Physician Loan and Buy vs Rent (already searched forums)

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jfoster
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Physician Loan and Buy vs Rent (already searched forums)

Post by jfoster » Sun Dec 16, 2018 11:41 pm

I've searched prior relevant threads on these topics, but I didn't find one that fit my situation, so I'm asking here. The thrust of the question is whether to buy a home with less than 20% down payment or not. If you're of the opinion that it's never OK, no matter what, you can go ahead and stop reading here and tell me why I'm stupid. If not, read on.

I'm a physician considering a physician home loan (or conventional loan with ~10%). As many have previously pointed out in other threads, these can be a bad idea for new physicians (e.g, job my not work out, may not know area well enough to choose wisely, etc.). However, I'm not a totally new physician. I've been out for 2.5 years. I'm about to make partner in my group, and although I can't see the future, I'm about as sure that the job will work out as anyone could ever reasonably be. I know the area well, and I know exactly where I would and would not want to live. *To me*, it seems reasonable to attempt to buy a home with less than 20% down, so I can at least be gaining equity in the home (as opposed to rent). I am in a high COL area, and literally every rent vs buy calculator has determined that it's *slightly* cheaper for me to rent than to own, but I think this is ignoring the issue of building equity (and therefore net worth). Also, median home prices keep going up.

I'm happy to give specific numbers about income, savings, retirement, etc. if needed. For general info, I have maxed (and continue to max) every tax-advantaged space that has become available to me and my wife since fellowship, and I took a very aggressive student loan repayment plan to secure the lowest possible APR at the time of my student loan refinance. With my pay bump at partner, I could comfortably afford the monthly mortgage note on a 30-year loan, and a 15-year loan would be fine, but slightly less comfortable. I could also comfortably afford home insurance and maintenance. However, it will take me several more years to get to 20% in my price range while also renting AND repaying my student loans AND maxing my tax-advantaged accounts.

I think you guys are collectively the smartest people in the world, so I would love to hear your thoughts. I don't have any prideful desire to call myself a homeowner, and I think I'm pretty open-minded on this. I don't care one way or the other, I just want to build my net worth as quickly as possible.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by AkwardDoct@rd » Sun Dec 16, 2018 11:55 pm

I am/was in a similar situation. Bought my first home while in residency in a HCOL area.I put down 2% but no PMI and had a good rate around 3.5% but it was a 7 year ARM. I have since sold and now rent while building up a down downpayment. If I can't get to 20% by the time I need then I will likely factor how much the PMI will cost me for having less than 20% compared to what the rate would be for a 30 year physician loan which only a few places offer. I am sure that they give you a higher rate to offset some risk.

mhalley
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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by mhalley » Mon Dec 17, 2018 12:33 am

Wci posted about physician loans here https://www.whitecoatinvestor.com/perso ... gage-loan/
And here is a persons experience getting one

https://www.whitecoatinvestor.com/my-ex ... gage-loan/

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by Nate79 » Mon Dec 17, 2018 8:48 am

What is your current debt load?

In general I would say to push down your lifestyle and pay off the debt while renting and then buy a house. Buying a house, especially as a doc is the first step in lifestyle creep if you are not extremely careful. This may be the less popular opinion but it is less risky.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by lthenderson » Mon Dec 17, 2018 8:59 am

I'll qualify this by saying my wife is a physician. The biggest mistake I see other physicians do when buying a home is buying one that is outside the price range of 90% of the population. It isn't a problem with the physician because they can afford it. It becomes a problem in the future when for some reason they have to sell and not many people can afford it. The options are to take a huge loss or it sits on the market forever. In our small town, I can think of three different physicians whose houses are for sale right now and have been on the market for over three years. In the same small town, another physician sold his for about 2/3's what he paid for it to sell it in a reasonable amount of time.

Since you are still new and the medical field is changing dramatically these days, I would suggest buying a home at a price range that 50% of the population can afford so that if you need to sell it in the future you can. Later when you know that you plan to spend a large chunk of your life stationary or are wealthy enough you just don't care, then spring for the bigger more expensive house.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by Tal- » Mon Dec 17, 2018 9:07 am

As a general statement, I think that there should be a good reason why someone buys a house before having 20% down. There are plenty of reasons and situations where I support doing this, but I don't feel like we have enough information to make an informed decision here.

I think we need more info. Income. House price. Age. Savings. Spending. Specific loan terms. etc. If you tell me you' have $2M in 401k and are buying a $200K house, I'm probably fine. If you tell me you have $30K in 401ks and want to buy a $1M house, I may have more heartburn.
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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by J_Markov » Mon Dec 17, 2018 9:23 am

Agree with above, more specifics would be very helpful.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by jfoster » Mon Dec 17, 2018 11:02 pm

Thanks for responses. Details ->

35 Married
1 child
Spouse works a little, but it's minimal. All of her income (probably $20-30K/year) goes to her 401 and childcare.

Income:
2018: ~$350K
2019: No expected change
2020 onward: ~500-550K

Debt:
Student Loans = $113K @ 3.375% ($3,125/month) [used to be $210K, Nate79]
Car 1 = $21K @ 2.9%
Car 2 = $26k @ 0%
No CC debt

Savings:
HSA = $12K
IRA (combined) = $26K
401 = $32K (get your Tums, tal- )
- I would absolutely put more in 401 if I could, but given IRS limits, it's going to be a while until I get to 2M
Savings = $90K

Rent is currently $2.4K/month.
Looking at houses in $700-900K range (start taking that Tums, tal-)
Unfortunately, I can't give specific loan terms. I froze my credit back when the Equifax breech happened, and I really don't want to go through the pain of unfreezing it, shopping loan terms to bring back here, and then re-freezing when it becomes clear that this whole thing is a bad idea. If it matters, I bought a car a little over a year ago before freezing, and my credit score was 760+ at that time.

So far, it sounds like the consensus is to just save to the 20%, but I'm genuinely curious what the advantage of renting is when compared to gaining equity in a home. Thanks in advance.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by blueman457 » Mon Dec 17, 2018 11:44 pm

I've been in your shoes/currently wearing similar shoes.

Renting is a better option for you right now because you are cash poor. You have very little flexibility should something not go as you expect. You're going a great job on paying off your debt and if you make partner, you'll be in better shape. But until then you're still cash poor.

-Owning a home is an investment in lifestyle. I had a friend in NYC who sold their 2b/2bth; yes, they "made money on it," but spending money on rehabbing it, yearly taxes, and etc... he didn't make as much money as he thought in the end. Would have been better off buying something a little cheaper and investing more in the market.

-You run the risk of being house poor, which isn't fun. My sibling bought a really nice house at the end of their income, but the annual property taxes ($25k), and the maintenance of their home was relatively high. Various rooms weren't furnished very well for a few years. I don't think they vacationed very well those years.

Good luck,

Blue Man

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by WWJBDo » Tue Dec 18, 2018 12:22 am

Random thoughts:
That's a fair amount of debt you already have.
Past salary performance is no guarantee of future results.
Factors that might compel you to buy early or now:
- Housing in your area is cheap by historical standards (not true in many parts of the country)
- You are in California and you can afford the only house you want to live in (tax advantages are significant due to Prop 13)
- It's necessary for family harmony.

If none of those are compelling reasons for you, then I'd pay the crap out of those loans and eliminate them in 2 years (or better yet,save up the cash to pay them off,unless housing crashes and you want to have the down payment for a killer deal). The upside of housing sure feels like less than the downside, and it's very painful to lose money on a house because of the leverage involved.

The early years after residency/fellowship and first years as partner are the best chances you have to save money- delay and only gradually increase income despite the change in salary and save up to pay off the loans or buy a house in a few years. There's no rush now.
"It is difficult to get a man to understand something when his salary depends upon his not understanding it." Upton Sinclair

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by Nate79 » Tue Dec 18, 2018 8:01 am

You can be debt free in one year and have a down payment not too long after. I would wait until all that is done and then consider buying. Rent until then.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by UALflyer » Tue Dec 18, 2018 8:58 am

I am going to respectfully disagree with most of the posters advising the OP not to buy until he can put down 20%. The requirement for a 20% downpayment on conventional loans is there for the lenders' protection rather than the borrowers'. All that the 20% downpayment accomplishes is to ensure that in the event that the house is foreclosed on, there's a 20% cushion that protects the lender's loan. Hence, the reason that conventional borrowers putting less than 20% down have to pay a little bit more to compensate the lender for the risk in the form of PMI, etc...

From a buyer's/borrower's standpoint, what determines whether the overall financial burden is sustainable is your debt to income ratio as well as your job and income stability. There's no issue there for the OP, as even at the 2018 income figures (to be conservative), even with no money down the OP's debt to income ratio is going to be quite reasonable and comfortable, and the job incredibly stable. In fact, the OP's debt to income ratio is very likely to be lower than those of a ton of homebuyers actually putting 20% down, and the job and income stability are likely to be significantly better. This is the very reason that physician loans exist, as physicians just do not represent the same risk to the lenders.

The usual downside of physician loans is the fact that they are portfolio loans and their interest rates are slightly higher than those found on conventional loans. Given the OP's desired price range, however, even with 20% down the OP presumably wouldn't be able to obtain a conventional loan (because the loan balance would be too high) and, instead, would need a super-conforming/jumbo one. Physician loans are frequently priced at about the same level as those, so if this is the case for the OP, there may not actually be much, if any, interest rate premium that he'd end up paying. I would still double check on this though, as it would depend on the OP's specific geographic area.

So, I do not think that the absence of a 20% downpayment should deter the OP from buying. This doesn't necessarily mean that the OP should be buying, but the considerations should be the same as those of any other homebuyer. Namely, how long would he expect to stay in this house, whether the houses that they're considering represent a good long term fit for them (changing houses comes with significant transaction costs), etc...

Just to make it clear, I do not think that the same rationale applies to those straight out of residency/fellowship. They typically do not know whether the job will end up working out, are usually not yet sufficiently familiar with their own finances to determine what is and is not comfortable for them and, if they are new to the area, don't really know where to buy or what to buy. It takes them a little while to adjust to the new reality and to figure things out, so it's common for those of them who buy right away to either underbuy or to overbuy, and both can be rather expensive financial mistakes. The OP is in a very different situation, so I do not have the same concerns there.
Last edited by UALflyer on Tue Dec 18, 2018 10:47 am, edited 1 time in total.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by UALflyer » Tue Dec 18, 2018 9:27 am

Nate79 wrote:
Mon Dec 17, 2018 8:48 am
Buying a house, especially as a doc is the first step in lifestyle creep if you are not extremely careful.
Lifestyle creep is always a concern, and is a particular concern for physicians, who, because of their residency/fellowship, end up having a late start and frequently feel like they need to quickly accelerate their buying to catch up with others who started making money earlier. There are also a lot of people who try to take advantage of the newly minted attendings' salaries and their relative lack of familiarity with the best way to manage those. Hence, the reason that there are real estate agents who "specialize" in helping physicians (as if physicians have different housing needs from the rest of the population), financial advisors who market themselves to physicians (as if physicians have different investing options or needs from the rest of the population), etc... Physicians then don't always know how to select these professionals, so the physician specific marketing tends to ensnare them by making them feel like those professionals are there to address their unique needs. So, I do very much agree that physicians need to be extremely careful with all of this.

The issue here is that whether the OP has a 20% downpayment or not, the above risks would be exactly the same. So, although I agree that this is something that the OP needs to watch out for, I do not see how having 20% down reduces the OP's exposure to any of the above concerns.
Tal- wrote:
Mon Dec 17, 2018 9:07 am
If you tell me you' have $2M in 401k and are buying a $200K house, I'm probably fine. If you tell me you have $30K in 401ks and want to buy a $1M house, I may have more heartburn.
In this particular situation, I'd say the opposite. If the OP was considering buying a $200K house, regardless of the size of the downpayment or if he was paying cash, I'd advise extreme caution. This would likely be a starter house, and it'd be very unlikely that the OP and his family would stay there long term. Buying a starter house only to end up selling it shortly thereafter would be expensive and would be highly unlikely to advance the OP's financial or lifestyle goals.

The reason that the OP has limited savings has nothing to do with his irresponsibility or anything even close to that. He just hasn't been working and saving long enough to accumulate them, but it is coming. Based on what the OP has posted, he and is wife are fully maxing out their tax advantaged accounts, have paid down close to $100K in student loans, and the remaining balances and interest rates on them are reasonable vis a vis his income level and job stability.

I agree that the OP needs to continue to carefully manage his debt levels, and to prioritize savings, but it also doesn't mean that in his particular situation, buying a house in his desired price range would be irresponsible.
Last edited by UALflyer on Tue Dec 18, 2018 9:49 am, edited 3 times in total.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by FlyAF » Tue Dec 18, 2018 9:38 am

OP appears to have a net worth of $0. 160k in debt and 160k in savings, at 35 years old. People really feel he should be buying a 750k+ house?

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by Nate79 » Tue Dec 18, 2018 11:00 am

FlyAF wrote:
Tue Dec 18, 2018 9:38 am
OP appears to have a net worth of $0. 160k in debt and 160k in savings, at 35 years old. People really feel he should be buying a 750k+ house?
Agreed. I would recommend the OP wait a year or two and then buy. By then they can be debt free and have a decent down payment. Buying now would keep the high debt load and at a minimum double their housing cost. If everything goes perfect their income is going to be >$500k in a couple of years but things can and do go wrong.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by UALflyer » Tue Dec 18, 2018 11:35 am

Nate79 wrote:
Tue Dec 18, 2018 11:00 am
I would recommend the OP wait a year or two and then buy. By then they can be debt free and have a decent down payment.
In the OP's particular case, assuming that the interest rates are fixed, why would it be a virtue to be debt free?

His car loans are at 0% and 2.9%, while his students loans are at 3.375%. Although I certainly wouldn't pay interest unnecessarily, if these interest rates are fixed, given the mortgage rate environment, his mortgage rate is going to be higher than those. The value of the mortgage deduction has gone down, so although he will be itemizing, depending on his specific mortgage amount and the interest rate the after-tax effective mortgage rate is still likely to be higher than his current rates.

His cashflow can handle the increased expenses, so financially, he would get more bang for the buck by paying down the mortgage and/or investing aggressively.
Buying now would keep the high debt load and at a minimum double their housing cost.
This has nothing to do with the size of their downpayment. If it makes more financial sense for them to rent, it'll make more financial sense for them to do so regardless of whether they have 10% or 20% to put down. At today's interest rates, a $90K difference in downpayments (which, at the top of their desired price range, is the difference between 10% and 20% down) translates into approximately $475/month or $5,700-$6,000/year, of which roughly $1,200/year is principal.

Although it's nothing to sneeze it and I am in no way suggesting that it's meaningless, given their financial situation this is not something that should be the deciding factor for them. For instance, keep in mind that in their price range, a 1% swing in mortgage rates, which is the approximate interest rate increase over the last year or so, alone accounts for the same difference in monthly payments.
Last edited by UALflyer on Tue Dec 18, 2018 11:50 am, edited 2 times in total.

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leeks
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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by leeks » Tue Dec 18, 2018 11:42 am

Not yet.

It is your choice if you do not want to wait for 20% down but it does not look like you have enough of a savings cushion now. I would not buy unless an adequate emergency fund (suggest 12 months of expenses since you are essentially dependent on a single income) would remain after downpayment/transaction costs.

How much of that 90K savings would you have left after a minimum down payment and transaction costs (and movers and furnishings, etc)? I would want to be prepared to weather a potential job loss and period of unemployment without drawing on any retirement accounts. Sure, you are likely to remain employable but you never know what life can throw at you.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by Nate79 » Tue Dec 18, 2018 12:10 pm

UALflyer wrote:
Tue Dec 18, 2018 11:35 am
Nate79 wrote:
Tue Dec 18, 2018 11:00 am
I would recommend the OP wait a year or two and then buy. By then they can be debt free and have a decent down payment.
In the OP's particular case, assuming that the interest rates are fixed, why would it be a virtue to be debt free?

His car loans are at 0% and 2.9%, while his students loans are at 3.375%. Although I certainly wouldn't pay interest unnecessarily, if these interest rates are fixed, given the mortgage rate environment, his mortgage rate is going to be higher than those. The value of the mortgage deduction has gone down, so although he will be itemizing, depending on his specific mortgage amount and the interest rate the after-tax effective mortgage rate is still likely to be higher than his current rates.

His cashflow can handle the increased expenses, so financially, he would get more bang for the buck by paying down the mortgage and/or investing aggressively.
Buying now would keep the high debt load and at a minimum double their housing cost.
This has nothing to do with the size of their downpayment. If it makes more financial sense for them to rent, it'll make more financial sense for them to do so regardless of whether they have 10% or 20% to put down. At today's interest rates, a $90K difference in downpayments (which, at the top of their desired price range, is the difference between 10% and 20% down) translates into approximately $475/month or $5,700-$6,000/year, of which roughly $1,200/year is principal.

Although it's nothing to sneeze it and I am in no way suggesting that it's meaningless, given their financial situation this is not something that should be the deciding factor for them. For instance, keep in mind that in their price range, a 1% swing in mortgage rates, which is the approximate interest rate increase over the last year or so, alone accounts for the same difference in monthly payments.
I recommend to focus on eliminating the consumer debt and student loans before buying a house to simplify life, reduce risk, and to focus one's wealth building regardless of the interest rate. If the OP can hammer on the debt and remain focused by keeping their lifestyle down it will have far bigger financial impact than the negligible interest rate differences. Life is not a math problem, it is personal finance for a reason.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by Tal- » Tue Dec 18, 2018 12:30 pm

Your Tums comments cracked me up. :)

The extra info was super helpful - thank you.

There's a ton to like about your financial situation, and you're clearly off to a great start.

With that said, I would suggest waiting a bit before buying. You have a wonderful outlook, and I'd even be OK with you buying with less than 20% down, but buying a house today would put a strain on your fairly limited savings. It would also put a huge percentage of your net worth into your house, and introduce more risk into your investments than is currently necessary.

My suggestion would be to give yourself a goal and a set or rules about when you get to buy a house. For example: you can buy a house worth 2X of your total savings (including HSA, retirement, savings, etc.), up to a $1M house, even if you put less than 20% down. That means that if you can save another $200K in the next 2 years (seems reasonable), that you will be in great shape to buy a house in your price range.

Buying a house today is not the worlds worst thing, but waiting for a couple years is strong preferable in my eyes.
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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by UALflyer » Tue Dec 18, 2018 12:32 pm

Nate79 wrote:
Tue Dec 18, 2018 12:10 pm
I recommend to focus on eliminating the consumer debt and student loans before buying a house to simplify life, reduce risk, and to focus one's wealth building regardless of the interest rate.
Because of the bolded part, your advice is financially sub-optimal.

Paying down lower interest debts while maintaining higher interest ones accomplishes the exact opposite of "building one's wealth." It is sometimes still done to free up a person's cashflow, but the OP is not having any cashflow difficulties, so your advice to pay down lower interest debts while maintaining higher interest rates will just cost the OP thousands of dollars in extra interest, all in the name of "simplifying his life."
If the OP can hammer on the debt and remain focused by keeping their lifestyle down it will have far bigger financial impact than the negligible interest rate differences. Life is not a math problem, it is personal finance for a reason.
The problem here is that you are throwing out general slogans without looking at the OP's specific figures. In his particular situation, for the reasons above putting down 10% or 20% shouldn't really determine the outcome of the rent vs. buy conversation.

In the OP's particular situation, there are good arguments for waiting a while longer, and there are good arguments for buying now. Practically none of them have much, if anything, to do with him having 10% vs. 20% down.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by Nate79 » Tue Dec 18, 2018 12:46 pm

UALflyer wrote:
Tue Dec 18, 2018 12:32 pm
Nate79 wrote:
Tue Dec 18, 2018 12:10 pm
I recommend to focus on eliminating the consumer debt and student loans before buying a house to simplify life, reduce risk, and to focus one's wealth building regardless of the interest rate.
Because of the bolded part, your advice is financially sub-optimal.

Paying down lower interest debts while maintaining higher interest ones accomplishes the exact opposite of "building one's wealth." It is sometimes still done to free up a person's cashflow, but the OP is not having any cashflow difficulties, so your advice to pay down lower interest debts while maintaining higher interest rates will just cost the OP thousands of dollars in extra interest, all in the name of "simplifying his life."
If the OP can hammer on the debt and remain focused by keeping their lifestyle down it will have far bigger financial impact than the negligible interest rate differences. Life is not a math problem, it is personal finance for a reason.
The problem here is that you are throwing out general slogans without looking at the OP's specific figures. In his particular situation, for the reasons above putting down 10% or 20% shouldn't really determine the outcome of the rent vs. buy conversation.

In the OP's particular situation, there are good arguments for waiting a while longer, and there are good arguments for buying now. Practically none of them have much, if anything, to do with him having 10% vs. 20% down.
Financially sub optimal would mean you can predict the future. Anyone can do grade school math. My recommendation just like any invest vs pay down debt is based on the personal finance part of the equation which has far greater financial impact than the grade school math of interest rate arbitrage. If the OP focuses on paying down the debt before taking on the significant debt of a home (for at most a year of delayed gratification) it will reduce risk and have far greater financial return than a few $k of interest rate savings. Unfortunately this is the part that most BH just can not grasp because it is not an equation found in a book... Hammer on the debt means making lifestyle changes/delayed gratification - the faster it is done the faster they can get a house.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by Precept » Tue Dec 18, 2018 12:59 pm

Your OP ended with the qualifier that you want to build your net worth as quickly as possible. You also noted that you thought it made sense to be building some equity. I do not think the path laid out in your OP necessarily leads to higher net worth. Ultimately you are considering the following: 1) immediately increasing your monthly housing costs; 2) taking out a 30 year mortgage loan at an increase rate due to putting less than 20% down; 3) buying a house that could put you nearly $1 million in debt, including the ~160k in student/car loans.

In terms of net worth, your OP seems to implicitly include the potential future value of the house in your decision making process. There are many things to be said about that, however, in this case, I think it is steering you in the wrong direction. If you feel absolutely compelled to buy now, I would opt for a 15 year mortgage. It will naturally force you into more manageable home (likely in the 600-700k range). Your interest rate will be lower, you will pay less taxes, insurance, etc, and of course, you will be piling in equity at much faster pace. I do not think it makes sense to get an $800k 30 year mortgage with a 90% LTV just so some of your monthly payment goes to equity. On a 30 year note, with taxes, you are looking at ~$4500 in housing costs, for a ~$900 gain in monthly equity. At least with a 15 year mortgage, about half of your payment would go to equity. However, I assume you may not want to stretch yourself financially with a 15 year mortgage right now because you'll easily be able to afford the 900k house in a couple years.

Personally, I think your two year time frame is an excellent natural segway into the forthcoming jump in income. I would focus on saving for the 20% down payment, so that you can get the house you really want with a 15 year mortgage. In the meantime, I would pay the student/car loans on the normal schedule, considering the low interest rates.

FWIW, I am in an eerily similar situation, down to your current income, student loans, and the forthcoming big jump in two years. The desire to buy a house is fairly strong. However, we just made the decision to rent for another year to continue to accumulate a larger down payment. In fact, we are actually moving into a lower priced apartment, despite an income that will "qualify" us for a $1 million plus home. In the end, you'll likely be fine either way, because the $500k income jump will snuff out any "mistakes" you make right now. However, returning to your OP: lower cost of living, and less interest/debt is usually the most surefire path to a higher net worth.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by UALflyer » Tue Dec 18, 2018 1:28 pm

Nate79 wrote:
Tue Dec 18, 2018 12:46 pm
Financially sub optimal would mean you can predict the future.
No, it doesn't. It means that a 5% mortgage rate, even after a tax deduction, is going to be higher than 0%, 2.9% and 3.375% that he has on his loans (assuming that the interest rate on the current loans is fixed; if the rates are variable, this changes the conversation quite a bit). Hence, your advice to pay down lower interest rate loans is sub-optimal.
Anyone can do grade school math. My recommendation just like any invest vs pay down debt is based on the personal finance part of the equation which has far greater financial impact than the grade school math of interest rate arbitrage. If the OP focuses on paying down the debt before taking on the significant debt of a home (for at most a year of delayed gratification) it will reduce risk and have far greater financial return than a few $k of interest rate savings.
Unfortunately, you are still making general statements. What risk reduction comes from paying down lower interest rate loans?

For physicians, job security is generally a non-issue. Illness and/or disability is always a concern, particularly given his status as the primary breadwinner, which gets addressed through insurance.

I am 100% in agreement with the overall concerns over things like lifestyle creep, not overextending yourself, etc... If the OP was a newly minted attending, particularly in an unfamiliar geographic area, I'd also say that the OP should definitely wait. If the OP was asking about buying depreciating assets, such as a fancy car, I'd also advise patience. Given the OP's financial situation, however, telling him that he shouldn't be buying primarily because he doesn't have a 20% downpayment, as well as telling him that he should be paying down his lower interest rate loans first is just poor financial advice.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by poke-o-moonshine » Tue Dec 18, 2018 1:37 pm

I’m a physician with a similar income to yours who is now 5-10 years post training. I would hold off.

In the next 1.5 years until you make partner try to pay off your debt (~$160K) and save a good chunk of a down-payment (another $100k in addition to the cash already at hand).

Why? Because your expenses must already be rather high (about $140-150K/year? See below), and they will only go up once you buy a house. Your net worth isn’t yet positive, and if the partnership doesn’t come through or reimbursements go down, it is going to put you in a severe bind.

Assuming for the past two years you have made about $350K and wife $20K:
Income- $370K - $18K (401k) =~$350K gross
Assuming a total tax rate of 35% (the highest I can imagine it would be), you should net about $220-230k/year.

If all of your post-tax savings ($12k HSA, $26K IRA, $90K cash) and debt payments (~$100k in student loan payments) were during the last 2.5 years since finishing training that means you have used about $90K/yr to either save or pay down debt. $230k-$90k=$140k of other spending, and that is assuming a rather high total tax burden so it is likely even more. If you add a $900K house on top of that your expenses are going to go way up, severely limiting your ability to save and pay off debt for a long time.

Once you make partner and have the debt paid off, life looks much better. If income is $550k gross, you should net at least $330K after all taxes (assuming a very high 40% total tax burden). That allows you to save more than $130k/year even if your expenses go up to $200k/yr with the new house.

TLDR: Don’t spend the raise you hope to get 1.5 years from now when you are still poor (i.e. $0 net worth).

Precept
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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by Precept » Tue Dec 18, 2018 2:35 pm

UALflyer wrote:
Tue Dec 18, 2018 1:28 pm
I am 100% in agreement with the overall concerns over things like lifestyle creep, not overextending yourself, etc... If the OP was a newly minted attending, particularly in an unfamiliar geographic area, I'd also say that the OP should definitely wait. If the OP was asking about buying depreciating assets, such as a fancy car, I'd also advise patience. Given the OP's financial situation, however, telling him that he shouldn't be buying primarily because he doesn't have a 20% downpayment, as well as telling him that he should be paying down his lower interest rate loans first is just poor financial advice.
Concerning the down payment, if the cost of the mortgage were $0.00, you may be right. However, putting less than 20% down almost assuredly results in a higher interest rate. OP can't know for sure because his credit is locked. He is only considering a 30 year mortgage because the 15 year would be tight right now. In other words, he is willing to pay a higher interest rate for two reasons: 1) he doesn't have enough for conventional down payment; and 2) the house size he wants likely precludes a 15 year note.

Nonetheless, there may be many legitimate reasons to proceed with a 10% mortgage. However, I do not think it is "bad" financial advice to say wait a year or two to build up a 20% down payment. Despite OP's high income (and even higher future income), his current "financial situation" is that he is in debt and has a net worth of zero. This is a situation many doctors and lawyers find themselves in the early part of their careers.

OP asked whether buying a house right now was the path to a higher net worth. For the reasons I put above, I do not think so. At the very least, it is not a slam dunk decision to buy in his current situation from a personal finance perspective. That is not to say he can't afford to live in a house altogether right now. He clearly can.

UALflyer
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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by UALflyer » Tue Dec 18, 2018 2:57 pm

Precept wrote:
Tue Dec 18, 2018 2:35 pm
Concerning the down payment, if the cost of the mortgage were $0.00, you may be right. However, putting less than 20% down almost assuredly results in a higher interest rate.
I addressed this upthread. As I mentioned there, the usual downside of physician loans is the fact that they are portfolio loans and their interest rates are slightly higher than those found on conventional loans. Given the OP's desired price range, however, even with 20% down the OP presumably wouldn't be able to obtain a conventional loan (because the loan balance would be too high) and, instead, would need a super-conforming/jumbo one. Physician loans are frequently priced at about the same level as those, so if this is the case for the OP, there may not actually be much, if any, interest rate premium that he'd end up paying. I would still double check on this though, as it would depend on the OP's specific geographic area.

I do very much agree that buying a house right now isn't a slam dunk, but given the above factors and the OP's situation, the difference between putting down 10% and 20% is a different of roughly $5,500-$6,000/year (of which over $1,000/year would go to principal). It's not exactly pennies, but also isn't something that should be the deciding factor for them.

MedSaver
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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by MedSaver » Tue Dec 18, 2018 8:25 pm

If literally every rent vs buy calculator is telling you to rent, there's a reason. It's probably because renting is cheaper for your situation. You said that you felt the calculators were not accounting for equity, but most of the calculators I'm aware of do account for this (e.g. NYT's calculator asks "home price growth rate"). There's more than one way to build your net worth; like owning stocks. You also say that median home income continues to increase, but in my part of the country, house prices have leveled or even decreased slightly, especially at the higher end. Also, do you have a buy-in? I've known groups where total compensation might actually be $50-100K/yr less than expected because of buy-ins. I'm a young physician and make a similar amount to you (the wife works as well), but we have a healthy emergency fund and retirement savings. It sounds like you're going to put all your savings into the house. Maybe build a small emergency fund, pay off more debt and save towards 20% over the next year. You will be less stressed and have more hair!

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galeno
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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by galeno » Tue Dec 18, 2018 8:51 pm

What about the home mortgage interest deduction that the USA govt allows to home owners?

Up to $750K for a married couple? Property taxes can be deducted up to $10K?

With that income ($350K-$550K) and living in California they should be in the 40% tax bracket.

Wouldn't it be a good idea for the couple to enjoy the high subsidy that the US and CA govts provide by maximizing his mortgage interest deduction?
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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galeno
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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by galeno » Tue Dec 18, 2018 9:00 pm

The reason the "rent vs buy" calculators keep telling you to rent is because of your current low rent of $2.4K per month.

I don't believe you can rent an $825K home ($75K down payment and $750K mortgage) for $2.4K per month.

You need to compare apples to apples.

If you can rent a similar ($825K) home for less than $2700/month you should continue renting.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

Oakwood42
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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by Oakwood42 » Tue Dec 18, 2018 9:44 pm

blueman457 wrote:
Mon Dec 17, 2018 11:44 pm
I've been in your shoes/currently wearing similar shoes.

Renting is a better option for you right now because you are cash poor. You have very little flexibility should something not go as you expect. You're going a great job on paying off your debt and if you make partner, you'll be in better shape. But until then you're still cash poor.

-Owning a home is an investment in lifestyle. I had a friend in NYC who sold their 2b/2bth; yes, they "made money on it," but spending money on rehabbing it, yearly taxes, and etc... he didn't make as much money as he thought in the end. Would have been better off buying something a little cheaper and investing more in the market.

-You run the risk of being house poor, which isn't fun. My sibling bought a really nice house at the end of their income, but the annual property taxes ($25k), and the maintenance of their home was relatively high. Various rooms weren't furnished very well for a few years. I don't think they vacationed very well those years.

Good luck,

Blue Man
+1 good advice blue man

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by Golf maniac » Tue Dec 18, 2018 10:58 pm

For OP, you talk about “gaining equity” vs renting, there is no guarantee the house you buy will increase in value. I have owned 3 homes over the past 25 years and the first two gained very little equity and probably zero or negative if I took into account upgrades and maintenance. On the third house I lived in it for over 10 years and made about 50% on it. But if I took out the upgrades and maintenance it would be a lot less.

Buy a home for the lifestyle and making things better for your family, never buy a home thinking you will “build equity”, that is realtor talk.

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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by Cycle » Tue Dec 18, 2018 11:24 pm

jfoster wrote:
Mon Dec 17, 2018 11:02 pm
Thanks for responses. Details ->

35 Married
1 child
Spouse works a little, but it's minimal. All of her income (probably $20-30K/year) goes to her 401 and childcare.
I'm 35, married with 1 child (in two weeks). Income ~300k.

We have a 1000sqft unit 2br/1ba and plan to stay there for at least another 5 years. Paid 95k for it plus 50k rennovation, no debt. Short bike ride to downtown, so we like our spot, but we aren't in a fancy pants neighborhood.

Total vehicle value, $6k

Net worth 1.32MM. should hit our 4MM retirement number by child's 10th birthday.

Housing, vehicles, and student loans (grad school) can be real drags on savings. If you want to maximize net worth, minimize housing and vehicle costs. Seems to me your rent isn't too bad right now.
Never look back unless you are planning to go that way

Nissanzx1
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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by Nissanzx1 » Tue Dec 18, 2018 11:46 pm

Cycle wrote:
Tue Dec 18, 2018 11:24 pm
jfoster wrote:
Mon Dec 17, 2018 11:02 pm
Thanks for responses. Details ->

35 Married
1 child
Spouse works a little, but it's minimal. All of her income (probably $20-30K/year) goes to her 401 and childcare.
I'm 35, married with 1 child (in two weeks). Income ~300k.

We have a 1000sqft unit 2br/1ba and plan to stay there for at least another 5 years. Paid 95k for it plus 50k rennovation, no debt. Short bike ride to downtown, so we like our spot, but we aren't in a fancy pants neighborhood.

Total vehicle value, $6k

Net worth 1.32MM. should hit our 4MM retirement number by child's 10th birthday.

Housing, vehicles, and student loans (grad school) can be real drags on savings. If you want to maximize net worth, minimize housing and vehicle costs. Seems to me your rent isn't too bad right now.
Love this. This guy is winning everyday.

OP: 900K mortgage with PMI, $55K Car Loans, $100K+ Student Loans, $0 or negative net worth. I'd say no thanks. You work too hard to be in that rat wheel Dr. Rein in the lifestysle for a couple years and be on the other side of your financial life forever. You are seriously going to be so wealthy, it will be pretty cool...

Topic Author
jfoster
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Re: Physician Loan and Buy vs Rent (already searched forums)

Post by jfoster » Tue Dec 18, 2018 11:48 pm

Thanks for all of the replies, again. This discussion is great.

There are a few common points being made here, and I want to make sure I'm taking away their intended meaning.
  • Risk:
    As UALflyer pointed out, physician jobs are *relatively* stable, even in this era of medicine. Not that flat-out job loss it isn't a risk, but compared to other, more likely things, it isn't the one that I focus on as much. And for what's worth, I've insured against that risk.
    Tal- wrote:
    Tue Dec 18, 2018 12:30 pm
    I'd even be OK with you buying with less than 20% down, but buying a house today would put a strain on your fairly limited savings. It would also put a huge percentage of your net worth into your house, and introduce more risk into your investments than is currently necessary.
    What I'm mostly hearing though is that after down payment, transaction costs, movings costs, stuff-I-never-thought-of costs, the BIG risk is that I will likely have depleted my savings to a level that leaves me vulnerable to...Something. Obviously, I'm the only one that can gauge my comfort level with that vulnerability/risk, but I'll go ahead and tell you: it's low. Real low. Again, I don't have any strong desire to be a house just to be a Homeowner, so it's not a big deal for me to continue saving, which I will do.

    <20% Down Payment:
    UALflyer wrote:
    Tue Dec 18, 2018 8:58 am
    So, I do not think that the absence of a 20% downpayment should deter the OP from buying. This doesn't necessarily mean that the OP should be buying, but the considerations should be the same as those of any other homebuyer.
    This was my biggest sub-question. In prior threads around the forum, there is a distinct hardline feeling about 20%. That is, ignoring the better interest rate, no-PMI, etc., it just feels like people regard it as a magical barrier at which context becomes unimportant. 19.9% down? No way. 20%? Totally fine. The comments UAL, tal-, and Precept had on this topic were particularly helpful in understanding how it might be OK in some situations but not in others. I get that all things being equal more down is always better, but at least that helps me weigh how much better.

    Rent vs Buy
    Precept wrote:
    Tue Dec 18, 2018 12:59 pm
    I do not think it makes sense to get an $800k 30 year mortgage with a 90% LTV just so some of your monthly payment goes to equity. On a 30 year note, with taxes, you are looking at ~$4500 in housing costs, for a ~$900 gain in monthly equity. At least with a 15 year mortgage, about half of your payment would go to equity.
    Thanks. This helped me at least quantify the difference buying vs renting would make for net worth.
    UALflyer wrote:
    Tue Dec 18, 2018 2:57 pm
    As I mentioned there, the usual downside of physician loans is the fact that they are portfolio loans and their interest rates are slightly higher than those found on conventional loans. Given the OP's desired price range, however, even with 20% down the OP presumably wouldn't be able to obtain a conventional loan (because the loan balance would be too high) and, instead, would need a super-conforming/jumbo one. Physician loans are frequently priced at about the same level as those, so if this is the case for the OP, there may not actually be much, if any, interest rate premium that he'd end up paying.

    I do very much agree that buying a house right now isn't a slam dunk, but given the above factors and the OP's situation, the difference between putting down 10% and 20% is a different of roughly $5,500-$6,000/year (of which over $1,000/year would go to principal). It's not exactly pennies, but also isn't something that should be the deciding factor for them.
    This also helps really quantify what difference between renting+saving+jumbo loan vs buying+physician loan.

    Miscellaneous
    poke-o-moonshine wrote:
    Tue Dec 18, 2018 1:37 pm
    Why? Because your expenses must already be rather high (about $140-150K/year? See below
    Assuming for the past two years you have made about $350K and wife $20K:
    Income- $370K - $18K (401k) =~$350K gross
    Assuming a total tax rate of 35% (the highest I can imagine it would be), you should net about $220-230k/year.
    I made less coming out of fellowship, and my wife stayed home, but point taken. I can spend less.
Again, thanks for all the help.

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