Army LT Buying a House with USAA Cadet Loan

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us-army-lt-buying-houseI received the email below from a prior-enlisted active duty Army officer who wants to use his USAA Career Starter Loan to buy a house. Way back in 2008 I received my CSL and invested $15,000 of it in low cost, diversified ETFs. The other $10,000 I put into 1-5 year CDs, which were then paying more than the loan interest rate. After I graduated I sold the ETFs and paid off one of my many student loans, which was at 6% interest.

My repayment started in 2010 and it took me until 2013 to repay the entire loan, which was 2 years early. That saved me a few thousand dollars in interest and also freed up a lot of monthly cash flow.

There’s two main perspectives when it comes to the Career Starter Loan, whether it’s Navy Federal’s version or USAA:

  • You are a young military officer, have 99% confidence you will have a job for at least the next 4 years, and you can afford to take investment risks with the money. You’d be a fool not to take the low interest rate cash and invest it in the stock market, bonds, or property.
  • You are a young officer with probably little to no student loan, credit card, or auto loan debt. Why on Earth would you immediately start your career by taking on debt? Resist the temptation of easy credit and just start diligently investing every month in the TSP.

Let’s run some numbers. Let’s assume you take the loan ($25,000) at 1% interest, invest it in a Vanguard mutual fund (like the Total Stock Market Fund). You get 7% return for five years. You’ll pay about $600 in interest if you pay the loan out over the full 5 years. Your investment account total after 5 years: $35,063. Minus the $600 in interest payments and you’re at $34,400.

Now let’s say instead of taking the loan and making payments to USAA you just put $500 per month into the TSP for yourself (and track it with Personal Capital). And let’s say you get the same 7% return. After 5 years you’ll have $36,919. Over $2000 more than if you take CSL.

Besides the numbers, not having a massive $500 loan payment due every month as a lieutenant/ensign is very liberating. Suddenly every paycheck you receive you get to spend how you see fit. You don’t need to immediately ship off a quarter of your pay to USAA.

So with that in mind, let’s take a look at this “Seasoned Army LT’s” email and my response below.

I am an Active Duty officer serving in the Army.  I recently commissioned and have been contemplating about whether or not to take out the USAA starter loan and do one of two things:

  • COA 1:  Pay off the remainder of my student loans (approx. $24K at 3.8% interest)
  • COA 2:  Borrow the full 25K and use it on a home that I want to purchase and live in until I PCS, afterwards it would remain as a rental property.  Home is 94K without a down payment (thanks VA loan), equaling to a monthly principal/interest/property taxes/insurance (PITI) of $571 per mo.  If I use the starter loan, I will then finance only 69K, which will reduce my PITI to $468 per mo.

I know that the only way this action would be financially wise would be if I could get an interest rate lower than my mortgage interest rate.  FYI interest rate is great through NavyFed at 2.875% over 30yrs.

I would like to know your thoughts regarding either one of these financial COA's.

Welcome to the officer corps! Are you eligible for the Loan Repayment Program (LRP)? I know some Army officers can get their student loans paid off after they commission. If you are eligible for the LRP, I would definitely explore that option.

Just to remind you, I'm just another active duty officer with no financial credentials. If you want some real advice, you'll need to talk to a fee-only Certified Financial Planner like Rob Aeschbach, the Military Financial Planner. That being said, here's what I would do in your situation…

Use the USAA Career Starter Loan to Pay Off Student Loans

COA 1: I can't find online what rate USAA is offering for their Career Starter Loan (CSL). It's usually around 0.75% for Academy grads and 2.99% for ROTC grads.

I assume since you have student loan debt you either did OCS or ROTC. It definitely makes sense to refinance your student loans at 3.8% to a lower interest rate, if that's what USAA is offering. Besides saving on the interest, the USAA loan is scheduled to be paid off in 5 years, rather than the longer terms most student loans have. This will force you to pay the loan off quicker and start investing that money sooner. Check to see how much you'll save. It will probably be $1000+ in interest and a few years of time.

I think refinancing your student loans is your best course of action for the USAA CSL. Then, make extra payments on the CSL and pay it off early. You could be debt free in the next 3-4 years.

Use the USAA Loan to Buy an Investment Property

“Great investment opportunity!”

COA 2: While every situation is different, I think in general most people aren't cut out to be long distance landlords and would see a much better return on their investment and lower risk from investing in the TSP and other assets rather than real estate.

If you think renting out the home after you leave can cover the cost of PITI + property manager + annual maintenance + potentially bad tenants + vacancy, and you won't lose too much sleep over it, then go for it. What do you think you could get for monthly rent for the place?

We bought a condo at our first duty station and now we're trying to sell it before we PCS. We did get a good deal on it when we bought it and should make money when we sell, but the risk of not-selling or of another 2008 market crash happening is all too real. The break even point for renting vs. buying is usually 5-7 years. Since you'll be PCSing every 3-4 years it's probably less risky and more advantageous to just rent until you are close to getting out or already separated and then buy where you want to live, not where the Army tells you to live.

If you do put the USAA loan into the home, you're still financing the full 94k, your just breaking it up into a 69k VA loan and a 25k USAA CSL. Your payment for the first five years will be $468 PITI + $500 USAA CSL payment, so $968 total per month. Like you said, if USAA isn't offering a lower rate than your mortgage rate, it doesn't make sense to borrow that and put it into the house. I would focus on your higher student loan rate.

Another thing to think about is if you just make extra $500 payments on your mortgage. That would put you at $30k of extra equity in your property after 5 years.

Also, look into the 5/1 ARM (adjustable rate mortgage) option. The payments and interest will probably be much lower while your living in the house and rates are at historic lows. If rates do start to climb back up you could refinance into a 15 or 30 year mortgage.

All that being said, I would advise a lot of caution at buying your first rental property at your first duty station. With a 30 year mortgage the payments would definitely be manageable, but think of the extra costs involved in renting or selling the property when you PCS. Just comparing the cost of renting vs. the PITI of owning a home isn't a fair comparison, because their's a lot of maintenance and risk involved in buying a home. Vacancies are a real threat and can eat into your profit quickly.

Home Buying Advice From a Seasoned Army LT

The Seasoned Army LT responded a few days later:

Regarding the student loan dilemma, well the good thing is that I do not owe too much.  As for the LRP, I do not qualify due to being a prior AD service member.  So, I will more than likely refinance my student loans and pay them off quickly with the CSL.  With that said, I am at my 3rd duty station following 5.5 years AD Enlisted service in the Army, which is why I am looking to purchase a home.  My reasoning and advice for others is as follows:

Buy a home when you feel you are financially ready to assume the risk.  Have a budget.  Be prepared to float the mortgage (PITI) should your home sit un-rented.

I agree that you need to be ready to assume the risk if your home sits un-rented, but realize that as investments the real return on housing has been about 1%. Obviously you could do much better in the stock or bond market. Make sure that the risk matches the reward. In this case you have a lot of risk and are putting a lot of eggs in one basket for not much upside potential.

Buy a home sometime after your 1st duty assignment so that you have time to learn the Army system and get comfortable with the Army lifestyle.

I also agree that you should probably wait until after your first assignment to purchase a home while you serve. However you may just want to wait until you separate from the military to purchase any kind of home. Having to move every 3-4 years makes buying and selling prohibitive and becoming a long distance landlord is a whole other kind of stress that most military families aren’t ready to deal with.

I purchased a home at my first duty station and now I’m attempting to sell it before we PCS in the next few months. The costs associated with selling a home make it very difficult to turn a profit even in a rising market. And lest we forget, 2008 proved to everyone that housing prices do not always rise.

If you buy a home, consider a 15 yr mortgage.  The interest rates are much lower and in the long term you will typically owe half the amount in interest.  Also, this may put you in a great position for retirement where your home could be potentially paid off before you exit military service.  If when you retire you decide to live somewhere else that's ok, sell that home and use the proceeds of the sale to buy your dream home or at least reduce the new mortgage significantly.

Research everything about your prospective buy: Property taxes (know before you buy what the rate will be when the home is a rental, as it will increase), Homeowners insurance (homes with a solid foundation and a brick/block exterior are the cheapest to insure), Property management RATES and REPUTATION, Rental market, School district, and crime statistics.

Research ways to buy a home: For Sale By Owner (FSBO) -vs- Real Estate agency (Know that if you use a Realtor that you will pay their commission indirectly since the sales price is inflated. This may be several thousand dollars)

Rent a place when you arrive at your new duty station that is a month to month or a 3 month lease option.  This will buy you time so that you can search peacefully for your investment home.

Go to ACS and Housing and sit down with their counselors for advisement on your prospective purchase.

Do not use a Mortgage broker.  They are a service that is a financial waste.  Research bank rates on your own and save your money.

Don't forget about your military benefits.  Apply for a VA Home Loan Guarantee, it is a great program for service members.

Don't expect to make big profits on your rental.  It is an investment for the future, not a cash cow for the present.

Make a strategic buy and NEVER allow the seller or the Realtor to push you.  That should be a RED flag for all buyers.

Well Spencer, that is what I have for now.  Hope this helps and I will keep you posted as to the final transaction of the home I end up buying.  As of now Navy Fed is offering VA loans as low as 2.75% (if you buy points) on a 15 year mortgage.  I am electing to go with the 15 yr at 2.75% (purchasing price for lower interest is .25% about $235).  And yes I am doing a FSBO transaction because it make good financial sense and I do not mind the added work/research required.

These are all great tips if you’re still committed to purchasing a home while on active duty. I caution every military member to consider all options available to them and especially to understand the risks and rewards of buying a house or condo.

In this case the “Seasoned Army LT” seems committed to becoming an landlord and has definitely done his homework. Some people are cut out to be military landlords. As for me: definitely not. I'll stick to my low maintenance stocks and bonds (inside the TSP and Vanguard accounts) and track my growing net worth with Personal Capital.

2 thoughts on “Army LT Buying a House with USAA Cadet Loan”

  1. It seems like your math is off–

    “Let’s run some numbers. Let’s assume you take the loan ($25,000) at 1% interest, invest it in a Vanguard mutual fund (like the Total Stock Market Fund). You get 7% return for five years. You’ll pay about $600 in interest if you pay the loan out over the full 5 years. Your investment account total after 5 years: $35,063. Minus the $600 in interest payments and you’re at $34,400.

    Now let’s say instead of taking the loan and making payments to USAA you just put $500 per month into the TSP for yourself (and track it with Personal Capital). And let’s say you get the same 7% return. After 5 years you’ll have $36,919. Over $2000 more than if you take CSL.”

    If you put 500/ month into TSP for 5 years or 60 months = $30,000 in principal invested. (Assuming Roth and you’re not factoring in tax deductions for a Traditional)

    If you take a $25,000 dollar loan at 1% for 5 years= the true cost of that loan would only $25640.62– or aprox $427 in monthly payments.

    So technically, the CSP option is better because you saved $5000 in principal by taking the loan and getting your money in an investment earlier rather than later. This also passes the common sense test: by time-value of money. The more money you can get in the market for longer= generally the better your returns will be assuming a constant rate of return.

    • The difference I am trying to highlight between the two approaches is investing borrowed money vs. investing your own money. I agree that in general lump sum investment is superior to dollar cost averaging and that more time in the market is better than not.

      However, rather than making $427 monthly payments to USAA, you could instead be saving $427 out of your own paycheck and investing in your accounts. This gives you increased financial flexibility for when the inevitable surprises happen (last minute PCS, TDY, baby, marriage, etc). Instead of a fixed payment that you must make to your creditor, you achieve the flexibility of investing in yourself or using your money for whatever other purpose you deem necessary.

      It’s this financial freedom that I’m trying to get across. Because when you’re investing $427/month into your own retirement accounts, why not invest $500? It’s only $73 more a month, you won’t miss it. But if you had to make the USAA loan payment of $427, investing $73/month may not even seem worth it. Focusing on the big wins and making substantial investments is more important than a dollar here or a dollar there.


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