Physician buying an 850k vs 1.25m house

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cam156
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Physician buying an 850k vs 1.25m house

Post by cam156 » Tue Feb 02, 2016 10:00 am

Hi Everyone,

I will be moving cross country and starting my dream job in the near future.

While shopping for real estate we have found two houses we love. One is a new but unfinished home that is 850k and needs about 70 k to finish up. The second is 1.25 and old. It was however recently remodeled and has twice as much land. It is also 800 sq ft larger and could be our "forever home." It does not need a single dime.

We have 250 k for a down payment and will by making 350k a year (45% federal+state tax bracket)
Current mortgage rates are 3.6 % for a 30 year loan with a 10% down payment. PMI is waived (doctors loan) at 10 %.
Tax deductions could be significant (about 14k for an 783k loan and 18k for the 1.125 mill loan)

My specific questions are:
Is it a good time to buy a house?
Should I go for the "forever home" now as interest rates are low and tax deductions are high?
Is more land a better investment?
Is paying 45% of your post tax income in a mortgage too much (1.125 million mortgage = aprox 7k per month)
Should I buy the new home (870 k) finish it up and sell it in +/- 10 years for a forever home?
Should I go for a 5/1 ARM and try to pay off the 783k loan off ASAP (2.85% rate)?


Thanks !

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PaddyMac
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Re: Physician buying an 850k vs 1.25m house

Post by PaddyMac » Tue Feb 02, 2016 10:17 am

The red flag for me are "dream job". I know a doctor who moved to his dream job in his dream town and bought his dream house, only to discover that the hospital was corrupt and he had to leave a few years later. The house is now rented. Why not work in the job for a year or two and be sure that it's your forever job before buying the forever house.

letsgobobby
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Re: Physician buying an 850k vs 1.25m house

Post by letsgobobby » Tue Feb 02, 2016 10:24 am

How much time have you previously spent in this dream location?

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Toons
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Re: Physician buying an 850k vs 1.25m house

Post by Toons » Tue Feb 02, 2016 10:26 am

"Is paying 45% of your post tax income in a mortgage too much (1.125 million mortgage = aprox 7k per month)"

Yes :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

EHEngineer
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Re: Physician buying an 850k vs 1.25m house

Post by EHEngineer » Tue Feb 02, 2016 10:28 am

cam156 wrote:I will be moving cross country and starting my dream job in the near future.

My specific questions are:
Is it a good time to buy a house? Yes, because you need a place to live, not because of market conditions.
Should I go for the "forever home" now as interest rates are low and tax deductions are high? buying a house is only limited by your finances. Thinking of your primary residence as an investment is a good way to sucker yourself into making a bad decision about where you want to live and what you want to afford.
Is more land a better investment? only ask this question about investment properties, more land is more upkeep unless you are renting it or farming it. But that's OK if you will enjoy using the land.
Is paying 45% of your post tax income in a mortgage too much (1.125 million mortgage = aprox 7k per month) percent of income is less relevant parameter to high income earners. You will be earning way above median/average/normal.
Should I buy the new home (870 k) finish it up and sell it in +/- 10 years for a forever home? you said you loved it, why plan to sell?
Should I go for a 5/1 ARM and try to pay off the 783k loan off ASAP (2.85% rate)?taking an arm is absolutely the wrong decision. you want to stay for longer than the fixed period, so leave the door open to staying indefinitely by getting a fixed rate mortgage.
Hi cam156,

You can afford either house. But I have a few concerns that you didn't mention.
1) Do you really know the area well enough to buy? Maybe you should rent for 6 months or a year. Check out the schools, the traffic, and see the areas at different times of the year.
2) Have you estimated the taxes, insurance, upkeep and maintenance on both houses?
3)Have you considered your take home pay, savings rate and monthly expenditures will be (including housing costs) ? Do you have a spouse and kids yet? If you like to save a lot, or like to travel a lot, or want a lot of kids, or private schools, or fancy cars then don't build fixed costs into your life that you will regret later.
4) Have you considered what will happen if the job is not what you expect?

This is a great time to be excited about the future, but be careful about making long term commitments too quickly. You will be surprised how fast $350k feels normal, and no longer feels like you're "rolling in it."

Good luck to you.
Last edited by EHEngineer on Tue Feb 02, 2016 10:31 am, edited 2 times in total.
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goingup
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Re: Physician buying an 850k vs 1.25m house

Post by goingup » Tue Feb 02, 2016 10:29 am

I have no ideas for you based on the limited information.

Decisions like this come down to cash flow. Can you buy the bigger home and still contribute robustly to savings? Will you still have money to travel, buy vehicles as needed, and pay for kid's school tuition (if public schools aren't an option).

We have always owned nice homes, but never aspired to be "house-poor".

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Re: Physician buying an 850k vs 1.25m house

Post by climber2020 » Tue Feb 02, 2016 10:53 am

cam156 wrote:starting my dream job in the near future.
You don't actually know that yet.

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tc101
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Re: Physician buying an 850k vs 1.25m house

Post by tc101 » Tue Feb 02, 2016 11:00 am

Should I buy the new home (870 k) finish it up and sell it in +/- 10 years for a forever home?
That would probably be more trouble than it is worth, and lots more trouble than you think. Buy the more expensive house that you really want to live in and spend the next 10 years in a nicer house with less work. If you have extra time and energy after doing your regular job you can find something much more profitable than fixing up a house.

I think that it is risky to buy a house until you actually have started on the new job.
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furikake
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Re: Physician buying an 850k vs 1.25m house

Post by furikake » Tue Feb 02, 2016 11:15 am

It's a seller's market, of course it's a good time for you to buy so they make more money off of you. If it was me, I would wait. I'm waiting for the market to go down some so I can build my extension cheaper.

I would not buy either of these houses, personally I don't think you make enough to afford those houses. So don't buy yet, sit tight, live in the area for some time to scope out the area first, and by that time, hopefully the market has gone down some for you to buy at a better deal.

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Re: Physician buying an 850k vs 1.25m house

Post by LateStarter1975 » Tue Feb 02, 2016 11:29 am

Toons wrote:"Is paying 45% of your post tax income in a mortgage too much (1.125 million mortgage = aprox 7k per month)"

Yes :happy
Yes x2
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jbmitt
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Re: Physician buying an 850k vs 1.25m house

Post by jbmitt » Tue Feb 02, 2016 11:48 am

Our first house post residency was much less on a higher combined income. DS's job has not yet become a 'dream job' but it may turn into that. The compensation is fair but the calls are busy and the group politics with those close to retirement and those wishing to take less call are challenging.

We went in to our purchase with a 10-15 year expectation of staying in our current (new construction) home. It is not our forever home as we will eventually want more land, more space, better amenities, full home automation, solar/geothermal, etc, etc.

For the time being, our house is very nice, allows us to pay down student loan and mortgage debt quickly and get caught up on savings and retirement savings.

I would not feel comfortable with that much of our income tied up in a mortgage. We have always wanted to live a lifestyle that could be maintained on one income if needed and without counting on disability coverage or life insurance.

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Minsc
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Re: Physician buying an 850k vs 1.25m house

Post by Minsc » Tue Feb 02, 2016 11:55 am

I found my dream job and it lasted 2 years... Rent for a bit and see if it is truly heaven and if so buy in a few years.

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Re: Physician buying an 850k vs 1.25m house

Post by randomguy » Tue Feb 02, 2016 12:01 pm

LateStarter1975 wrote:
Toons wrote:"Is paying 45% of your post tax income in a mortgage too much (1.125 million mortgage = aprox 7k per month)"

Yes :happy
Yes x2

It is easily affordable. It isn't like 7k/month to spend on other stuff is close to roughing it. The debate is strictly if you want to spend money on a house or if you would rather spend/save it elsewhere. That is a personal choice.

I would definitely rent for 6-12 months before buying anything unless you or your wife have a lot of experience in the area AND there are numerous job opportunities in case you dream job doesn't work out.

I would never buy a house that I was planning on selling. If you really are going to sell the house in 10 years, you would be better off buying the more expensive house now.

Polymath
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Re: Physician buying an 850k vs 1.25m house

Post by Polymath » Tue Feb 02, 2016 12:03 pm

- Move to area first before buying
- Make sure job is what you think it is
- Get to know the area well
- Focus your house search in desireable area
- Don't spend more then 30% of income on house, lesser if you are able to live below your means.

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windhog
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Re: Physician buying an 850k vs 1.25m house

Post by windhog » Tue Feb 02, 2016 12:19 pm

I am a retired doc who has made my share of mistakes, but not this particular one. I have a good friend who does financial planning for physicians, and we have discussed this aspect of physician culture many times. Why is it that newly-minted docs who have delayed the gratification of the dream house for so long make the mistake of buying big before they know the lay of the land?

My view is that the delay is allowed with the promise (to oneself and/or spouse) that the finish of training will be rewarded by “movin’ on up” to a fitting life-style. Please recognize all the pressures that drive this behavior: personal, family, social, etc.

Rather than recount my friend’s stories of clients who have repeatedly blown serious dollars this way, let me just offer that I worked in three different settings (group, academic, solo) in two widely-separate locations over 30 years and finally got it right on the third try. Just remember, you have provided lots of medical care, but you have not spent one day in real world that lies ahead except in your dreams. Rent for six months at the very least. Please.

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Re: Physician buying an 850k vs 1.25m house

Post by Twins Fan » Tue Feb 02, 2016 12:42 pm

cam156 wrote:It does not need a single dime.
You have never owned a home have you? :happy No house out there does not need a single dime.

The good time to buy is when you're ready. Don't worry about rates and timing, or rushing into it. I agree with others to move there and rent for a bit. Unless you're familiar with the area already and certain you will stay at the job/location... then maybe. If not familiar or certain about all that, your "dream home" ideal could change quickly.

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Re: Physician buying an 850k vs 1.25m house

Post by Swampy » Tue Feb 02, 2016 12:46 pm

Like baseball, this is subject to a three strikes rule.

Strike 1: I will be moving cross country and starting my dream job in the near future.
(Will it still be a dream job in 2-3-4 or more years?)

Strike 2: The second is 1.25 and old. It was however recently remodeled and has twice as much land. It is also 800 sq ft larger and could be our "forever home." It does not need a single dime.
(Actually two strikes in this one - there is no such thing as a 'forever' home and an old home will need more than a dime in upkeep.

Strike 3: Is paying 45% of your post tax income in a mortgage too much (1.125 million mortgage = aprox 7k per month)
(YES - ever heard of house rich and cash poor?)


But, do as you wish. :sharebeer
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Re: Physician buying an 850k vs 1.25m house

Post by Dulocracy » Tue Feb 02, 2016 12:52 pm

More important than the percentage of your income is the question: Can you still save 15-20% of your income for the future if you purchase this home?

I agree that you do not yet know if this is your dream job. You will not know that until 6mos to a year in.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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Re: Physician buying an 850k vs 1.25m house

Post by Impromptu » Tue Feb 02, 2016 12:59 pm

Don't be a penny wise and a pound foolish. Either of these houses are going to be your biggest expenses. They are going to dictate the rest of your life. With your income you won't be able to travel nearly as much. Fun toys? Nope. You will be a slave to the house, insurance, utility, property tax, maintenance, and other home payments. You will find it hard to downsize when the job goes awry. Forget trying to sell it. One of my neurosurgeon friends has been trying to sell her $1.2 Million behemoth of a house for 3 years. Nothing you have written indicates why you need such a large, expensive house in the first place. Ego? Entitlement? That has been the downfall of many physicians financially.

Instead, think what is the bare minimum house to meet all of my needs? Then go up a step from there. Voila! You have bought yourself a nice $300,000 house and your financial reserves skyrocket. You become a multimillionaire within 10 years. You can dictate your life's path.
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Re: Physician buying an 850k vs 1.25m house

Post by avenger » Tue Feb 02, 2016 1:06 pm

Is this your first job out of training?

As many as half of first jobs don't work out in the first 2-3 years.

I would rent until you know the area and job well.

Lowly advice from one physician to another.
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Re: Physician buying an 850k vs 1.25m house

Post by ksyung71 » Tue Feb 02, 2016 1:09 pm

We need more info here to give better advice.

what are your student loans, if any?
is this your first job out of training?
Is the 350K income for one earner or two?

I think 850K with a 250K downpayment is doable from a purely financial, "can I afford it" standpoint right now, but I don't think its a good idea to buy right away when relocating to a new area and starting a new job. Better to rent first and get to know if you really want to lay down roots there before committing. many practices have noncompete clauses. You may find you have to move out of the area if your new job doesn't work out. waiting will give you more time to save up a bigger downpayment so you can afford the "forever" house in a few years. At that income level, you should be able to save pretty quickly.

I think 1.25 M is doable in a few years when you have had more time to save up a bigger downpayment. I wouldn't take out a million dollar mortgage with a 350K total household income. If this is 2 earner household, consider buying a house such that fixed expenses can be paid off one income. That gives you more leeway in your budget. Besides, you have to consider some of your mortgage interest deduction may be phased out by Pease. You can't even deduct interest on greater than 1 million in mortgage principal.

And also, is 1.25M a mansion in your new area, or simply the price of entry for a decent, but by no means extravagant house (e.g. 3 BR/2.5BA 2000 sq ft) The necessity of paying that much really varies so much by area. I wouldn't buy anything so nice that if you had to move in the future that there would be a very limited pool of buyers for your house. E.g. million dollar house dime a dozen in Southern California versus million dollar house in the midwest.

Without more info on where the OP is moving to, I don't think we can just tell them "buy a perfectly nice 300K house and be satisfied". we have no idea where OP is moving to. In certain parts of the country 300K can't even buy a crappy old studio condo.

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Re: Physician buying an 850k vs 1.25m house

Post by dziuniek » Tue Feb 02, 2016 1:33 pm

Lots of folks here mentioned you don't know if your job will really be a dream job. I must agree.

My wife is a pharmacist. She's been working at the same hospital for 8+ years now. She started as a Pharmacy Technician, then Per Diem Staff Pharmacist (while doing her residency), and is currently an ED Pharmacist managing about 10 MRTs. She's growing tired of the place.

Things change. (job responsibilities change, titles change, skillset changes)

Your wants and needs change.

We thought the house we bought was in a town we'd stay forever in. Not anymore. For whatever reason crime seems to be on the rise (not a lot, but still). The town's PD posted on Facebook recently: "this ain't your grandpa's town anymore."

This coupled with the fact that my wife wants to change her job these days makes for some difficult decisions in terms of where we should live. The job she is looking at currently is 'clinical coordinator' and since there's a few of these positions throughout the state, we might need to look outside. Eeeh.

You're close to our age, I think, hence a looooot of things might change still!

We had a kid since we bought the house and thought it was spacious enough. Ha! Wishful thinking. We did pay top buck for out little humble abode as it was completely renovated (read:flipped). Eeeh.

End of rant in favor of rent. (for a bit)...

Oh, Get a rate lock, for like a year(if that's how it works) :) Pretty sure you can afford it.

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Re: Physician buying an 850k vs 1.25m house

Post by betterfinances » Tue Feb 02, 2016 2:05 pm

cam156 wrote:Hi Everyone,

We have 250 k for a down payment and will by making 350k a year (45% federal+state tax bracket)
Hi Cam!

From looking at your past posts, and from information on Google, it appears that you are a two doctor family. I see the average doctor salary is around $175k and since you are married and making $350k, I assume both of you must be employed.

I'll share a little nugget with you. My wife and I (combined) don't make $350k a year, but we make a lot of money. And now that we have 2 kids in daycare and house, our income seems to fly out the door as fast as we make it.

I would suggest an inexpensive house for now, and then graduating to a larger house later.

You'll be surprised at how fast you can spend 350k a year.

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Re: Physician buying an 850k vs 1.25m house

Post by goodenyou » Tue Feb 02, 2016 2:13 pm

The best advice you will get is to live BELOW your means for several years. This is not below your means. It is at or (around here) considered above your means. Maintenance, homeowner's insurance, property taxes, lawn and garden care...the list goes on. You also may want a fancy import car parked in front of your expensive house too. Don't make the mistake of spending like crazy as a young physician. It is much more satisfying to spend freely when you are worth a lot of money. I enjoy spending money now. My $.02 as a physician for 20+ years.
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Re: Physician buying an 850k vs 1.25m house

Post by GreatOdinsRaven » Tue Feb 02, 2016 2:19 pm

Yes, it's too much-

You never know how a job is going to work out. They're almost never as good as advertised.

I know of many doctors who bought homes too soon and either left their jobs or were "asked to pursue other opportunities."

I wouldn't buy any home right off the bat, especially the more expensive one. But YMMV.

Good luck.
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Re: Physician buying an 850k vs 1.25m house

Post by cheapindexer » Tue Feb 02, 2016 2:39 pm

the general theme of many replies in one of caution. I would strongly agree.

My first physician "dream job" ended up being at a center which ceased to exist after not even two years on the job. Am I safe in assuming your contract has a 90 day exit clause for your employer? Agree with renting, wait 6-12 months at least. Stay in delayed gratification mode for just a bit longer!!

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Re: Physician buying an 850k vs 1.25m house

Post by joebh » Tue Feb 02, 2016 2:44 pm

cam156 wrote:Is it a good time to buy a house?
That is an extremely context-specific question.
One of the factors is the local real estate market. If you don't know enough about real estate in that locale, perhaps it's too soon for you to buy.
Should I go for the "forever home" now as interest rates are low and tax deductions are high?
Only if you know for sure that this will be your forever home. I don't see how you are in a position to know that now, but your mileage may vary.
Is more land a better investment?
Again, this is context-specific. In some locales 1 acre would be a significant advantage over 1/2 acre. In other locales, 12 acres wouldn't be much different than 6 acres (for example).
Is paying 45% of your post tax income in a mortgage too much (1.125 million mortgage = aprox 7k per month)
That does seem excessive to me.
Should I buy the new home (870 k) finish it up and sell it in +/- 10 years for a forever home?
I would never advise purchasing a house to fix up and sell, if you intend to live in it. A home isn't an investment, it's a living arrangement.
Should I go for a 5/1 ARM and try to pay off the 783k loan off ASAP (2.85% rate)?
I wouldn't.


Everything you have written tells me you are moving too fast on a home purchase in an unfamiliar area. I'd advise renting for a while, learning more about your new job and the area, then deciding what you want to do.

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Re: Physician buying an 850k vs 1.25m house

Post by William104 » Tue Feb 02, 2016 2:56 pm

betterfinances wrote:
cam156 wrote:Hi Everyone,

We have 250 k for a down payment and will by making 350k a year (45% federal+state tax bracket)
Hi Cam!

From looking at your past posts, and from information on Google, it appears that you are a two doctor family. I see the average doctor salary is around $175k and since you are married and making $350k, I assume both of you must be employed.

I'll share a little nugget with you. My wife and I (combined) don't make $350k a year, but we make a lot of money. And now that we have 2 kids in daycare and house, our income seems to fly out the door as fast as we make it.

I would suggest an inexpensive house for now, and then graduating to a larger house later.

You'll be surprised at how fast you can spend 350k a year.
^ this! I make around that ballpark and wouldn't think of taking out 1M on a mortgage. With a house, kids, etc it doesn't go nearly as far as you would assume. I also sell homes for a living, and I'd say you're overextending yourself quite a bit (without seeing your other financial details).

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Re: Physician buying an 850k vs 1.25m house

Post by alfaspider » Tue Feb 02, 2016 3:32 pm

William104 wrote:
betterfinances wrote:
cam156 wrote:Hi Everyone,

We have 250 k for a down payment and will by making 350k a year (45% federal+state tax bracket)
Hi Cam!

From looking at your past posts, and from information on Google, it appears that you are a two doctor family. I see the average doctor salary is around $175k and since you are married and making $350k, I assume both of you must be employed.

I'll share a little nugget with you. My wife and I (combined) don't make $350k a year, but we make a lot of money. And now that we have 2 kids in daycare and house, our income seems to fly out the door as fast as we make it.

I would suggest an inexpensive house for now, and then graduating to a larger house later.

You'll be surprised at how fast you can spend 350k a year.
^ this! I make around that ballpark and wouldn't think of taking out 1M on a mortgage. With a house, kids, etc it doesn't go nearly as far as you would assume. I also sell homes for a living, and I'd say you're overextending yourself quite a bit (without seeing your other financial details).
Second this. My spouse and I make around that much combined and I couldn't imagine having a $7k a month liability hanging over my head like that. Our mortgage is less than half of what you would be taking on and it still hurts a little every time that direct debit happens. We don't even have kids yet. Money buys a lot of things, but one of the most important things it can buy is options. If you are spending it all on a fancy house, you are severely limiting those.

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Re: Physician buying an 850k vs 1.25m house

Post by queso » Tue Feb 02, 2016 3:47 pm

alfaspider wrote:Second this. My spouse and I make around that much combined and I couldn't imagine having a $7k a month liability hanging over my head like that. Our mortgage is less than half of what you would be taking on and it still hurts a little every time that direct debit happens. We don't even have kids yet. Money buys a lot of things, but one of the most important things it can buy is options. If you are spending it all on a fancy house, you are severely limiting those.
Similar HHI here and we came to the same decision as alfaspider. We were more comfortable with a home that was roughly 2x our HHI and went with a 15 year mortgage that we are paying enough extra on to be done in 10. We feel that is a better way to go since it lowers our fixed expenses and leaves extra money for our other savings goals, etc. It also gives us the ability to ratchet the payment back to the minimum without the extra and get by on one income if something happens to one of us. Either way, you can afford it so just food for thought. Sure, my neighbor's 3M house is nice, but when I think about cleaning it, paying the heating bill or replacing the roof I get thankful for what I have really fast. :happy

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Re: Physician buying an 850k vs 1.25m house

Post by Derby » Tue Feb 02, 2016 4:34 pm

I will add to the chorus saying do not buy any home at all until you've been there for a year and you are sure that your dream job will remain your dream job. There will be houses just as wonderful for sale a year from now.

I'm surprised no one has mentioned this yet, so I will: http://whitecoatinvestor.com/

This blog is written by a regular and well-respected poster here, and he knows his stuff. Start by searching for all his posts about home buying, then continue reading. :moneybag
Carpe Diem.

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Re: Physician buying an 850k vs 1.25m house

Post by Watty » Tue Feb 02, 2016 4:58 pm

LateStarter1975 wrote:
Toons wrote:"Is paying 45% of your post tax income in a mortgage too much (1.125 million mortgage = aprox 7k per month)"

Yes :happy
Yes x2
One reality check on this is if you will be able to afford the house and also max out all your retirment accounts.
cam156 wrote:It is also 800 sq ft larger
Do you actually have use for the extra space?

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Re: Physician buying an 850k vs 1.25m house

Post by Ninnie » Tue Feb 02, 2016 5:56 pm

Agree with everything stated by the majority of wise posters above.

In terms of simple affordability, $950k (always over-estimate remodel work) is doable, but do you really want to live through the construction? It's worse than you think it will be. $1.25 is too high on your salary, that would be an all-consuming mortgage payment to have around your neck.

A huge red flag that shows you're moving too fast is that you're comparing two homes with over a $300,000 price point difference. First decide on your desired price point and then keep your search narrower. Don't be looking at homes over your limit.

"Dream jobs" and "forever homes" are not predictable. Your current finances are.

Inframan4712
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Re: Physician buying an 850k vs 1.25m house

Post by Inframan4712 » Tue Feb 02, 2016 6:07 pm

Things you need to prioritize higher than a massive boat anchor of a home:

1. Pay off student loans
2. Maximize retirement
3. Emergency fund
4. Reliable, safe transportation
5. Health, life, and disability insurance

Don't forget you have to furnish the home you buy. Years ago the figure was 25% to 33% of the cost of the home, just to furnish it! It may not be that high in your case, but it's going to be high.

Don't be house poor. I bought way, way below my max house and have been able to pay for the above stuff plus travel.

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JDCarpenter
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Re: Physician buying an 850k vs 1.25m house

Post by JDCarpenter » Tue Feb 02, 2016 6:21 pm

I'll join the consensus. WhiteCoatInvestor has a good way of putting it: "live like a resident" for a few more years (well, add a little bit of spending, but you get the idea)... It will put you in a great position.

Anecdote: In the early 90's, DW and I made a good bit more than you (inflation adjusted) when we bought our dream home after 18 months into her first job out of residency. With renovation costs, we put 1.1m nonadjusted dollars into it (in LCOL area). Things changed... We decided that I should stay home with kids for many years, which took the equivalent of a primary care doc income away. Her specialist earnings stagnated due to running out of hours in day and large increases in malpractice. Mid-career (15 years in), we decided to move to another state--between the tail coverage and the ugly loss on the house, we were out about two years of her income. Yeah, the house was nice and we have good memories, but from a financial perspective, we chose poorly.

(good news: high income professionals have a lot of wiggle room and can retire early even after stupid mistakes if they learn from them!)

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cam156
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Re: Physician buying an 850k vs 1.25m house

Post by cam156 » Tue Feb 02, 2016 6:32 pm

Tremendously wise advice !

Points well taken. I had initially ruled out renting as the costs of moving out of the rental (again) as well as the costs of missing out on the historically low interest rates and tax deductions did not make sense in my mind. That said, I will slow down and re-consider renting.


Thanks Bogleheads!

Rainy
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Re: Physician buying an 850k vs 1.25m house

Post by Rainy » Tue Feb 02, 2016 7:12 pm

cam156 wrote:Hi Everyone,

Is paying 45% of your post tax income in a mortgage too much (1.125 million mortgage = aprox 7k per month)
DH and I are making 400k gross a year and we bought a 1.3M house with 400k down. Our interest rate is 2.375 (7/1 ARM), so our monthly payment including property tax is about 5200 (not count mortgage interest deduction yet). We can save about 100k every year with this purchase while living a comfortable lifestyle.

In my opinion, you make 50k less and you pay 20k more per year on the mortgage, if you have similar spending style as us, your ability to save might be very limited. If you can wait for a few years, it will be more comfortable for you to afford the 1.25M house. If you want to buy now, the cheaper one is better and you can move up after a few years.

BTW, the reason I go with ARM instead of 30-year fixed for 2 reasons: 1. when we purchased the house, we did not have kids yet. We may move when our kids reach school ages. 2. With 100k new money saved every year and some old money saved, we will be able to pay down the mortgage significantly if the interest rate goes wild after 7 years. If this is your forever home and the possible crazy interest may kill you, 30 yr fix is a great.

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Re: Physician buying an 850k vs 1.25m house

Post by inbox788 » Tue Feb 02, 2016 7:15 pm

cam156 wrote:Should I go for a 5/1 ARM and try to pay off the 783k loan off ASAP (2.85% rate)?
This is actually very interesting. Imaging owning your home outright 5 years after you start working and not having a mortgage for the rest of your career. Even if the rates shoot up, year 6 should still be under 5% and if there is a year 7, the balance shouldn't be more than 100-200k left.

Inframan4712
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Re: Physician buying an 850k vs 1.25m house

Post by Inframan4712 » Tue Feb 02, 2016 7:48 pm

Mortgage interest is one of the few deductions allowed for high-income folks. Many, many other deductions phase out - like student loan interest, unfortunately!

A mortgage at 2.75% that is deductible and thus less than 2% sure is attractive when you can buy 3% brokered CDs in a tax-deferred account. I can't for the life of me understand the point of paying off a 2.75% loan. And I say that as someone who used to own a paid off $200k house. Guess what? I still had to pay $500 a month in taxes and insurance to live in that home.

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Watty
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Re: Physician buying an 850k vs 1.25m house

Post by Watty » Tue Feb 02, 2016 7:58 pm

cam156 wrote:Tremendously wise advice !

Points well taken. I had initially ruled out renting as the costs of moving out of the rental (again) as well as the costs of missing out on the historically low interest rates and tax deductions did not make sense in my mind. That said, I will slow down and re-consider renting.


Thanks Bogleheads!
One option would be to buy a lower end house that you plan on keeping as a rental when you move in a year or two. You could get a low interest mortgage on it and not pay it off quickly so that if interest rates go up sharply you would be somewhat covered for that. Of course there are a LOT of good reasons to not want to become a landlord even if you have a property management company.

If rates do go up a lot then the pool of people who can buy million dollar homes will shrink dramatically so you might be able to buy a dream house at a greatly reduced price. You might not get a great interest rate on a mortgage then but you could pay it off quickly so it would not matter as much.
Last edited by Watty on Tue Feb 02, 2016 8:43 pm, edited 1 time in total.

radiowave
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Re: Physician buying an 850k vs 1.25m house

Post by radiowave » Tue Feb 02, 2016 8:35 pm

One other thing to put into the mix, is where do the two houses comp compared to the rest of the neighborhood. If they are on the high or very high side, it may be difficult to sell when the time comes. So you may have an issue like JDCarpenter notes above. We moved from FL a few years ago, had a beautiful house on a small lake, but were on the high side of the comps in the neighborhood, left at the tail end of the housing bust, the comps had to go against some foreclosures in the area, so we did not do well as I moved to my "dream job" across the country. FYI, we love where we moved to, the dream job has turned into a small nightmare :-(
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Re: Physician buying an 850k vs 1.25m house

Post by freebeer » Tue Feb 02, 2016 8:52 pm

cam156 wrote:...making 350k a year (45% federal+state tax bracket)...
I don't know what your subspecialty is or your passion for working but it's a fact that many MDs burn out. also technology and legal frameworks make MD compensation subject to change as well. I made 350K+ a year (in software not medicine) for a number of years and I'm super super super glad that I was a (somewhat accidental) LBYM person and saved like crazy during that stretch. I make a lot less now in a job that's much less stressful and more rewarding in a number of ways. If I had had a 1.25M house or even an 850k house I'm' sure that wouldn't have happened. Many friends have much fancier houses, others not, I don't feel like I or the family ever "suffered" for not having one of the fancier ones. Anyway I've had houses worth from the high 500s to the high 700's I just haven't ever (EVER!) paid more than in the 400's for any of them (got pretty lucky with appreciation) ... :sharebeer

so basically I say - pretend you are making 185K a year and house and spend accordingly, save the rest, you'll thank me later (I hope).

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Re: Physician buying an 850k vs 1.25m house

Post by am » Tue Feb 02, 2016 9:42 pm

Pay off low interest mortgage to not throw away money every month especially if you have the cash to pay it off. Returns are not guaranteed in any investments no matter how low the expectations. The peace of mind that comes with a paid off house is priceless.

What a mistake in my opinion to consider such expensive houses with the way medicine is trending. Golden handcuffs for sure! Just cause you can should you? The upkeep, furnishings, repairs, insurance, etc. will cause you to hemorrage money. With students loans, disability insurances, etc. you will be living paycheck to paycheck. Not to mention how often MD jobs do not work out!!!

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Re: Physician buying an 850k vs 1.25m house

Post by Grt2bOutdoors » Tue Feb 02, 2016 10:08 pm

cam156 wrote:Tremendously wise advice !

Points well taken. I had initially ruled out renting as the costs of moving out of the rental (again) as well as the costs of missing out on the historically low interest rates and tax deductions did not make sense in my mind. That said, I will slow down and re-consider renting.


Thanks Bogleheads!
Since we're on the topic of costs - the biggest expenses are transaction costs, costs that are never to be recouped in the near term given current economic conditions and your guess is as good as mine for the long term. Let's look at real estate transaction costs - whether you are buying or selling, you will be paying a real estate broker close to 5% of the gross selling price. If you think moving out of a rental is expensive, how does shelling out 5% of 1.25 million upfront sound? How about 5% of 850K? Next, you have mortgage costs, then we have window treatments, painting, carpeting, maybe some lawn maintenance. And wait, then we have the back-loads in the form of house maintenance - the pool liner needs replacing, the furnace is going, the a/c compressor stopped working. Oh no! what have we gotten ourselves into?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Physician buying an 850k vs 1.25m house

Post by JonnyDVM » Tue Feb 02, 2016 10:35 pm

You are really stretching the limits of feasible on a mortgage payment here. I'm a fan of 2.1X gross income as a price target for a home. 2.5X as a max upper limit which makes your 850k feasible. 1.125 million is going to make you house poor IMO. You won't be able to travel as much, retire early ect. If you hate travel and a house is the most important thing to you then you could probably swing the larger house. I certainly wouldn't want to but that's for you to decide.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

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Re: Physician buying an 850k vs 1.25m house

Post by hmw » Tue Feb 02, 2016 11:44 pm

Inframan4712 wrote:Mortgage interest is one of the few deductions allowed for high-income folks. Many, many other deductions phase out - like student loan interest, unfortunately!

A mortgage at 2.75% that is deductible and thus less than 2% sure is attractive when you can buy 3% brokered CDs in a tax-deferred account. I can't for the life of me understand the point of paying off a 2.75% loan. And I say that as someone who used to own a paid off $200k house. Guess what? I still had to pay $500 a month in taxes and insurance to live in that home.
I believe that the Pease limitation does apply to mortgage interest deductions. The effect is small for someone who makes 350k a year.

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Re: Physician buying an 850k vs 1.25m house

Post by TroutMD » Wed Feb 03, 2016 12:26 am

cam156 wrote:Hi Everyone,

I will be moving cross country and starting my dream job in the near future.

While shopping for real estate we have found two houses we love. One is a new but unfinished home that is 850k and needs about 70 k to finish up. The second is 1.25 and old. It was however recently remodeled and has twice as much land. It is also 800 sq ft larger and could be our "forever home." It does not need a single dime.

We have 250 k for a down payment and will by making 350k a year (45% federal+state tax bracket)
Current mortgage rates are 3.6 % for a 30 year loan with a 10% down payment. PMI is waived (doctors loan) at 10 %.
Tax deductions could be significant (about 14k for an 783k loan and 18k for the 1.125 mill loan)

My specific questions are:
Is it a good time to buy a house?
Should I go for the "forever home" now as interest rates are low and tax deductions are high?
Is more land a better investment?
Is paying 45% of your post tax income in a mortgage too much (1.125 million mortgage = aprox 7k per month)
Should I buy the new home (870 k) finish it up and sell it in +/- 10 years for a forever home?
Should I go for a 5/1 ARM and try to pay off the 783k loan off ASAP (2.85% rate)?


Thanks !

I didn't read all the responses but the above is the worse mistake you could ever make of your life!

It's great you have 250k for a down payment, invest it or pay cash for a 250k home!

If you buy this house, you will join the ranks of the working rich. You will be tied to your job, working extra, covering more cal/shifts because that 1.25m house won't take IKEA furniture and your Civic will be replaced with a Mercedes and your kids will end up in a private school....

Don't make the same mistake many doctors make...

White Coat Investor has probably already posted on here, but if not please look at his blog or offer to call and tak to him and follow his advice! You will thank us in 5 years!!

I should add, I am an MD, made slightly more than you plus a wife with a low 6 figure income. Our first home out of residency was about a third of your price and our next home was only slightly higher. We left said dream job also with a great nest egg in our middle 30s and essentially dumped it all into a business. We will see what the future holds, we were doing better than 99% of docs our age but right now it's all on black!
Last edited by TroutMD on Wed Feb 03, 2016 12:31 am, edited 1 time in total.

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Re: Physician buying an 850k vs 1.25m house

Post by HomerJ » Wed Feb 03, 2016 12:28 am

cam156 wrote:Is paying 45% of your post tax income in a mortgage too much (1.125 million mortgage = aprox 7k per month)
This is doable at your high salary, but it IS expensive, plus don't forget heating and cooling a larger house, and furnishing a more expensive house, and landscaping more land, and keeping with the Jones next door when you live in a nicer house.

Buying too much house, and too much car are the two biggest financial mistakes you can make.

Get those two purchases right, and you've won 90% of the battle for financial independence.

I think you'd be better off with a smaller cheaper house at first, and saving a ton for a while... But that's just me.

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Re: Physician buying an 850k vs 1.25m house

Post by ks289 » Wed Feb 03, 2016 7:59 am

I definitely agree that the prudent decision is to avoid stretching too much for either home to avoid the kinds of issues mentioned (job loss, drop in income, need to move) which when combined with even a modest drop in property value can be a big financial hit.

Some elements which may have an impact on the decision are
-kids or plans to have kids --impact on work/income
-other expenses
-student loans and other debt
-current level of savings aside from $250,000 down payment
-stability of income and prospects for future income growth

I think that doing a detailed cash flow analysis may shed light on exactly how much home you can comfortably afford. Strictly by the income numbers, you probably can afford the $850,000 home (particularly since you are putting $250,000 down) and maybe even the more expensive home if you have no other debt, low expenses, and high level of current savings. The problem is that the risk is still clearly higher than finding a more reasonable home to buy or rent.

When we bought our home about a decade ago, we were in a similar position and decided to stretch for the "forever home." We met with a fee only financial advisor and did a detailed financial plan and cash flow analysis which clearly defined all of our financial goals (retirement, college, etc). It has worked out so far, but we were lucky nothing happened to our income/jobs in 2009 and we did not have to move/sell in 2009.

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Re: Physician buying an 850k vs 1.25m house

Post by Leemiller » Wed Feb 03, 2016 8:10 am

One question is are you moving to a HCOL or LCOL area? Some of the responses seem to assume you could buy a home for 250-300,
which isn't the case where I live. We are dual income attorneys and kept our mortgage to less than 2x our annual income. We are currently renovating and it is crazy expensive and buying furniture, also gets expensive. If you can keep the mortage to 2-2.5x income I think you'll have more breathing room. Also, worst case scenerio either of our income could carry our basic costs - that is a lot of peace of mind when you know high paying jobs aren't always easy to get.

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