Ask Our Broker With Peter G. Miller: Debt Concerns
Q: Why is student debt so high in our country? How can people buy homes if they’re saddled with huge monthly costs?
A: In 2007 student debt amounted to $510 billion, a figure which soared to $1.38 trillion at the end of 2017, according to the Federal Reserve Bank of New York. It’s estimated that on average, students graduate from college owing $35,000.
The massive, sudden and remarkable increase in student debt shows up when mortgage lenders compute debt-to-income (DTI) levels.
A household with a joint income of $90,000 a year has a gross monthly income of $7,500. If lenders will allow 36 percent of that income for recurring debts, it means buyers can spend as much as $2,700 a month on such things as housing costs, auto payments, student debt and credit card bills.
If our two buyers have $70,000 in combined student loan debt, then at 5 percent over 20 years the monthly cost is $492. Add in two new car loans at, say, $515 each, and $300 in credit card spending, and our borrowers have recurring monthly debts of $1,822. That leaves $878 for housing costs ($2,700 less $1,739). If taxes are $175 a month and insurance is $100, then we have $603 available to pay mortgage principal and interest. At 4.5 percent interest over 30 years, we can borrow $119,000. In many markets, that’s not enough for ownership.
How can potential buyers resolve the debt bomb?
First, look for mortgage programs which allow more debt; some are now available with DTIs of as much as 50 percent. However, big monthly debt payments represent a lot of risk. If monthly incomes go down, then borrowers, lenders and mortgage investors could all face losses. A safer bet might be a smaller FHA loan with a 43 percent DTI ratio for monthly expenses.
Second, consider an ARM, perhaps a 5/1 or 7/1 mortgage. Such loans have significantly lower start rates when compared with fixed-rate financing, but – again – there is risk if rates rise in the future.
Third, start a budget – and stick to it. Pay down bills and don’t get saddled with new ones. Your credit score will improve, and thus you will qualify for a better mortgage rate.
As a country we need to re-think the value of a college degree in an economy increasingly dominated by artificial intelligence and robotics. In turn, for too long we have looked down on those who earn a living in the trades, and yet many professionals earn good incomes and have no college debts. If you don’t believe it just get a quote from a plumber, electrician or auto mechanic.
Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to email@example.com.
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