aren’t quite at the same historical lows they reached in 2020 and 2021, you still may be able to save money every month if you act now. Interest rates may soon rise as sharply as they fell previously. It’s anybody’s guess, but most experts agree there will be a correction in the credit market. It’s only a matter of when.
Reducing Your Housing Costs
Apartment living is expensive, no matter where you live. It’s more expensive, of course, if you live in a large city, but either way, the rent you pay has no value at the end of the month. Owning a home, by contrast, is an investment that has monetary value. Your mortgage payments build home equity that you can access when you sell your home or even while you’re living there. In addition, homeownership offers tax advantages. You can deduct a portion of your annual mortgage payments from your taxable income. That means more money in your pocket and less in the government’s. Financial advisors often recommend homeownership as a wealth-building tactic. Is owning your own home a high priority for you? Then your financial strategy should take that into account.
Like student loan interest rates, mortgage interest rates fell sharply due to the COVID economic crisis. And they’re just as likely to rise again during this period of recovery. If you’re in the position to afford a home, buying one now might allow you to save on mortgage payments and reduce the lifetime cost of owning your home. Fixed-rate mortgages, while they typically come with higher interest rates versus variable-rate mortgages, are the way to go right now. Your principal and interest payments will remain the same, no matter where rates go in the future.
Low-Cost Mortgage Options
In the first quarter of 2021, conventional mortgages made up 76 percent of the mortgage market. And they do offer some advantages, including the flexibility to choose your loan term and the wide range of property types that qualify for one. Getting approved for a conventional loan requires less paperwork than other types of loans, and you’re likely to receive your funds very quickly. That’s more important now than ever as the housing market has become more competitive, and bidding wars are common. But for many US residents, there are less expensive options. These include a variety of government-backed loans.
Government-backed loans usually come with lower interest rates than conventional loans. That’s because lenders view them as less risky. If a homeowner defaults on a government-backed loan, the federal government must pay the financial institution that holds the mortgage a large portion of the remaining loan balance. Bear in mind that the interest rate you’re offered will still vary based on your creditworthiness: that’s true of any mortgage.
You May Qualify for a VA Mortgage
Are you a veteran of the US military or an active reservist? Then your best mortgage option may be a Veterans Administration (VA) loan. VA loans were created in 1944 as part of the GI Bill, and they are arguably the biggest thank you the federal government has ever conferred on servicemen and women. While government-guaranteed, VA loans are administered by banks, credit unions, and other lending companies. More than 1400 financial institutions offer them.
Home Ownership without the Down Payment
In addition to lower interest rates, these loans offer another significant benefit: you can buy a home with a VA mortgage without making a down payment. So even if you’re just starting your career and haven’t had time to amass a down payment large enough to qualify you for a conventional loan, you may still be able to reach your goal and enjoy the lifestyle and financial benefits of homeownership.
VA Loans Are Not without Their Quirks
To be approved for a VA loan, both lenders and the government require borrowers to complete paperwork. So you’re unlikely to close on a VA mortgage speedily. The VA limits the amount you can spend on a home. In most locations, the limit is set at $548,00, though you may be able to borrow more if you live in an expensive city. While VA loans don’t require borrowers to pay for private mortgage insurance (PMI) even if they make no down payment, loans do come with an initial funding fee, equal to 2.3 percent of the amount you’re borrowing. The fee can be rolled into your monthly mortgage payment, but you’ll pay interest for that privilege. You should factor in both the initial funding fee and the cost of financing it when you’re calculating your total cost of homeownership.
Still, if you served or are serving in the military, a VA loan may amount to your best deal in the mortgage market. Take advantage of this money-saving perk. You earned it with your service.
Look Into a USDA Loan
When it comes to government-guaranteed mortgages, it’s not just who you are but where you buy that can make a difference. The US Department of Agriculture offers its own guaranteed loan program. Low-cost USDA mortgages are available to non-veterans and service members—pretty much anyone, actually—provided you buy a home in a USDA-eligible location. The program was originally designed to encourage economic development in rural areas, but the definition of “rural” has changed over the years. Today, 97 percent of US addresses qualify as USDA loan-eligible. You can purchase property with a USDA loan in all 50 states. You can even buy a home in Maui with a USDA loan.
USDA loans offer many of the same benefits and restrictions as VA loans. USDA mortgage interest rates consistently track lower than conventional loan rates. You can purchase a home with no money down through the program. Credit qualifications are often more lenient with USDA loans, though that will vary from lender to lender. (The USDA doesn’t set a minimum credit score, but the lenders who administer USDA loans often do.) As with every type of mortgage, your credit score will influence your offered rates. But even a fair-to-middlin’ credit score will earn you a better USDA loan rate than you’re likely to get if you take out a conventional mortgage. USDA loan applicants have to jump through fewer hoops and fill out less paperwork than VA loans. And USDA loan funding is considerably faster than VA loan funding. Sometimes you’ll receive word whether you’re approved in a day or two, though you should allow 30 days or so to receive funding.
There is one major disadvantage associated with USDA loans, but because you are just starting your career, it may not amount to an obstacle. You must conform to specific income standards. If you earn more than 15 percent of the US median income (that would be more than $90,850 in 2021), you probably won’t be eligible for a USDA loan.
FHA Loan Offer Fewer Restrictions
Only about 9 percent of mortgages written in 2020 were government-backed FHA loans. Given the benefits they offer, that’s pretty surprising. You can take out an FHA mortgage even if you’re a high earner. While you must make a down payment, it’s a pretty low threshold: just 3.5 percent of your home’s purchase price. The property can be located anywhere and the loans are available for single-family homes, condominiums, and multi-unit properties. Maximum loan amounts vary by location between $420,680 and $970, 800. For first-time homebuyers, that’s usually an ample budget. In fact, more than 81 percent of FHA loans were granted to first-time homebuyers in 2020. About a third of FHA loans are held by minority homeowners. All told, the government opens a wide door for homebuyers through the FHA program.
There’s always a catch, of course. When you take advantage of some of the benefits of FHA mortgages, such as the low down payment option, you will be required to pay Mortgage Insurance Premiums (MIP). The amount of money you pay and the length of time you pay it varies depending on the term of your loan and how quickly you pay off your mortgage. It never hurts to make one extra mortgage payment per year if you can swing it. Calculate your estimated MIP payments under various scenarios. You may decide it’s more economical to make a larger down payment than pay MIP premiums for years and years.
Taking Steps Toward Moving Up
Are you still with me? I’ve given you a big plate full of information to digest. But it all boils down to a few key takeaways:
- Do what it takes to reduce the cost of your student loan debt, including refinancing.
- Build a strong credit profile. That’s one move you can make to reduce the cost of borrowing money for any purpose. Make that one a life-long goal.
- Mortgages come in a variety of shapes and colors. If you plan on buying a home, research your options.
- Compare real dollars and cents. Calculate the costs of any mortgage you’re considering, factoring in all of your expenses, including homeowners insurance, taxes, and mortgage insurance.
- Explore government-guaranteed mortgages. They’re often the best deals out there.
That may still sound like a tall order. But you can get a lot of support from the financial and real estate professionals with whom you work. Remember, they’re competing for your business. Make them work for it by handing them part of the burden.