Paying down loans vs. saving for a house

[lilsnappa]

Here's the situation.

My wife & I refinanced her student loans after med school. Using SOFI, we refinanced $130k @3.5% for a 5 year term. We've been dumping as much as we can into the debt for 16 months now and its under $90k now.

We're now talking about buying a home when she finishes residency (currently a PGY-2 in Peds), and I'd like to start piling up a significant downpayment over the next 20-24 months.

My question is, is it smart re-refinance the loan to a longer term in order to keep piling up cash? The thought we have is that we want to be ready to buy sooner rather than later, and still plan to pay down the loans asap.

 

[Spatty99]

If it were me I would refinance and begin to save.  I was actually in a similar situation a few years ago and that is what we did- looking at the numbers but accounting for the value in being in the perfect home for your family.    And as I explained to my wife, once you pay into a loan you can't take it back.

[hightower]

I'm going to disagree with Spatty99.  I know it can be exciting and tempting to buy a home as soon as you get your first contract as an attending, but I would continue to focus on finishing paying off your student loans.  There's no rush to upgrade your lifestyle now.  You have no kids (right?) and she is still a resident.  So, just keep living like residents.  When she's done and your student loans are gone, start saving the max amounts towards 401k's, Roth's, HSA's and see what your budget looks like for home savings at that time.  With your student loans gone it won't take you long to save up the money you need for a down payment. The beauty is that you'll be shopping for a home debt free with a healthy savings rate and plenty of cash on hand to put down.  It will make for a much more pleasant buying experience and will likely result in getting you the best rates possible on a mortgage.

You can still start putting a little money aside for a down payment now if you'd like.  Just don't ramp it up until your loans are gone.

[DMFA]

I, too, would advise against rushing into a home purchase.  Many variables change upon becoming an attending, including leaving the job (and possibly the area), which can really leave you in a suboptimal situation.

If you do end up in a completely ideal situation to buy a house (this is a very questionable what-if) but just don't have the 20% cash to put down for a conventional loan, then many banks can arrange a non-conforming "physician loan" with very little (even zero) down and without PMI.

[Live Free MD]

hightower wrote:

I’m going to disagree with Spatty99.  I know it can be exciting and tempting to buy a home as soon as you get your first contract as an attending, but I would continue to focus on finishing paying off your student loans.  There’s no rush to upgrade your lifestyle now.  You have no kids (right?) and she is still a resident.  So, just keep living like residents.  When she’s done and your student loans are gone, start saving the max amounts towards 401k’s, Roth’s, HSA’s and see what your budget looks like for home savings at that time.  With your student loans gone it won’t take you long to save up the money you need for a down payment. The beauty is that you’ll be shopping for a home debt free with a healthy savings rate and plenty of cash on hand to put down.  It will make for a much more pleasant buying experience and will likely result in getting you the best rates possible on a mortgage.

You can still start putting a little money aside for a down payment now if you’d like.  Just don’t ramp it up until your loans are gone.

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Very well said.  I agree completely.

[Hatton]

I agree with Hightower and dmfa.  Your wife does not even have a job yet!  Do not spend money before you make it.  Your debt is not huge in comparison to many other posters.  Let her finish, find a job, make sure she likes the job, continue to pay off the loan.  Then you house hunt.  I would recommend 1-2 years on a new job especially if you change cities.

[Dr. Mom]

The odds are low that your first house will be your forever house.  Pay down loans aggressively now.  Wait until closer to the time she graduates to be sure where you will be located, your budget together, and to be sure what you think you want hasn't changed.  If you need to use a physician loan to buy the house, so be it.  At least the interest can be deductible.  Let it be the longer term loan.  Best wishes!

[Kamban]

Another thing is unfortunately pediatrics is a low paying specialty. You don't want to have a mortgage and a student loan at the same time when the income is not that great compared to an interventional cardiologist.

So use the first couple of years paying the student loan and eliminating it. Then start saving for a house. By that time two years would have passed by and you would know if she likes the place, she and others in the group get along, and maybe become a partner ( if she is going to do PP).

I disagree completely on buying a house on the 1st day/year as an attending.

[RDB]

Get rid of the loans. It is so easy to justify upgrading your lifestyle and before you know it, you can only afford an extended payment plan on your loans. You are looking at a year or two difference. Buckle down, get rid of them and live a little more free. It will also make your home purchase a lot more fulfilling and enjoyable.

[Craigy]

I am on the path of paying off the loans first, and would suggest that.

Leaving financial arguments aside of what is the smarter move, you don't want to become one of these docs who is paying on student loans 10 years from now.  People in their late 30s and 40s, even 50s, still paying on a student loan.  No thanks.

[lilsnappa]

A little more context for the conversation. I am not in medicine, and almost 10 years into my career. My income is equal to or greater than what hers will be once she finishes residency. Right now, we're dumping her entire residency income (plus some) into the student loan debt. We live well below our means (~25-30% savings rate per year), and already have 6 months of living expenses set aside.

We're trying to set ourselves up to be better financially prepared once she finishes residency. She has already begun her job search, as we have already made a decision what general geographic area we want to be in(closer to family).

What we're grappling with is what is the best financial situation to be in when we're ready to buy a home. We will have $60-80k over the next 18-24 months, so I want to maximize the value of this available cash.

Which situation would you prefer:

a) Little to no student loan debt (only debt we have), but less than 20% on a home. Are the physician mortgage rates on par with a conventional mortgage?

b) A substantial downpayment (>20%) for our next home, but remaining student loan debt - that will get paid off within 1-2 years of residency completion

[RDB]

If I only had your two choices, I would choose a). A third choice, and really easy to say when discussing someone else's finances, much harder when it is your own, would be to pay down loans, then rent until you have 20% down, then buy.

I do not have experience with the physician mortgages, but I would not feel bad about that option of the rate was the same or very close. It makes it easier knowing that you will be in that geographic location regardless.

You guys will do well, you are asking all the right questions and appear to be making sound decisions. Option a) and b) will work out well long term, what you want to avoid is going for option b) but then finding yourselves strapped and ending up with loans for much longer than expected.

[lilsnappa]

RDB wrote:

If I only had your two choices, I would choose a). A third choice, and really easy to say when discussing someone else’s finances, much harder when it is your own, would be to pay down loans, then rent until you have 20% down, then buy.

I do not have experience with the physician mortgages, but I would not feel bad about that option of the rate was the same or very close. It makes it easier knowing that you will be in that geographic location regardless.

You guys will do well, you are asking all the right questions and appear to be making sound decisions. Option a) and b) will work out well long term, what you want to avoid is going for option b) but then finding yourselves strapped and ending up with loans for much longer than expected.

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I agree that option c) pay off the loans & rent until you have 20% down is the rational choice, if options a) & b) are not available. We do plan to rent, if necessary, but moving also has a time a financial cost associated. We plan to pay off all student loans within 2 years of residency completion, regardless of buying a home or not.

 

[RDB]

lilsnappa wrote:

RDB wrote:

If I only had your two choices, I would choose a). A third choice, and really easy to say when discussing someone else’s finances, much harder when it is your own, would be to pay down loans, then rent until you have 20% down, then buy.

I do not have experience with the physician mortgages, but I would not feel bad about that option of the rate was the same or very close. It makes it easier knowing that you will be in that geographic location regardless.

You guys will do well, you are asking all the right questions and appear to be making sound decisions. Option a) and b) will work out well long term, what you want to avoid is going for option b) but then finding yourselves strapped and ending up with loans for much longer than expected.

Click to expand…

I agree that option c) pay off the loans & rent until you have 20% down is the rational choice, if options a) & b) are not available. We do plan to rent, if necessary, but moving also has a time a financial cost associated. We plan to pay off all student loans within 2 years of residency completion, regardless of buying a home or not.

 

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Totally agree, I dislike everything about moving.

[DMFA]

Student debt of high-income professionals has no mitigating factors (if you're actually on the hook you pay it back). Mortgage debt is reduced by your tax bracket (tax-deductible), serves as a hedge against inflation and shares liability with the bank for disaster, and is probably at a lower "real" rate than the student debt.

You're basically trading debt for debt either way. No debt is a "good" debt, but mortgage debt has the most factors that make it suck less. Such is why I/we have recommended killing them off first.