I sold my late mother’s home for $250,000. I make $80,000 and have $220,000 in student debt. I want to buy a house. Should I use all my inheritance for a down payment?

My mother passed away and left me her house, which I just sold and will make $250,000. I’m 41 and have no real retirement savings. I make $80,000 a year and am maxing out contributions to my employer matching retirement account. I own my car, pay my credit cards in full every month, and my only real debt is $220,000 in federally funded consolidated school loans. (I only took out $100,000 and have been making income based repayments for 13 years).

“I want to make sure I have access to liquid assets for a down payment once I find my home, but I’d also like to make that money work for me.”

I currently live with my best friend at his house. He doesn’t charge me rent or utilities, since he was paying the mortgage on my mother’s house, with the plans that once it was sold, I would be free to find my forever home; so this is a temporary situation, but it doesn’t have to be a short-term solution. I want to make sure I have access to liquid assets for a down payment once I find my home, but I’d also like to make that money work for me.

I plan to keep maxing out the contributions to my work Roth IRA, but I’m not sure where to put the rest until I find a house to buy. I am looking for properties in the $350,000 to $400,000 range. Would it be better to put all that money into a down payment to keep my mortgage lower and make minimal monthly contributions to a retirement account, or if I should use the least amount possible for a down payment with a higher mortgage, but put a larger amount into retirement savings?

Dear Start Over,

Friends support each other and you have good people around you. You get back to life what you put into it. You seem to be the recipient of the same generosity and kindness from those in your life. I salute your friend for helping to make this period of your life, dealing with your mother’s death while navigating the road, a little easier. You are also right to take your time. It’s rarely a good idea to make major, irreversible financial decisions when you’re going through a period of grief and/or significant change.

But let’s address your $220,000 in student debt first.

“After 25 years of payments (300 payments) on Income Driven Repayment, the remaining debt is forgiven,” Mark Kantrowitz, author of “How to Appeal for More College Financial Aid” and “Who Graduates from College ? Who doesn’t?” The forgiveness is currently tax-free, until the end of 2025, he said, and is likely to be extended or made permanent. Republican proposals to eliminate forgiveness at the end of an income-based repayment plan are unlikely to go anywhere, he added.

Your monthly payment under IBR is probably about $750 a month, depending on your income, Kantrowitz said. “It’s probably less than the new interest that’s due, based on interest rates from 13 years ago, so it’s negatively amortizing. That means the loan balance will continue to grow. You should continue to make amortizing payments based on income. The remaining debt should be forgiven in another 12 years, given that you’ve been paying IBR for 13 years. You’re more than half way through forgiveness.”

Take your time before buying a home and don’t run out of cash flow and/or a 12-month emergency fund. Interest rates are on the rise and we may have a recession next year. Some experts say home prices will rise at a slower pace, while others see home prices falling by as much as 8%. If you want to avoid paying private mortgage insurance, put 20% down on the purchase price of a $400,000 home ($80,000). But Kantrowitz said there are many mortgage options with lower down payments, especially for first-time home buyers.

Read also: “My goal is to have a net worth of at least $100,000”: I’m 29 and live with my mom in a rented mobile home. I have an emergency fund of $25,000 and $26,000 in a Roth IRA. what do i do next

Timothy Speiss, a partner at Eisner Advisory Group, said you have a lot going for you, given your $250,000 inheritance. It’s smart to continue making maximum annual contributions to your employer-matched retirement plan. Speiss also advises you to review your plan’s investment asset allocation so that you have an appropriate asset allocation by age 41, roughly equivalent to a 60/40 split (60% stocks, 40% bonds) . “A fixed or mixed interest mutual fund can be a suitable non-retirement plan,” he adds.

Larry Pon, a financial planner based in Redwood City, California, says you should focus on maximizing your retirement plan. The power of compounding is your friend: you’ll earn money on reinvested interest for the next three decades. “At the very least, if you get raises, increase your contribution with those raises,” he says. “I would like you to save at least 10% in your retirement account. I tell all my clients to maximize their retirement plan contributions.”

Pon suggests that you spend no more than a third of your income on living expenses. That’s roughly $2,222 per month. “That would mean making a bigger down payment to get a smaller mortgage,” he said. “Housing costs include mortgage, property tax, insurance, utilities, and maintenance. Let’s say your expenses, besides the mortgage, are $500/month, then your payment of the mortgage should be about $1,700/mo. That means a down payment of $190,000 and using a 15-year mortgage to get the lowest rate.”

Bill Van Sant, senior vice president at Girard, a wealth division of Univest, agrees. “I would advise saving for a bigger down payment, especially considering how rates have gone up from 3% to 7%. If you put down less down payment, you’ll be borrowing more money at a higher rate. By leaning- you more towards a bigger down payment, ultimately you’ll pay less interest in the long run and be closer to paying off the house.”

Start looking around now, but you have time to wait and see how the housing market will evolve in 2023.

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