Mortgage Question

[andrew.doering]

I am just about to graduate from residency and we are going to build a house and I just got the est mortgage payment and I wanted to make sure I'm not overextending myself. I have 2 young children and my wife is staying home to take care of them for now.
My income will be in the 225k ballpark next year. I have 184k student loans that I am making minimal 90/mo payment on now. Other than cellphone/life/car insurance we don't have a lot of expenses. The house is about 500k and because I am buying prior to working a year I only qualify for an ARM (this is through the builders mortgage co) Est monthlyp is $3300.
I want to start saving and putting $ toward retirement, saving for the girls, etc. am I over-stretching?
I am a bit nervous about it.

[StarTrekDoc]

Congrats on the start of your journey!  Key on the mortgage - structure to avoid PMI.  If possible, really get out of ARM, or at the very least try to negotiate a 3/1 or 5/1.  New homeowner AND new practice is going to be challenging.  At least you have the little ones already!  

As WCI has suggested; the best way to save is to live like a resident as long as possible.

If you're quite confident that your professional life will remain stable at the new job for the following years and the location of the house want to be in is adequate for 5 year plan, go for it.

[VagabondMD]

I am going to argue against doing this, and the fact that you are nervous means that part of you feels the same. Many first attending jobs do not work out. Let me say that again. Many first attending jobs do not work out. Building a home is not only expensive, but it is time consuming, and there will be lots of opportunities along the way to add more features as you go. Wait a couple years until you have settled into the job, and then buy the same house from the attending who built it (at a discount) when you are on firmer financial ground.

[raddds]

There is a timely post on http://www.physicianonfire.com/sunday-best-3122017/ written by Doctor in Debt titled "5 Reasons Millennial Physicians Should NOT Buy a Home Right Out of Residency". Maybe not all reasons will apply but you should consider the advice. Best wishes!

[Decapolis]

Don't do it...at least not yet. Is 3300 including your property tax? If not that could be significant(mine is 12k a year on a cheaper house), just depends where you live. Either way a 3k/month mortgage will take a good chunk of your monthly cash flow making 225k. Don't forget your student loan payment will be much larger when you're not paying just the minimum.  You will be amazed at how quickly it goes after you start saving 20%, building an emergency fund, funding kids colleges etc. If it were me I would rent and pay off the student loans first. Remember it's not the little things that kills us financially, it's the big stuff...houses, vacation houses, new cars every few years. If you are already nervous don't lock yourself into a >3k/month payment right out the gate.

[StarTrekDoc]

Radds and PoF's article makes a very strong point.  Home ownership IS STRESSFUL and can be a money pit if you're not careful.  Only you know your situation of job and family.

#1:  job - if you're certain about your job (like staying on the University of your residency) and nearly 100% sure of no transition for 5 years, then buy.  If not, pass.

#2: High Cost of Living - Real Estate market -- here is the major exception to the rules (ie: NYC, SF Bay area, LAX/SD) - markets rise fast.  Price appreciation is real.   OTOH, living in say suburban Detroit where my parents house stayed neutral for some 20 years, then the clear answer in my books is rent.  --  the cross comparison would be how much would your rent be for similar living conditions?

It's like people who sleep okay with 100% Growth stock vs  50 Bond/50 Growth vs 80 Bond/20 Stocks.

[andrew.doering]

Thanks to all for your responses. The monthly payment I mentioned does include r.e. taxes. I think I can get a better rate through a lender not associated with the builder which I am trying to do now.

I should have mentioned before that I have signed the sales agreement, so getting out now would be upwards of $20K.  

I am familiar with the area and many of the docs at the practice and can say that I will be comfortable there for long enough to have the home appreciate. Renting would drop my monthly expenses by roughly $1K based on the loan I mentioned (I am hoping to get better). My wife is also happy with the area and misses owning a home. She has put up with renting a small apartment in residency and moving all over so I am trying make sure that she sees some benefit of putting up with me this long!

I guess I should spin to asking if anyone has any advice on how to continue living like a resident!

[wideopenspaces]

It sounds like you have made up your mind but if it were me, I would lose the 20k and rent instead. You are going to have 684k in debt on a 225k salary. It's going to be very difficult for you to put much towards retirement (and frankly I would not put anything in a 529 until your own loans were gone and you had a decent retirement fund for yourself). Do you have an emergency fund? Disability insurance? I would wait to buy a house and instead aggressively pay off those loans. But if not, at least put 20 percent of gross income towards retirement and make sure to get disability insurance and an emergency fund.

[andrew.doering]

I have disability and life insurance locked in. We do not have much of an emergency fund to speak of and that is something to think about. I guess I don't understand finances will be so vastly different with only a $1K difference in monthly payments between renting and buying. 20K is over 6 months of mortgage and nearly 10 months rent.

 

[CordMcNally]

andrew.doering wrote:

I guess I should spin to asking if anyone has any advice on how to continue living like a resident!

Click to expand...

The big things have already been mentioned: modest house (a house 2x greater than an attending salary is more than I would do), avoid buying new cars, avoid contact with financial advisors who want to transfer your money to their pockets, and generally not trying to keep up with all of your colleagues because you can bet there are going to be several that will live well above their means.

 

Living like a resident means being conscious about where you're spending your money and trying to cut out any excess. If you want further advice, more advice can be given if you want to post your general budget and savings plan.

 

[wannabe]

I recently built a house and we closed on it about 1 month ago so in that regard we are in similar situation. My loan to income was at about 1.4 and my student loans will be paid off in a few months but I still feel a little stressed and over stretched. Also with building there are other cost that need to be considered such as landscaping which can quickly add another 10-40k, you want blinds/shades also, that will add another 3-10k. Don't forget about the extras that are likely not including in with building as I quickly learned. With building there are also many many ways to "upgrade" your home and I can assure you that you will likely want some type of upgrades that will cost more as the builder likely has priced in only the base model. My house was very similar to yours in total cost and I was very surprised at how much cash I burned through on things I did not anticipate.  I guess it would come down to what you would feel comfortable with but I would guess most on this board would not feel comfortable with this situation. Good luck either way as building is an exciting but stressful time.

[VagabondMD]

andrew.doering wrote:

...many of the docs at the practice and can say that I will be comfortable there for long enough to have the home appreciate.

Click to expand...

I do not find that to be reassuring.

[MaxPower]

I also committed the cardinal sin of buying a home straight out of fellowship 2.5 years ago. It sounds like you were actually asking for justification of a decision you've already made, rather than asking for advice.

Can it be done? Probably. Will it be easy? Probably not. A house payment that large on a salary like that will require lots of sacrifice in other areas of your life. The term "house poor" comes to mind here. As a guess, your take home pay per month is likely to be just under $12,000 (based on this: http://taxformcalculator.com/tax/225000.html). If you are trying to save the max in retirement accounts (401k vs 403b, Roth IRAs, HSAs), that takes your monthly take home pay to about $9,000. If you then take your mortgage payment out of that, you're left with around $5700 per month for all other expenses (life and disability insurance, car insurance, utilities, house upkeep, student loan payments, car payments if you have them, food, gifts, entertainment, vacations, clothing, etc).

Is it possible to live on the rest of that $5700 (or so) per month? Absolutely. Plenty of people, like residents, live on that much per month total, or less. It's just going to require sacrifice in other areas of your life. And while some expenses may go down over time, like loan payments once they're paid off, others will go up. Only you can decide if that degree of stretch for 15-30 years (I'm assuming this is 15 year based on your payment) is worth it, for me it wouldn't be.

[HandFellow]

I was in a similar situation upon fellowship graduation last year.  We really struggled finding a good rental, so we tried to buy a house.  Fortunately for us, financing fell through (mostly based on my contract), and we found a place to rent.  My financial situation is currently more favorable: less loans, higher salary, and lower cost of living.  Even in that circumstance, when crunching the numbers, I couldn't get comfortable buying a house.  I know it is what your spouse wants and it will make you feel like you "have arrived," but home ownership is expensive, especially those first few months.  You have closing costs, moving expenses, and you are going to feel the pressure of furnishing it.

Do yourself a favor and wait a few years to get established.

[abds]

Since you've committed, best of luck to you.

Out of curiosity, what do you realistically expect to happen to your salary in the next several years? Will you be at 600k in 2 years or will you be at 225ish forever? I ask because a 500k mortgage will probably be tough on that income (unless you do everything else to live like a resident, but since you're doing the #1 thing of NOT living like a resident--buying/building a house--I don't think that's likely).

Be aware with the building process, it will snowball way quicker than you realize.

- They give you an allowance for exterior stone but the 4 options you like are all an extra $20,000

- They give you a plumbing fixture upgrade allowance, but the ones you actually like are an extra $3000

- The lighting fixtures cost more than you realize and that's $3000 more

- They give you a cabinet upgrade allowance but the cabinets/closets you like are an extra $15,000

- The granite/quartz you like is $3000 more

...You get my point. Landscaping and window coverings mentioned above. Just be aware that you will not stay within the amount they budgeted for you.