Down payment vs. lump sum loan payoff

[shamand00]

I’m currently an orthopedic surgery chief resident and will be doing a fellowship next year. In summer of 2023 I’ll be starting my private practice job. I currently have about 60K in my savings, 50K in Roth IRA, 60K in my brokerage account. I own my home that I bought 0 down using a physician loan, and am planning to sell this spring with an anticipated profit of around 120K. My medical school debt is consolidated at 3.6% with a balance of 276K that I’m paying minimal monthly payments on through SoFi.


My private practice job will start me off with a guaranteed $250K draw but with production incentives that make the likely take home gross around $500K the first year and up much higher during years 2-3 and onwards peaking at around $1M. My loan payments become a little over $5K a month in the fall of 2023. Home prices in the area my family and I will be settling down in are around $500K for a 3 bed 2 bath.


My question is, should I use the windfall from my home and some of my savings to pay down a big chunk of my loans and refinance again, or funnel the same amount towards a down payment on a home? Alternatively, I could keep my loan at 3.6%, try and get another physician loan despite the relatively high debt to income based on a payment of 5K a month and starting income of 250K, and invest even more into my 3 fund portfolio.


My car loans are $450 a month. My wife has no debt. We have no credit card debt or medical bills. We do have 2 small children.


Thank you in advance.

[JBME]

How long is your fellowship? Likely you should not buy. Just because you made it work during residency doesn’t mean you can do it again. I’m concerned about your leverage practices and you expect to make these high salaries but you’re getting ahead of yourself. If you’re making so much money why do you have more than one car loan? You aren’t practicing good financial behavior and I’m concerned about what this could turn into once you’re making, according to you, at least $500k/yr

I’d take the profits to get rid of your car loan and pay off the medical debt. Use the fellowship time to max out retirement accounts (Roth Ira and 403b/401k ) and build a down payment for your attending house

[shamand00]

Fellowship is 1 year long which all ortho fellowships are. I don’t have more than one loan. It’s one loan at $450 a month. Other car is paid off. Current mortgage is $2K. I max out my Roth and my wife’s Roth each year, and we have plenty in our emergency fund, in fact probably too much. We save a ton of money monthly. I’m curious what exactly about my financial practices you find questionable?

[JBME]

Unless you know for sure you will stay in the same place after fellowship, it’s a terrible idea to buy a house with plans to move away from it after just one year. One year of generous appreciation won’t offset the closing costs and property taxes and realtor fees. And you’ll pay any ordinary income taxes on the gains.

you said “car loans” which suggests more than one loan.

Maxing out Roth isn’t good enough. Is that 20% of gross income? You should be maxing workplace retirement accounts too.

I mentioned I think you are playing fast and loose with leverage. You have a bunch of debt that isn’t aggressively being addressed and you’re assuming you’ll have a massive salary before you actually do. What if the salary isn’t that high? What if you become disabled in the next year?

[shamand00]

To clarify, I’m talking about buying a home in Fall of 2023 when I start my job, not during fellowship.

My residency institution does not offer matching. I would much rather invest in my brokerage account than my work’s 401K. My wife contributes to her own 401K.

The whole reason I posted this is to ask whether I should, as you say, aggressively pay down my debt once I have a large lump sum to do so this spring, or save it for a downpayment I may need in a year and a half when I do buy a home. Or should I just go for another physician loan, keep my loan at 3.6%, and invest my windfall.

Yes, I am aware of the risk of private practice. No private practice will guarantee you an income. I’ll save you the whole analysis process my mentors and I went through before I signed my contract but suffice it to say those numbers are not pie in the sky, but highly likely to pan out.

Obviously I could get hit by a truck tomorrow. That’s why I have a disability policy, a life insurance policy, and tons of savings. This whole question is moot if I become disabled.

[CordMcNally]

My residency institution does not offer matching. I would much rather invest in my brokerage account than my work’s 401K. My wife contributes to her own 401K.

I know this isn’t the advice you were going for but it’s likely better to save on the taxes at your marginal rate, even with subpar retirement options, than to invest in a taxable account at this point.

[shamand00]

I know this isn’t the advice you were going for but it’s likely better to save on the taxes at your marginal rate, even with subpar retirement options, than to invest in a taxable account at this point.

You’re right. But I’m leaving in less than 6 months so don’t see the use in starting to contribute more heavily to it now. Once I settle at my new job I’ll probably automate contributions to my 401K

[CordMcNally]

You’re right. But I’m leaving in less than 6 months so don’t see the use in starting to contribute more heavily to it now. Once I settle at my new job I’ll probably automate contributions to my 401K

The use is a reduction in taxes at your marginal rate with minimal effort required to get it. It would take you like 2 minutes to fill the form out and submit it.

[JBME]

The use is a reduction in taxes at your marginal rate with minimal effort required to get it. It would take you like 2 minutes to fill the form out and submit it.

given the OP is a resident/fellow I'd go with the Roth 403b option if that exists. That's really the best thing for the OP to do.

OP, sorry was on my phone earlier and didn't do the math in my head that this is for after the fellowship, and hopefully you're not buying a home for fellowship. In your case I think from your posts you certainly seem to lean towards keep it for an eventual home down payment. Consider splitting the difference....half to loan payoff (car loans before student loans) and half in a high yield savings account for a home you buy once you've been an attending for a full year

[shamand00]

given the OP is a resident/fellow I'd go with the Roth 403b option if that exists. That's really the best thing for the OP to…I think from your posts you certainly seem to lean towards keep it for an eventual home down payment. Consider splitting the difference....half to loan payoff (car loans before student loans) and half in a high yield savings account for a home you buy once you've been an attending for a full year

I will research the 403b option through my institution for sure.

I’m actually leaning towards paying down my loan and refinancing to decrease my monthly payment. But that would hinge on me being able to secure another low to no down payment no PMI physician loan once I do go to buy in 2023.

[adventure]

I will research the 403b option through my institution for sure.

I’m actually leaning towards paying down my loan and refinancing to decrease my monthly payment. But that would hinge on me being able to secure another low to no down payment no PMI physician loan once I do go to buy in 2023.

There is a little bit of ... we can't know ... because many "think" (bc the Fed said they would...) that the interest rates are going to be higher in 2023, so at some point you'll have both a comparison between student loans (3.6%) vs mortgage (@ x%), but you would have more flexibility having cash for a larger (than 0 or 5%) down payment. Will you need the flexibility? Hard to know. Probably not something you can plan. In these situations, we try and note the value of simplification (e.g. get rid of a car loan, finish the student loan, etc). Fewer moving pieces gives some flexibility. We've had multiple physician loans, all were 5%, none at 0%. (I couldn't find a 1M+ loan w/ a 0%, even if I'd wanted it.)

+1 vote for the 403b and 403b Roth.

[Brains428]

I'd throw it at the student loans and refi to a 5 year fixed. You'll likely easily qualify for a 0 down physician loan. Or you could add to the 60k savings and get to 20% of 500k pretty quickly, if needed should financial conditions change (for banks, not necessarily you).

Tax savings doesn't seem great right now, but you'd probably take an automatic 10-20% return on your money given the current market conditions. It's easy to roll over the money later, also.

[Tim]

Your private practice assumptions are reasonable.
$500k in a full year can work out. But, you won’t have a full year in year 1 taxes.
Strategy bs tactics. Tactics is your focus.

• Push as much as possible into Roth. I don’t care about fellowship or house or student loans.
• Refi student loans now with a long repayment (7,10,15 years) with the residency $100 payment. You lock in a fixed rate, can always prepay or refi.
• Rent in fellowship and first year of PP
• You can invest in taxable or keep it “safe” for a down payment.
• In ortho (regardless of which fellowship), it takes a year or two to find your comfort zone in whatever setting it is. YOU may choose to change your setting. That is why not to buy a house when you start.
• Stick to the 20% retirement savings once you start as an attending..
• With your prior taxable and savings the first year, your choice will be how much total debt do I want. That will guide your choice how much need vs want.
• $500 to $750 is the setting. $750 to $1m is a work/life choice in a good setting.
• Strategically, your first house won’t be what you really want and can afford. That one year allows you to avoid churning the first house after 2-3 years.

Strategy will yield better results than the tactics of student loans, house down payment or how much down from a tactical standpoint. Gives you the most flexibility and lowest risk You will be different after 3 years of practice and have the house you really want.
There is no doubt about being able to afford it. Your choice, debt or investment in 5 years. The house churn is more expensive than the down payment.
Anecdotally, 3-5 churn and 1 divorce. Interest rates and down payments, ortho’s are bullet proof to lenders. How much do you want. Buy one house, not the one you can afford starting out. You might choose to rent for 2 years, just because you don’t want that much debt.

[jz-]

Tim,

house churn

jeeze, that's a great term.

[Tim]

Tim,
jeeze, that's a great term.

“If it is only $50k to $100k, I can afford it easily.”
Yes you can, but that doesn’t mean you should do it.
Some academics make the coin this person is talking about. Public record. The personal price for an extra $200k nets only $100k. Most hate taxes and at some point regret some choices. A big shovel allows some mistakes.