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Mortgage down payment or pay student loan?

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  • Mortgage down payment or pay student loan?

    I am currently a 3rd year resident in Family Medicine. I have been moonlighting and saving this money for a down payment on a house when my wife and I move after residency (Yes I know WCI recommends renting initially). I do not think I will make enough money before moving to be able to put a 20% down payment on a home. It is looking closer to 10-15%. I am in an area that will provide physician loans with no down payment and no PMI. My question is, should I use what I save and go ahead an put it toward the down payment or should I put that money towards my student loans to get a head start on these? I plan to refinance when I graduate from residency, but I still predict the interest will be higher on the student loans even after refinancing.

  • #2
    If you're going to buy a house, better to have some down payment than no down payment.  Easier to do a 5% down doctor loan than a 0%.

    If you could rent for a year and build cash that would be ideal, but if you know you can find a house you will like (and stay in for many years) at a good price, buying makes more sense.

    Depends on how big a dent you'll make, too.  If you could pay off half your loans, I'd be tempted.  But again if you're buying a house, even with 0% down, you need cash, cash, cash.


    • #3
      If you could post some numbers for reference purposes, it would help. Any ideas on starting salary? Guessing around $200k - $250k? Working spouse and pay? Planned spending on house? From the above, it sounds as if you'll remain in the same vicinity, just moving from rental to mortgage, correct? I do hope you'll also include the option to rent for at least a year in your decision.
      My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
      Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients


      • #4
        Agree more details would help.  In general my advice is to pay off the student loans in their entirety before buying a home.  And save up a full 20% so you can get a good rate and terms on a mortgage.  You probably won't be able to resist the urge to buy a home, but if you can you'll thank yourself later.

        I can tell you that being 6 years out of residency and still paying off student loans sucks.  I own a nice home though (and a nice little mortgage to go with it)!


        • #5
          Here are some more numbers for you Johanna:

          My income will be $210K, Wife will be around $45-50k

          Planned spending on house - $350K

          Student Loans - $250K

          Anticipated amount of cash saved available at time of move - roughly $30K.

          The rental option is still a possibility. I actually own my house now and moving to a new city about 4 hours away. Luckily I already have a buyer for my current home when I move.


          • #6
            Even if you put some money on loans, you should still be keeping some cash cushion, prob $10-20k, particularly comes in handy when you're moving, placing deposit on a rental, closing costs on a new house, etc.

            I would just make your regular payments on the student loan until you get housing figured out.


            • #7
              With that kind of student loan burden I would definitely focus on paying it off first.  Use any profits from your house sale to pay it down.  Take that 30k and keep half of it for an E-Fund while using the other half to start paying off debt.  My wife and I had similar numbers to you at the end of residency.  Like I said, we didn't focus on student loans, bought a house, and the result is I'm still working my butt off the last 1-2 years to pay them off.  Will FINALLY be done this June most likely.
              It's just easier to get them out of the way earlier rather than later.  Sign up for extra work if possible and accelerate the pay off.  Depending on your home sale, you could really get them paid off quickly and move on with your life.


              • #8
                So, after saving for another 1.5 years and selling your current house, you'll have only $30k to put down on the new house? I'll have to give it to you - $350k is reasonable for the house. otoh, having $570k in debt on a $260k income is a bit bothersome. I'd rather see you save and pay down debt for a year before buying.

                But since that's not what you asked, I don't have a huge problem with a doctor loan if you are definitely buying a $350k house. It just wouldn't be what I'd recommend.
                My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
                Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients


                • #9
                  I would hold off on the extra payments to student loans until after you have moved and had a couple paychecks. If you don’t have the 20% for the down payment then I would talk to the lender about interest rate difference on 0-5-10-15% with a doctor loan. Run the math on what it actually costs or saves you.

                  If you could drop the 30k right now, assuming 6.8% rate, you will save 2k of interest by this time next year. If you run cash shy at moving time how much will it cost you to borrow?

                  If the plan was to rent...I would just dump whatever you could on the student loans with the minimum e fund.


                  • #10
                    Given the numbers -- neither.

                    Rent.  Make sure the new place is the right place and employment.  If you're quite certain of the situation, renting for a few months as fine and keep the majority of the stuff in storage if you have a lot of stuff since owned home previously.

                    Most places negotiate a move cost and that would include short term storage by the move company and allowance for the second move from storage into new place.

                    That's what I would do to allow for settling down into the new area; ID the right house and right place and right situation.   Then 20% down or a management mortgage, then start paying down that loan if PSLF isn't in the cards.



                    • #11
                      Strongly consider renting until you are in a better position to take the mortgage loan while also having less student loan debt.

                      *If* you *HAVE* to have debt, then having mortgage debt is superior to having student debt.  Given that mortgage interest is tax-deductible, a loan of 3.6% in the 33% tax bracket is more like 2.4% after taxes.  It's very unlikely that you're getting that low on your loans.  Plus, the loan is backed by a (likely) appreciating asset with liability shared by the bank.

                      Clearly having no debt is the optimal choice, but if you have to choose to have one debt over the other, mortgage debt is the preferable of the two bad situations.


                      • #12
                        Thank you all for the advice. It is truly hard to resist the urge of buying a home right out of residency, but it seems clear that renting is the best decision at this point. I will strongly consider this and expand my search to include rental homes.


                        • #13

                           I am in an area that will provide physician loans with no down payment and no PMI.
                          Click to expand...

                          You mean the US? Is there some area where you can't get a physician loan? I'm not aware of one.
                          Helping those who wear the white coat get a fair shake on Wall Street since 2011


                          • #14
                            I have not yet felt the urge to buy, which has been helpful in primary care with a lot of school debt. If you’re going to have kids, be sure to leave a hole in the budget for child care (or spouses lost income if she decides to stay at home). We have two and child care is our 3rd largest monthly expense behind student loans and retirement savings. Rent is 4th. We’re in a fairly HCOL though so buying seems completely unreasonable at this point.