Paying down loans vs. saving for a house

[lilsnappa]

hightower wrote:

So, I’m going to change my tone a little and ultimately I say just enjoy life and don’t worry about it

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My tendency is to worry about these things well ahead of time in an effort to be prepared for when the decisions need to be made. I'm in business management consulting...a consultant'ism we use regularly is "plan the work, work the plan", if it's good enough for multi-billion dollar corporations, it is good enough for our personal financial lives.

 

[hightower]

I do want to echo what many have said about most physicians not staying in their first job.  I'm 5 and a half years into my first job and I'm currently transitioning to a new position half way across town.  My wife and I, like you, have family in the area and bought a house right after residency.  We were previously in a condo downtown. I now wish I would have stayed in that condo because now we're talking about moving AGAIN in the next year or two so we don't have to drive so much to my new job.
With that being said, we had an itch to buy an old house and fix it up and make it new again and we got to scratch that itch and its no longer there.  So there was some value to going through with it.
Perhaps part of your motivation is just to have the experience of buying your first home?  Sometimes that's literally impossible not to pursue.  I think that's just part of life and its ok.  You're clearly a person who also thinks very practically and worries about making sure you are doing things "right."  Most doctors are that way.  From a purely financial standpoint, it would be better to pay off your loans and get all your ducks in a row before buying your first home.  There's no debating that on these forums.  But, from a emotional/enjoy your life perspective its nearly impossible to change your mind once you have your heart set on the romantic idea of nesting and buying your first home together.  So, I'm going to change my tone a little and ultimately I say just enjoy life and don't worry about it  You're smart enough not to get yourself into a bad loan situation and you're responsible enough to eventually pay off your loans anyway, so its not really a big deal.

[lilsnappa]

Anesthesia84 wrote:

If you do buy a house, I would also recommend buying what you can afford on one salary if possible. That way, at least you have the option to cut back your work if the job is not as it seems. And you can pay down debt and save a lot if you’re both working full time.

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Thanks everyone for the feedback. I do agree with most that hastily running into a home purchase is ill advised, and that's not what is driving this conversation. Like StarTreckDoc touched on, what we are really looking for is flexibility. The fact that we will be able to get a physician mortgage loan without 20% is a solid fall-back option, but it is a risk. I've already lived through buying a house with 100% financing, transferred for work 6 months later, renting it for a time, and ultimately selling it 2.5 yrs later for the same price I bought for...eating the closing costs.

What I would like to do (which I haven't sold my wife on quite yet), is to purchase a house that we can live in for a time and then convert it to a rental property. But regardless of the cost of the house, I would still prefer to have at least some equity in the house up front. After hearing from everyone in this thread, what I'm leaning towards is to refi the student loan through SOFI. The goal would be to have about $75k left on the student loan at residency completion, and also have $50-60k available for a downpayment.

[Anesthesia84]

Just to echo what others have said - you are in great shape financially and would probably do just fine buying a home when she starts her first attending job. I would just get a non conventional physician's loan with less than 20% down and keep paying the student loans at your current rate.... if that is the route you decide to go.

BUT as everyone has said - many physicians do not stay at their first job. Yes, you know the area. But if you have not worked in the group, it is really hard to know the dirty details of what you might and might not like about the group. If you buy a house it is a lot more difficult to leave the job, and you might end up stuck in a crappy situation. I've been in conversations with the partners in my group and it always comes up with who is "stuck" working here because they bought a house, their spouse also works here, kids are in school, etc.

If you do buy a house, I would also recommend buying what you can afford on one salary if possible. That way, at least you have the option to cut back your work if the job is not as it seems. And you can pay down debt and save a lot if you're both working full time.

[StarTrekDoc]

With the assumption that Southern Louisiana doesn't appear to be a Cost of Living area with high appreciation home value rate -- you have time to decide.

If the refi doesn't cost much; do it and lock in a longer term and build up the kiddie for an option of both.  The opportunity cost of 2 years of interest payments is negligible in the grand scheme of things and offers the option of doing either a large down payment into your loan or a 20% down on mortgage of home that you've ID'd.

Unlike the CW here, we bought a home immediately coming out of residency with a 100k+ debt back in 2000.  Our situation was different with entering High COL market with traditional home appreciation 8+% yearly, so it was a calculated, but relatively safe risk -- 3BR nice home -- best neighborhood , best school, and easy to rent/sell if things didn't work out.  Stayed in it for 3 years -- paid $190k, sold for $295 -- not bad on 40k investment.

That said, your situation on the ground may be very different.  Allow yourself choices.  The general area maybe already chosen, but the practice and exact home/school and family situations still can be in flux over next 18months.

You'll have income to spare.  Give yourself the luxury and option of choice with a refi of the current loan; and then decide 20% down house with 30 yr vs rent/paydown chunks of loan at a time if the first home doesn't appeal to you.

[Zaphod]

nachos31 wrote:

“but our situation is a little different since we are very familiar with where we would like to end up.”

Are you familiar with the job opportunities and have you had first hand experience at those opportunities to know that you’d stick with them? What if one or both of you end up hating your job(s)? Are there other options in the area that would not require moving if you were tied down with a mortgage. You may know the area and that you’d like to live there but you still need to suss out the jobs for 1-2 years to ensure a good fit/happiness.

Great work on paying down your loans like you’ve done!

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Just remember if your employer knows you've bought a house than that is a lot of leverage in their favor.

[nachos31]

"but our situation is a little different since we are very familiar with where we would like to end up."

Are you familiar with the job opportunities and have you had first hand experience at those opportunities to know that you'd stick with them? What if one or both of you end up hating your job(s)? Are there other options in the area that would not require moving if you were tied down with a mortgage. You may know the area and that you'd like to live there but you still need to suss out the jobs for 1-2 years to ensure a good fit/happiness.

Great work on paying down your loans like you've done!

[Craigy]

You will find there is a very large prejudice on this forum against purchasing homes, particularly if you are moving, starting a new job, finishing residency, etc.  People like you don't even ask if they should rent instead of buy, and many posters will vehemently advocate renting nevertheless.

There is a lot of merit to their many arguments, particularly the transaction costs and risk of having to move again, but most of the arguments presuppose that you have a plethora of cheap good rental housing available, which might be the case across much of the USA, but, in my experience, is not really the case in south Louisiana unless you live in the sticks, and even then, the cost of housing will be cheap enough that the rent vs buy calculation isn't a big deal.  My total note with property tax and insurance is way less than what a crappy rental house would be, and only slightly above what it would cost to rent a shitty apartment of similar size, living amid the unwashed transients.

The other big presupposition is that you're a poor schmuck and that transaction costs will gut you and be devastating if you have to sell in a couple of years, which is more of a Dave Ramsey mindset for the average listener making $45k and struggling to manage their rent and their $6,000 student loan, i.e., not you.

[lilsnappa]

wideopenspaces wrote:

Even if your loans were paid off and you had a 20 percent down payment ready I would NEVER recommend buying a house in the first year post residency in a new location. So many things can go wrong in that first year. Take the time to spend a year figuring out what part of town you want to live in and if you like the job. Then buy a house. After moving several times in my life I’d never buy a home in a new town right off the bat because it takes time to know what area fits your life the best. We were renting in residency and moved 3 times in 4 years. It was a total PITA but I’m really thankful we did it because we lived in several areas around town and I absolutely fell in love with our last location. That is the neighborhood we bought in when we decided to stay after residency and I’ve never looked back. You guys are in great financial shape, you don’t want to get stuck in a crappy job in a crappy location because you couldn’t wait a year to buy a house.

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Completely agree, but our situation is a little different since we are very familiar with where we would like to end up. We moved out of state for residency, and we've decided to move back home to be closer to both of our families (which live about 80 miles from each other in South Louisiana) to start her medical career.

If we were moving to a new city or area of the country we were unfamiliar with, then we would absolutely rent until we became more familiar. But, since we are moving back to a place we are very very familiar (I've already bought & sold a home in the area), we want to be ready to jump on a house as soon as we have some clarity of her job placement. This is what has spurned the conversation & the question originally posed.

[Craigy]

+1, from a debt vs debt standpoint, student loans are far worse than any other debt, save your gambling and loansharking debts.  First, your tax benefit, if any, is severely capped.  Second, you don't have anything to show for it, e.g. a house or a car etc. that you can sell and quickly payoff the debt, or simply look upon as something you enjoy while you pay.  Third, they're likely at some terrible above-market federal rate unless you have refinanced them.  Fourth, and worst of all, student loans will likely survive bankruptcy while other loans can be discharged, adjusted or diminished.  They literally will follow you around all the way to the grave, and some will follow you beyond that.

[wideopenspaces]

Even if your loans were paid off and you had a 20 percent down payment ready I would NEVER recommend buying a house in the first year post residency in a new location. So many things can go wrong in that first year. Take the time to spend a year figuring out what part of town you want to live in and if you like the job. Then buy a house. After moving several times in my life I'd never buy a home in a new town right off the bat because it takes time to know what area fits your life the best. We were renting in residency and moved 3 times in 4 years. It was a total PITA but I'm really thankful we did it because we lived in several areas around town and I absolutely fell in love with our last location. That is the neighborhood we bought in when we decided to stay after residency and I've never looked back. You guys are in great financial shape, you don't want to get stuck in a crappy job in a crappy location because you couldn't wait a year to buy a house.

[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.

[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.

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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.

 

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Totally agree, I dislike everything about moving.

[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]

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.