Considering a 10% down vs. doctor's mortgage

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Allixi
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Considering a 10% down vs. doctor's mortgage

Post by Allixi » Sun Nov 06, 2016 9:47 am

Hey all,

I'm planning to buy a house in the next year. I'm not especially enthusiastic about the process, but the wife and family are pushing me pretty hard. We currently live in a condo I bought 3 years ago that's in a good location and works well for the two of us, but would be too small if we had a baby, which we do want ASAP. It's especially important to my wife that we move into a house BEFORE a baby is born, so this is somewhat a case of "happy wife happy life".

After looking at houses in my city I wanted to limit the price to ~500K, which would be 2.5x gross income for me.

Some other factors to consider:
1) I have ~180K of student loan debt I want to pay off within 4-5 years. This would certainly strain my debt-to-income ratio in getting a conventional mortgage and I'd prioritize paying this off over saving for a large down payment.
2) Neither of us want to have to move again to get into a better school district, so we're looking at potentially staying up to 20 years in a house. Variable rates are probably not feasible.
3) I already max out a 401K, 2x backdoor roth IRAs, and am putting a little bit into a 529 for my wife (she may go for further schooling).

Realistically, I'd have to save for another 4-5 years for a 20% down payment which could be as high as $100K. My options seem to be:

1) Get a mortgage with 10% down. I just tried to apply for a HELOC for this and the bank appraisal was a lot lower than what I was expecting (almost $20K lower than the Zestimate). I could probably extract only $20-25K of home equity with some extra work.
2) Get a doctor's mortgage - I have sent out some inquiries already to get a sense of payments/rates/fees

Any suggestions? Is getting a 10% down and paying PMI for a few years much more advantageous than a doctor's mortgage? Is it much more difficult to refinance a doctor's mortgage down the road?

Thanks in advance!

dailybagel
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Re: Considering a 10% down vs. doctor's mortgage

Post by dailybagel » Sun Nov 06, 2016 10:21 am

For background, here is a post from WhiteCoatInvestor explaining a "doctor mortgage": http://whitecoatinvestor.com/personal-f ... gage-loan/

strafe
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Re: Considering a 10% down vs. doctor's mortgage

Post by strafe » Sun Nov 06, 2016 10:28 am

"Doctor's mortgage" does 2 things for you:
1. It generally provides more favorable treatment of student loan payments in calculating debt to income ratios.
2. It waives PMI for loan to value ratios above 80%.

My experience from a few years ago was that rates and fees were comparable to traditional conforming loans.

Your post seems to conflate doctor's mortgage with zero down payment. You can put any amount down with a physician mortgage. To answer your question, it's always better to avoid PMI.

The more important question is whether it's wise to take on so much debt relative to your income. I think you already know the answer.

afan
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Re: Considering a 10% down vs. doctor's mortgage

Post by afan » Sun Nov 06, 2016 10:55 am

Some of this decision depends on your expected future income. If this is about what you will be making over the next 5-10 years, then I think you would be taking on too much debt. If you expect your income to increase significantly, it might be fine.

As a physician, you are aware of the cost and value of education. You will need to start saving for your children's college expenses and it does not sound like you are putting anything away for that yet.

Many people move after a few years as their families grow. This is hardly the end of the world. Wanting to move out of the condo before your wife gives birth does not mean you have to buy immediately. You will have many months from the time you know about the pregnancy to the delivery. Plenty of time to shop, buy and move. Even staying in a smaller condo for a while with a newborn can be fine. Babies do not move around much. By the time your first child is a toddler you may want to have more space. That gives you maybe 2 years from now.

I am assuming you are new to practice. If so, how sure are you that you will stay in the same position and at the same location? Many people change jobs and sites, particularly in their first few years. That could completely change the calculus on where you would want to live. How well do you think you know your options about location, space and schools? These are complicated decisions and can take a long time to get right. You might well find your opinion changing a lot over the near future. This is part of the reason moves are common in the early years. The convenience to school, length of commute, details of schools, day care, and extra curricular opportunities shift in importance as you actually experience the effects.

Long way of saying that I would not stretch now to pay more than you can comfortably afford on the assumption you will be happy with the house and effect on your lifestyle.
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Leemiller
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Re: Considering a 10% down vs. doctor's mortgage

Post by Leemiller » Sun Nov 06, 2016 11:29 am

Why don't you sell your condo, rent a bigger place and then look at buying a place? Do you have an emergency fund? Keeping the condo sounds like you'd be very leveraged with all that debt. Also, why is it taking 4-5 years to save 100k on a 200k income? You are spending a lot now and kids cost money. We had a baby in a rented condo just fine and enjoyed the city for a longer. We bought a home with a mortgage of a bit lower than 2x income, with 20% down, and it is much more comfortable - especially since we have two incomes coming in. I would be very stressed in your scenario.

KlangFool
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Re: Considering a 10% down vs. doctor's mortgage

Post by KlangFool » Sun Nov 06, 2016 11:43 am

Allixi wrote:Hey all,

I'm planning to buy a house in the next year. I'm not especially enthusiastic about the process, but the wife and family are pushing me pretty hard. We currently live in a condo I bought 3 years ago that's in a good location and works well for the two of us, but would be too small if we had a baby, which we do want ASAP. It's especially important to my wife that we move into a house BEFORE a baby is born, so this is somewhat a case of "happy wife happy life".
Allixi,

Is your wife pregnant now? For certain culture, you are not allowed to move when your wife is pregnant. So, your wife's parent or your parent will stop you and her from doing that if this is known to them. And, if you insist on doing that, you and your wife will get into trouble with your parents and your in-laws.

KlangFool

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White Coat Investor
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Re: Considering a 10% down vs. doctor's mortgage

Post by White Coat Investor » Sun Nov 06, 2016 11:45 am

KlangFool wrote:
Allixi wrote:Hey all,

I'm planning to buy a house in the next year. I'm not especially enthusiastic about the process, but the wife and family are pushing me pretty hard. We currently live in a condo I bought 3 years ago that's in a good location and works well for the two of us, but would be too small if we had a baby, which we do want ASAP. It's especially important to my wife that we move into a house BEFORE a baby is born, so this is somewhat a case of "happy wife happy life".
Allixi,

Is your wife pregnant now? For certain culture, you are not allowed to move when your wife is pregnant. So, your wife's parent or your parent will stop you and her from doing that if this is known to them. And, if you insist on doing that, you and your wife will get into trouble with your parents and your in-laws.

KlangFool
Which cultures?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

KlangFool
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Re: Considering a 10% down vs. doctor's mortgage

Post by KlangFool » Sun Nov 06, 2016 12:00 pm

White Coat Investor wrote:
KlangFool wrote:
Allixi wrote:Hey all,

I'm planning to buy a house in the next year. I'm not especially enthusiastic about the process, but the wife and family are pushing me pretty hard. We currently live in a condo I bought 3 years ago that's in a good location and works well for the two of us, but would be too small if we had a baby, which we do want ASAP. It's especially important to my wife that we move into a house BEFORE a baby is born, so this is somewhat a case of "happy wife happy life".
Allixi,

Is your wife pregnant now? For certain culture, you are not allowed to move when your wife is pregnant. So, your wife's parent or your parent will stop you and her from doing that if this is known to them. And, if you insist on doing that, you and your wife will get into trouble with your parents and your in-laws.

KlangFool
Which cultures?
Chinese.

KlangFool

Allixi
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Re: Considering a 10% down vs. doctor's mortgage

Post by Allixi » Sun Nov 06, 2016 12:33 pm

No she's not pregnant now. Moving while pregnant would be a hassle but not forbidden AFAIK. There is a cultural quirk that involves having another caregover move in/nearby for 1-2 months peripartum, which I don't think is necessary but I probably can't overrule. No need to discuss that here on this forum.

I've been reading bogleheads and WCI for 2 years now. I understand the "most" boglehead approach is to save until you can pay cash. The "best" approach might be to save 20% and get a conventional mortgage, which would probably take 3-4 years. The point of this topic is to explore what options might I have if I wanted to buy something this year, which is certainly not guaranteed but for me worth thinking seriously about.

Katietsu
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Re: Considering a 10% down vs. doctor's mortgage

Post by Katietsu » Sun Nov 06, 2016 12:46 pm

I think I would start by getting actual numbers on a low down payment doctor loan. I would compile this information along with your other financial goals. You and your spouse then need to have a serious conversation about priorities. You have significant student loan debt. Your want a "forever" home now, you are choosing to max out tax advantaged retirement vehicles, you want to start a family, your wife may want to go back to school, you should build a strong emergency fund, etc

You have a solid income but not necessarily solid enough to do everything at once. Sit down. Prioritize. Do a realistic projection of costs. Then move ahead.

Hulk
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Re: Considering a 10% down vs. doctor's mortgage

Post by Hulk » Sun Nov 06, 2016 12:51 pm

Certainly you can do what you want, but here is my thoughts...

If it is going to take 4-5 years to save an addition 50k, to get you up to 100k/20% downpayment, I really dont like your 180k in med school debt. How long were you planning to keep it around? Ideally you'd bang that out first.

If it were me, I'd to the following.
1. Pick up extra work and work my tail off and knock out that 180k. Now is the time with no kid.
2. Save an addition 50K for a 20% down payment.
3. Only then buy a house.
4. Worry about baby when you actually have brought one home.

Though you avoid PMI with doc loan, you pay a higher interest rate. The best scenario (interest rate) is 20% down and a doc loan. I know thats not what your wife wants to hear but you dont have to worry about schools for 5 or 6 years and you have a condo that works for now. Though not ideal, you can move with a kid or a pregnant wife.

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Artsdoctor
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Re: Considering a 10% down vs. doctor's mortgage

Post by Artsdoctor » Sun Nov 06, 2016 12:55 pm

I'm not sure we used a "doctor's mortgage" but we definitely took advantage of a program Chase was offering when we were starting out and again when we moved to California. They offered a traditional mortgage (jumbo) at 80% of the home's value, and then followed it with a loan that was 10% of the value--and we came up with the remaining 10%. There was no PMI. The loan based on 10% of the home's value had a higher rate but it was deductible on our tax form, which we found helpful.

I don't know if this type of financing still exists but it worked for us. We paid off our student loans first, then the 10% financing, and then were left with a traditional mortgage which was refinanced several years ago and will be paid off on our 60th birthdays.

EnjoyIt
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Re: Considering a 10% down vs. doctor's mortgage

Post by EnjoyIt » Sun Nov 06, 2016 1:12 pm

Allixi,
I hate your plan and your options. 2.5x is overextending yourself especially when including the 180k school loan debt. You are setting yourself up for hard work, stress, and picking up overtime as reimbursements are expected to decrease for physicians over the years. Currently as it stands medicare reimbursement will increase by 0.5% every year till 2019 and then there will be no other increases. There is no adjustment for inflation. Although inflation has been low if history continues and inflation ranges from 2.5%-3% every year we are all expecting pay cuts to a tune of 22-25% over the next 10 years. In addition based on the new MARCA reimbursement model, we will be getting a 4%, 5%, 7% and then 9% one time bonus or payout every year starting in 2019. Solo or small group providers are likely to get pay cuts. Basically having $650k+ worth of debt on a $200k income that will decrease over the years is bad news. I would strongly consider re-evaluating your situation and your spending. Work some overtime to help save up some more money, and consider a smaller house. Otherwise accept the consequences of working well into your late 60s, burning out, and working overtime.

You are heading down the classic poor finances slope most physicians follow. Be better than that.

arsenalfan
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Re: Considering a 10% down vs. doctor's mortgage

Post by arsenalfan » Sun Nov 06, 2016 1:30 pm

Rent until you figure out the schools, friends, commute, and finances. Also what kind of kid(s) you have, and schooling they may need.

We bought the forever home straight out of residency when we relocated to a new HCOL, and had a 1 yo.

Sold that 6 years later and moved to another home 1.5 miles away, because better neighborhood & neighbors centered around a swimteam (surprise we have 2 swimmers in the family!). Different Elementary School as the one we had became overcrowded in the intervening 6 years, right when our kids were ready to hit elementary school.

A lot changes in 6-7 years. I used to feel compelled to have the nest all setup before having kids. Now I believe having a financial nest setup is better. Like others have said, kill your debts and gain freedom. Then prioritize other goals with your partner.

letsgobobby
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Re: Considering a 10% down vs. doctor's mortgage

Post by letsgobobby » Sun Nov 06, 2016 2:03 pm

I'm not worried about you putting only 10% down and getting a doc loan, but I am worried about you having almost $630k of debt on a $200k income.

How secure is your field? Your income? Your job? Can you moonlight? How many children will you want to have?

At the end of the day, buying a house at $500k is not the end of the world at your income but you are taking on some uncertainty because you will be so leveraged. However, the alternatives do not sound appealing either: renting; moving several times; upsizing homes; staying longer in the condo; etc. None of those really sound feasible from a family dynamic standpoint.

You might think about really taking a knife to your larger budget and having a conversation with your wife about, If we go ahead with the $500k house we have to be prepared to make some cuts elsewhere, etc.

I recently got a doctor's loan, 10% down with no PMI and rates consistent with 80% LTV loans. However I am farther along in my career and have no student debt and many years of savings and investment returns.

Allixi
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Re: Considering a 10% down vs. doctor's mortgage

Post by Allixi » Sun Nov 06, 2016 3:13 pm

Well, thank you all for your responses. I figured it would be like announcing I'm about to go commit a crime :D

I've read plenty of these types of topics on this forum; it is a new and interesting experience putting one up yourself.

I think the hardest part is getting my family to believe that we just too poor to do this right now.

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DarkNyte
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Re: Considering a 10% down vs. doctor's mortgage

Post by DarkNyte » Sun Nov 06, 2016 3:32 pm

I recently finished fellowship 2.5 years ago, so I believe we are in similar phases of practice.

I echo all of the above advice. Rent first, figure out what your future family is like before buying the house you think it needs today.

I'm still renting, but I was able to pay off ~150k of student loan debt after 1.5 years of practice while still maxing all retirement accounts.

If I had bought a house right out of training I would have lost out on a a lot of agent fees since I have already had to make a major move to join another practice. I also would probably still owe some of my student loans, and probably a car loan as well, but instead I'm debt free and all of my income goes to buying my financial independence. Renting gives you the most options for your future until you are more established.

Don't feel pressure to buy now. Almost all of my friends and family at least own one home and keep asking me and my wife when we will buy one, but I know for a fact that our net worth is growing faster without the purchase of a house. We life in Southern California, where buying a house is super expensive, similar to the prices you're considering.

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Re: Considering a 10% down vs. doctor's mortgage

Post by Slacker » Sun Nov 06, 2016 3:57 pm

Allixi wrote:
I think the hardest part is getting my family to believe that we just too poor to do this right now.
Allixi wrote: I'm planning to buy a house in the next year. I'm not especially enthusiastic about the process, but the wife and family are pushing me pretty hard.
This is the key element in this.

You need to see if your wife can get on the same page as you. Make sure she knows how you feel about all of the debt compared to your income and how stressful it will be for you (or maybe already is right now, today).

Then perhaps the two of you can discuss various ideas of meeting in the middle and reducing stress for all. It seems that maybe the extended family has too much involvement in the lives of you and your wife to emotionally manipulate you into such a horrible debt load on your young family.

My personal take on it would be to push for a deal whereby you agree to buying a house only after the $180K student loan is wiped out (or only loans at under 3% remain) and you have at least a 10% down payment.

Doctor's loans? I apologize, but I know nothing about that.

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Re: Considering a 10% down vs. doctor's mortgage

Post by Meg77 » Sun Nov 06, 2016 4:18 pm

Hi there. I'm a mortgage banker and just want to let you know that there are lots of different physician mortgage options out there that will allow you to put 0-10% down and still avoid PMI and get interest rates as good as a conventional loan. Sometimes the closing costs are a bit higher than average, but not by much in many cases. So to answer one of your questions, you don't need to worry about saving up 20% to put down or borrowing on a HELOC on your current condo for a down payment. Just save up about 5%-8% of the home amount for closing costs including possibly having to prepay a large portion of property taxes and insurance to fund an escrow account up front.

Now, more to the point, please don't start house shopping yet! I have so many friends who are newly married making good money in their early 30s who decide to go buy a 3-4 bedroom house in a good school district - and a luxury SUV - before they are even pregnant. Some of them still aren't pregnant or took years to conceive. In the meantime they are paying large mortgages and enduring long commutes and spending weekends doing home maintenance for no real reason. They no longer have huge savings rates or enjoy walkable neighborhoods. I realize society pushes us all to think this is normal and even mandatory, but it is NOT. Please urge your wife to consider the following:

1. Babies take up very little space. They don't need their own room, and they certainly don't require multiple bedrooms, a yard, a 2 car garage, or a walk in closet.

2. Even if she is pregnant right now, it will be a minimum of 6 years before the school district you live in matters (in reality it still doesn't matter much in kindergarden or elementary school in many areas). And school districts can evolve a lot during that time period anyway.

3. You have a huge amount of student loan debt. Wouldn't it feel great to pay that off before assuming a huge mortgage obligation? And enjoy your low maintenance, less expensive, urban dwelling for a few years longer while you still can? You have your whole lives to live in the suburbs and frequent Home Depot while taking care of a big house and all that entails.

I realize this may be a losing battle for you, so good luck either way.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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Re: Considering a 10% down vs. doctor's mortgage

Post by goodenyou » Sun Nov 06, 2016 11:47 pm

I hope it not the proverbial ""my wife married a doctor, so now I need to perform routine." The best recipe for disaster is over leverage, excessive debt and a job that doesn't work out. Couple that with a spouse that is not engaged with understanding finances and the need for savings and investing for financial freedom for both of you and you have a disaster in the making. My advice from someone who's been in a similar place, go slowly, make money, and incrementally improve your lifestyle as your financial situation improves. I have seen many colleagues make disastrous decisions that led to financial and marital failures.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

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Re: Considering a 10% down vs. doctor's mortgage

Post by Afty » Sun Nov 06, 2016 11:47 pm

Meg77 wrote:1. Babies take up very little space. They don't need their own room, and they certainly don't require multiple bedrooms, a yard, a 2 car garage, or a walk in closet.

2. Even if she is pregnant right now, it will be a minimum of 6 years before the school district you live in matters (in reality it still doesn't matter much in kindergarden or elementary school in many areas). And school districts can evolve a lot during that time period anyway.
Great advice that I wanted to emphasize. For the first year of our daughter's life, we lived in a two bedroom condo in a crowded East Coast city. It was fine, even nice since we could walk most places we needed to go. We have friends who still live in the city with 2 kids and make it work. The kids share a room and will get a bunk bed once the younger one is out of the crib.

Also, you never know how long it might take to get pregnant. It might take years or never happen at all. I would not make such a major life decision before a baby is actually on the way.

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Re: Considering a 10% down vs. doctor's mortgage

Post by rcjchicity » Mon Nov 07, 2016 2:00 pm

Have to agree with a couple of the previous posts that wanting to start a family ASAP doesn't mean you're going to be able to start a family ASAP. It could take a lot longer than anticipated, possibly with costs associated. I wouldn't want to be over-leveraged in a big, somewhat empty house in that situation.

Allixi
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Re: Considering a 10% down vs. doctor's mortgage

Post by Allixi » Wed Nov 09, 2016 2:08 pm

Ok, time for an update.

First of all, let me say that I pretty much posted this topic in a fit of panic. I LOST MY HEAD, PLAIN AND SIMPLE.

I currently make 205K as a base salary. With various bonuses the average is probably 240K, and with some extra shifts (can't really moonlight per se) it could be 260-270K.

A bit of background - Chinese culture apparently believes a mother should almost be on bed rest and not do any sort of chores or labour after delivery. My wife and family insist that a caregiver (one of my parents, or one of hers, or somebody we hire) be around for up to 6 months after. This doesn't really make sense to me, but I had not appreciated how important it is to them until recently. Perhaps we should have discussed this more before, but it's certainly not worth having a divorce now.

We currently live in a 2 bed, 1 (tiny) bath condo. It might be fine for the two of us and a baby, but definitely not with another adult caregiver. So I start looking at renting a bigger place - nothing is available now in the areas we want to live in. I realize now we are at least 9 months out from having to make any decisions here, but I like to plan ahead. And (as stated before) moving during late pregnancy, while not forbidden, would be less than ideal.

Now the thinking goes something like this:

"Hmm...I'm going to need to buy a house eventually, and you should stay in it as long as possible, so why not buy earlier? I like my job, and even if I stopped liking it I'm pretty sure I would find another one in this city as opposed to moving somewhere else.

So let's start looking - I'm going to pick a random target of 400K (seems reasonable). Searching...well, not really anything I'm super happy with. Guess I have to increase the price up to, let's say 500K. Well, still not seeing much, but doesn't that mean if something comes up I'd better be able to grab it quickly? Time to hit Bogleheads and ask some questions about mortgages!"

And here we are. I needed a reality check for sure. I realize now we are a LONG ways away from having to do anything. 12-24 months from now the situation could change. We could still rent someplace, and if I were to entertain buying a house it would be 200-300K at most. This was a lot of angst on my part over pretty much nothing.

Thanks for reading!

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Re: Considering a 10% down vs. doctor's mortgage

Post by KlangFool » Wed Nov 09, 2016 2:54 pm

Allixi wrote:Ok, time for an update.

First of all, let me say that I pretty much posted this topic in a fit of panic. I LOST MY HEAD, PLAIN AND SIMPLE.

I currently make 205K as a base salary. With various bonuses the average is probably 240K, and with some extra shifts (can't really moonlight per se) it could be 260-270K.

A bit of background - Chinese culture apparently believes a mother should almost be on bed rest and not do any sort of chores or labour after delivery. My wife and family insist that a caregiver (one of my parents, or one of hers, or somebody we hire) be around for up to 6 months after. This doesn't really make sense to me, but I had not appreciated how important it is to them until recently. Perhaps we should have discussed this more before, but it's certainly not worth having a divorce now.

We currently live in a 2 bed, 1 (tiny) bath condo. It might be fine for the two of us and a baby, but definitely not with another adult caregiver. So I start looking at renting a bigger place - nothing is available now in the areas we want to live in. I realize now we are at least 9 months out from having to make any decisions here, but I like to plan ahead. And (as stated before) moving during late pregnancy, while not forbidden, would be less than ideal.
Allixi,

You cannot argue against success. 1+ billion of Chinese show that it is working.

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letsgobobby
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Re: Considering a 10% down vs. doctor's mortgage

Post by letsgobobby » Wed Nov 09, 2016 3:39 pm

Allixi wrote:
"Hmm...I'm going to need to buy a house eventually, and you should stay in it as long as possible, so why not buy earlier? I like my job, and even if I stopped liking it I'm pretty sure I would find another one in this city as opposed to moving somewhere else.

So let's start looking - I'm going to pick a random target of 400K (seems reasonable). Searching...well, not really anything I'm super happy with. Guess I have to increase the price up to, let's say 500K. Well, still not seeing much, but doesn't that mean if something comes up I'd better be able to grab it quickly? Time to hit Bogleheads and ask some questions about mortgages!"Thanks for reading!
Your thinking is fine. Don't let a few very overly conservative folks tell you otherwise. Be realistic: if you will not be happy in the house and school district in ten years, pass. Get the house you want.

Housing is not a means to wealth for most of us. I bought in 2003 and lost money (not much) when I sold 8 years later. I bought in 2011 and made money (not much) when I sold 4 years later. We sold because there was something about the house we did not like. If we had been more selective in 2011 we would not have had that problem.

I would use the next 1-2 years to make huge progress in your savings and debt repayment so you can afford to buy the house you want in 12-24 months. I would not buy too little house in the wrong place. I think that would be a mistake.

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