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  • Down payment vs. Loans

    Hey all,

    I have about 110k in refinanced student loans at ~2.7%. We are a family of 3 and plan to expand to hopefully 4 in the next 2 years. We currently have a great renting situation that is very affordable, just in small 2 bedroom apartment. After residency, my income will jump up in July/August. We currently live in a high COL area.

    We were hoping to buy a house in the next 1-2 years. The houses we are looking at will likely be in the 900k-1.1m range (pricey I know). We have about ~95 in liquid savings already saved up for the down payment. Will be getting ~30k signing bonus as well. We will likely go for a 20% down payment, but are open to a physician loan. I had 2 questions for y'all.

    1) With a decent rate on my student loans, we have been leaning towards saving for the down payment rather than paying it down As My payment is ~1500/month and ~200 of is interest. Given the low rate is it wise to keep saving for the down payment rather than the loans?

    2) Hoping to by a house around next summer or spring. Between Wife and I we will have ~330-350k in income annually. Can save about 9-10k a month to go to the housing fund. So hopefully have about 200-220k for the downpayment in a year. We are trying to figure out how much house we can afford. We've used the online calculators, how accurate and useful are those?

    Thanks for the help

  • #2
    We went through this scenario when we bought our home a couple years back. In the end, the interest deduction was worth it to carry the larger mortgage, so we went with a low down physician mortgage and dumped money into the loans and knocked those out a few months after buying the house.

    As for price of the house, it's high, but that's the tradeoff for HCOL areas. If you really want to feel comfortable, you could wait an extra year, save up that much more for a downpayment, and carry a much smaller mortgage.

    What I've found is that it was very easy to save up a ton of money quickly when you have a relatively smaller mortgage. We bought a house we couldn't afford in residency, and the little things stressed us out. Now, my wife and I have about your same income and have a $675k mortgage. The large positive cashflow every month makes life so much easier. We just don't worry about little financial things anymore. Furnace broke? Just buy a new one. Don't want to mow the grass? Hire it done. Car needs that much work done? Go ahead. Kids need new clothes? Sure, get whatever.

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    • #3
      You're talking about a mortgage plus student loans of 3x yearly income with 2 little kids that will require childcare. I wouldn't touch that but people do crazy stuff in hcola. Good luck.

      Comment


      • #4
        Originally posted by dmaller View Post
        We are trying to figure out how much house we can afford. We've used the online calculators, how accurate and useful are those?
        Not very on both accounts. A mortgage of 2x yearly income is a rule of thumb that gets thrown around a lot here and 3x yearly income is another that you'll see in the financial world. I'm assuming you live in a HCOLA so I imagine you'll be spending more on a home than most people would here. As far as the student loan, there's not necessarily a right or wrong answer. But, if you're going to pay the minimum and save/invest the rest, make sure you are actually saving/investing the rest. I think it's a smart idea to wait another year or two to buy a house. That gives you time to settle in at your job and decide if it's long term. I wouldn't spend any of that signing bonus until it's actually yours. Also, don't forget to be forward thinking will regards to income. Will having another child affect your income (i.e. will one parent stay home, etc.)?

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        • #5
          Thanks for the responses. Will be sure to re-assess our cash flow with and without the 2nd job. We are +/- waiting that extra year because of the 2nd child. We are also open to not getting our end-game home and finding a cheaper place and living for 6-7 years and finding another one once we can put more money to it.

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          • #6
            Generally speaking you can go up to 43% debt-to-income ratio. Based on $27,500 per month in joint income, your maximum outgoing expenses could be up to $11,825 (including your new home, student loans, and anything else that reports to credit).

            Assuming a $1.1M purchase with 20% down @ 4% interest, your total estimated payment with taxes and insurance included would be about $5.6k per month.

            This leaves you with about $6.3k room for student loans and other items that report to credit.

            You should fit well under the debt-to-income ratio limits. Here if you have any other questions.
            Josh Mettle, Director of Physician Lending at Fairway Independent Mortgage Corporation | [email protected]

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            • #7
              Originally posted by Josh Mettle View Post
              Generally speaking you can go up to 43% debt-to-income ratio.
              That seems awfully high.

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              • #8
                Can =/= should.

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                • #9
                  First, it is wise that you are waiting sometime before purchasing. Use this to help get a good idea what you want to budget for housing (don't forget costs beyond mortgage). At your income level you should be able to afford a house in the range you describe but you should be aware of the tradeoffs as it will represent a significant portion of your income; you will have less for other luxuries / very early retirement.

                  Given the low rate of your student loan, I think it is reasonable to defer rapid payoff. Mortgage rates could be higher in the future and the down payment may give you more flexibility.

                  Also, I know it wasn't what you asked, but make sure you and the spouse are both maximizing all tax advantaged retirement accounts and backdoor roth. Hopefully that was already the plan but I have known some people who were so eager to get the house that they missed that opportunity.

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                  • #10
                    Originally posted by Josh Mettle View Post
                    Generally speaking you can go up to 43% debt-to-income ratio. Based on $27,500 per month in joint income, your maximum outgoing expenses could be up to $11,825 (including your new home, student loans, and anything else that reports to credit).

                    Assuming a $1.1M purchase with 20% down @ 4% interest, your total estimated payment with taxes and insurance included would be about $5.6k per month.

                    This leaves you with about $6.3k room for student loans and other items that report to credit.

                    You should fit well under the debt-to-income ratio limits. Here if you have any other questions.
                    This calculation is why people get into trouble... remember 2008?
                    If you live in HCOLA, do you also have high state taxes?
                    I live in HCOLA (maybe VHCOLA to some but not Silicon Valley) and am in California, so pay ~13% state taxes... so all that $$ is not yours.
                    I'd pay off the loans, keep renting, save up for a down payment so your mortgage is no more than 2x your annual income.
                    Good luck and congrats on saving so much in residency!

                    Comment


                    • #11
                      Thanks for the responses all!

                      As for retirement accounts we max 403b and roth ira (backdoor for this year), every year for the past few years, but this year we will fall short on the 403b savings on my end. Since I will be going from resident -> attending midway through year, the job I am starting won't allow for a 401k contribution until several months until 2021, I upped my contribution earlier in the year to front load it, but still needed to keep some money liquid. By graduation i'll probably have saved ~10 of the 19,500So I will lose some tax advantaged space there, but we aren't going to sweat it.

                      Definitely a lot to think about. The timetable is 1-2 years because having a 2nd child in our place will be a little to cramped and we don't want to rent a bigger place since the place we have is a GREAT deal for the area.

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                      • #12
                        Was just going to piggy back on this thread. We haven't started a 529 for our 1 year old. Our thinking is that the funds would be better suited to our retirement accounts, loans, and housing funds? Would it be more appropriate to start once we have the loans payed off and down payment we need?

                        Comment


                        • #13
                          Originally posted by dmaller View Post
                          Hey all,

                          I have about 110k in refinanced student loans at ~2.7%. We are a family of 3 and plan to expand to hopefully 4 in the next 2 years. We currently have a great renting situation that is very affordable, just in small 2 bedroom apartment. After residency, my income will jump up in July/August. We currently live in a high COL area.

                          We were hoping to buy a house in the next 1-2 years. The houses we are looking at will likely be in the 900k-1.1m range (pricey I know). We have about ~95 in liquid savings already saved up for the down payment. Will be getting ~30k signing bonus as well. We will likely go for a 20% down payment, but are open to a physician loan. I had 2 questions for y'all.

                          1) With a decent rate on my student loans, we have been leaning towards saving for the down payment rather than paying it down As My payment is ~1500/month and ~200 of is interest. Given the low rate is it wise to keep saving for the down payment rather than the loans?

                          2) Hoping to by a house around next summer or spring. Between Wife and I we will have ~330-350k in income annually. Can save about 9-10k a month to go to the housing fund. So hopefully have about 200-220k for the downpayment in a year. We are trying to figure out how much house we can afford. We've used the online calculators, how accurate and useful are those?

                          Thanks for the help
                          As someone who lives in a relatively low cost of living area and has made exactly what you two will make for the last 5-6 years, I would NEVER consider coming even close to a 1 million dollar property. Use the 2x rule for mortgages and you could theoretically afford a house in that range with a big enough down payment, but you will be house poor. You won't have as much freedom to do as you please with your income. Houses are much more expensive then the mortgage you sign up for. Remember, the mortgage is the minimum you will pay each year for that house. It's totally different then renting on so many levels. It's nice to own a home, but it's not nice to own a home when it eats up all of your income, especially if you still have student loans hanging over your head. Been there, done that, never again.

                          My advice is this...stay put after residency in your "great renting situation." Pay off all of your student loans and any other debt you may have. Then start saving cash for a down payment while at the same time maxing out your 401ks, backdoor Roths, HSAs, 529, and any other tax advantaged space you may have. If, after 4-5 years of practice as an attending you feel like parting with $400k+ for a down payment on a house, then go for it.

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                          • #14
                            Originally posted by dmaller View Post
                            Was just going to piggy back on this thread. We haven't started a 529 for our 1 year old. Our thinking is that the funds would be better suited to our retirement accounts, loans, and housing funds? Would it be more appropriate to start once we have the loans payed off and down payment we need
                            I'd probably do enough just to get a state tax break. Otherwise, no, I wouldn't prioritize the 529 currently

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