ARM physician's loan for residency

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oudoc08

oudoc08

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So, I'm trying to decide on a home loan for residency. Are the 5/1 ARM's a good option? My banker told me there's almost no difference currently between the 15 or 30 yr. fixed, and the 7/1 and 10/1 ARMS, but the 5/1 is about 1.25% lower.

This is the physician loan from BOA. I'm not wanting to do the interest only option, as my wife has a good full-time job, and we'll be wanting to build some equity during residency.

My question is, since residency is 4 yrs, is it a pretty safe bet to have a 5/1 ARM given the fact that after residency, when I should be making pretty decent change, a variable rate shouldn't hurt too bad even if the market is crappy? Also, at that time, we'll most likely be looking to upgrade or relocate.

Anybody have any different views of the physicians loans, what to watch out for, traps to avoid, etc?

Thanks!
 
oudoc08 said:
So, I'm trying to decide on a home loan for residency. Are the 5/1 ARM's a good option? My banker told me there's almost no difference currently between the 15 or 30 yr. fixed, and the 7/1 and 10/1 ARMS, but the 5/1 is about 1.25% lower.

This is the physician loan from BOA. I'm not wanting to do the interest only option, as my wife has a good full-time job, and we'll be wanting to build some equity during residency.

My question is, since residency is 4 yrs, is it a pretty safe bet to have a 5/1 ARM given the fact that after residency, when I should be making pretty decent change, a variable rate shouldn't hurt too bad even if the market is crappy? Also, at that time, we'll most likely be looking to upgrade or relocate.

Anybody have any different views of the physicians loans, what to watch out for, traps to avoid, etc?

Thanks!
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1) avoid ARM's - that's what's causing the current mortgage crisis. What happens if you can't sell in four years in a depressed market and have an ARM that's going to ratchet up pretty quickly? And of course everyone that had them over the last 4-5 years didn't think it would be an issue for them either.

2) location is everything - absolutely everything

3) Will you have enough appreciation in four years to cover the 7% or higher that a commission will cost you when it's time to sell? Make sure you EASILY qualify for your loan - don't stretch yourselves too thin. Take a look at "what if's".

4) avoid BOA - I left them year's ago because they really don't care about their customers. There are a lot of smaller mortgage lenders that actually do try to help their customers.
 
It would seem that having a drastic increase in salary in 4-5 years would be more than enough to cover any rate increase or fees at 5 years, as well as stave off the "what if I can't sell" fear. Worst case, you can't sell for a year or so after residency. In the current (and predicted future) job market, are there really new grads who can't find a job in a year?
IMO, the people who are in trouble now are people who bought over their means w/o thinking what might happen if the rate increased. Those people as well didn't have a pretty much guaranteed salary increase after a set period of time, and made poor decisions based on their financial situations at the time.
Typically, responsible people aren't the ones having to be bailed out. The ones who are are in the subprime lender category.
They should know better than to be buying a bling *** house while working at McD's just because they could swing the interest only, 1% ARM.
I'm not planning on doing the same, I just want the best rate for my money, and at the time, it seems to be the ARM.

Examples of bad service from BOA? We've only been with them for a couple months, but it's been ok so far.

What other lenders have people worked with that offer similar programs?
 
oudoc08 said:
It would seem that having a drastic increase in salary in 4-5 years would be more than enough to cover any rate increase or fees at 5 years, as well as stave off the "what if I can't sell" fear. Worst case, you can't sell for a year or so after residency. In the current (and predicted future) job market, are there really new grads who can't find a job in a year?
IMO, the people who are in trouble now are people who bought over their means w/o thinking what might happen if the rate increased. Those people as well didn't have a pretty much guaranteed salary increase after a set period of time, and made poor decisions based on their financial situations at the time.
Typically, responsible people aren't the ones having to be bailed out. The ones who are are in the subprime lender category.
They should know better than to be buying a bling *** house while working at McD's just because they could swing the interest only, 1% ARM.
I'm not planning on doing the same, I just want the best rate for my money, and at the time, it seems to be the ARM.

Examples of bad service from BOA? We've only been with them for a couple months, but it's been ok so far.

What other lenders have people worked with that offer similar programs?
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Good reasoning, which is also how a LOT of people got trapped in the current morgage situation as well. The fact of the matter is, you can't predict the future, no one can. You may have a 95% probability that your future is as you stated above with you getting that bump in salary, but a LOT of things COULD happen to you in the future that you just did not forsee, or no one else did either. IE, you could just for some unknown reason not match, or you could get a residency and then the residency program goes under and you have to relocate, or you god forbid got injured, etc etc etc. Its those random occurrences that caused many people to get screwed in their deals that caused them to lose out as well as the poor people who couldn't afford what they bought.
 
Avoid ARM
Avoid ARM
Avoid ARM
Avoid "physician" loans.
Avoid ARM.

Wait until you can actually afford to buy a house. America didn't, and the housing market in combination with our poor personal credit (these two are both a result of unrestricted greed amongst the populace) are now tanking the WORLD economy.

oudoc08 said:
So, I'm trying to decide on a home loan for residency. Are the 5/1 ARM's a good option? My banker told me there's almost no difference currently between the 15 or 30 yr. fixed, and the 7/1 and 10/1 ARMS, but the 5/1 is about 1.25% lower.

This is the physician loan from BOA. I'm not wanting to do the interest only option, as my wife has a good full-time job, and we'll be wanting to build some equity during residency.

My question is, since residency is 4 yrs, is it a pretty safe bet to have a 5/1 ARM given the fact that after residency, when I should be making pretty decent change, a variable rate shouldn't hurt too bad even if the market is crappy? Also, at that time, we'll most likely be looking to upgrade or relocate.

Anybody have any different views of the physicians loans, what to watch out for, traps to avoid, etc?

Thanks!
Click to expand...
 
Are you SURE that your salary is going to be THAT much higher in 5 years?
 
oudoc08 said:
So, I'm trying to decide on a home loan for residency. Are the 5/1 ARM's a good option? My banker told me there's almost no difference currently between the 15 or 30 yr. fixed, and the 7/1 and 10/1 ARMS, but the 5/1 is about 1.25% lower.

This is the physician loan from BOA. I'm not wanting to do the interest only option, as my wife has a good full-time job, and we'll be wanting to build some equity during residency.

My question is, since residency is 4 yrs, is it a pretty safe bet to have a 5/1 ARM given the fact that after residency, when I should be making pretty decent change, a variable rate shouldn't hurt too bad even if the market is crappy? Also, at that time, we'll most likely be looking to upgrade or relocate.

Anybody have any different views of the physicians loans, what to watch out for, traps to avoid, etc?

Thanks!
Click to expand...

I'll share my experience with you. My wife and I bought a house for $141K with a 7/1 arm mortgage in 2006. We qualified to buy more house but we decided that was more than enough for the two of us. No downpayment. Monthly payment is $890. The loan we got was interest and principal. We went with a local credit union. I would suggest to stay away from interest-only loans.

We looked at BOA, and other banks but decided against them as their interest rates were higher than the 6.25 we got from the credit union.

Be aware that there are other costs associated with owning a home. One good thing to get is a home warranty. I got this from the seller and mortgage company.

If you are still interested in going with an ARM, I would get a 7/1 or 10/1 because it will give you plenty of time to sell the house before the loan resets.
 
i bought my current house because it was a good deal...friend of a friend getting a divorce etc. bought my house fot $250,000, it apprasied for $325,000 as is. i look like a genius. it needed some dressing up as well. I am thinking, i put $25,000 into it and sell it for $350,000 and make $100,000 in a year and a half.
but the housing market here in florida tanks. there is a foreclosure on my street keeping all the prices way down. the foreclosure needs some work like mine did and the people owe $260,000 on it and can't move it. the comps in the area are $260-280,000, most are not updated inside so I can maybe ask a little more for mine. i am likely to break even, if i can sell the thing...no one is looking it seems.
my mother in laws house here appraised for $505,000 a little while back...she has it listed for $385,000 and cannot sell it (for a year now). this is what happens when housing markets are over inflated and then crash.
don't ask how bad it can get...the housing market can make you loose your shirt. that said it is at a low now and is likely to be bad for a little while but will probably be better in four years...although i don't know, thats why they call it speculation.
i do know the market is bad most places and you should be able to bid pretty well on whatever is out there some one in this market will be desperate enough to give you a good deal.
 
militarymd said:
Are you SURE that your salary is going to be THAT much higher in 5 years?
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When you have 20% to put down on a house and a fully funded 6-12 months of living expenses emergency fund expenses then you are ready to buy a house. Then you will not be forced to take a sub prime rip-off ARM loan. Until then you are risking your financial future, by buying a house you really cant afford. The bankruptcy laws have changed so every dollar you barrow you will have to pay back, If residency does not go to as planned or the Democrats get the white house and congress and ram through some sort of universal health care and the job market changes you could be in a big hole if you have more house than you can afford.
 
oudoc08 said:
I'm not planning on doing the same, I just want the best rate for my money, and at the time, it seems to be the ARM.

Examples of bad service from BOA? We've only been with them for a couple months, but it's been ok so far.

What other lenders have people worked with that offer similar programs?
Click to expand...

The rate isn't the whole story. Fees? Closing costs? PMI? Pre-payment penalties (often found with ARM's)? Escrow requirements?

Have you checked rates at www.bankrate.com ? What about www.lendingtree.com ? Have you looked around at other lender's? Banks frequently charge higher rates and associated costs compared to other lending sources. Try a mortgage broker as well and see what kinds of lenders and programs they represent.

BOA - lousy service overall - they have the attitude one would expect of a mega bank with lots of customers - they could care less about individual customers at the local level. They significantly under-appraised my home years ago for a HELOC, despite a very strong rising seller's market and a pile of comparative sales to back up my claims. They didn't care. I walked, and over the next six months, transferred every dime of my several accounts with them to other institutions. And of course to this day, let anyone who cares to know what I think about them. :laugh: Remember - give someone great service and they'll tell one or two people about it - give them lousy service and 100 people will hear about it. They never learn. This is the bank that never met a fee it didn't like.
 
Thanks for all the great posts. A couple other questions.

1. Some of you are saying to avoid "physician loans". Why is this? They offer no PMI, as well as the ability to obtain the loan up to 60 days prior to residency. Other loans require at least a couple of paystubs, and moving after residency is not an option for me.

2. Secondly, while I see the potential downfall in ARM, does the fact that we will be a 2 income family, and will be buying substanially below our means, offer protection against fluctuating rates, disability, etc? She's a pharmacist making a little over 100k/yr, and we're looking to buy a house in the 150-200k range.

3. Finally, this will be our 3rd home purchase, and while I theoretically agree with one posters advice not to buy until you have 20% down and 12 mos cash in the bank, in todays world, that's not happening for most, and as well, may not be the best investment of your money, especially in a strong buyers market, as is the case right now.
 
militarymd said:
Are you SURE that your salary is going to be THAT much higher in 5 years?
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I didn't hear that LALALALALA

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I have 1 piece of advice as a real estate agent (did it for 2 years, my wife does it full time now). Whatever kind of loan you get - get it through a lender your agent knows well.

Lenders are liars. I have personally seen them, with multiple buyers, promise a rate, only to later say they can't do it. Here's how they work:

They promise you a great rate, and you go with it. The week before closing (when they know you're eager to get it done, and sometimes in a bind to get it done), they call you up and say, "We have a problem. The underwriters had a problem with the loan, but the good news is that we can still do it; it's just going to be an extra 1% than what we thought."

Most people say OK and go on with the transaction.

If you have a decent agent who has worked with some lenders (who want to continue to get business from that agent), they should be able to steer you to somebody who won't screw around with you.

And if you don't have a buyer's agent (free to you), you need one. PM me and I can refer you to somebody pretty much anywhere in the US.
 
I have only one thing to say: RENT. Houses don't really appreciate over time when inflation is taken into account. They do only in bubble markets. Since right know they are going down you will lose money without a doubt. Look up patrick.net, there is some good stuff there.
 
urge said:
I have only one thing to say: RENT. Houses don't really appreciate over time when inflation is taken into account. They do only in bubble markets. Since right know they are going down you will lose money without a doubt. Look up patrick.net, there is some good stuff there.
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However, you do lose a huge tax benefit by renting. We are renting now and I have to say it is terrible compared to when we owned our homes. We came out with significant appreciation, as well as a great yearly deduction for interest and taxes. Now we're just chunking a grand a month into somebody else's nestegg.
Also, you can't modify your property, paint, remodel, etc. We have the greatest landlords ever, but it's still somebody else's house.

I'll also argue I don't think you can predict the housing market in 5 years.
 
Yes, you lose a tax benefit. But you don't have to pay property taxes. They probably cancel eachother out.
 
I would argue that it's typically a bad idea to rent if you're going to be there >= 3 years.

Renting is paying somebody else's mortgage for them, plus more.
 
urge said:
Yes, you lose a tax benefit. But you don't have to pay property taxes. They probably cancel eachother out.
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Yes but property taxes as deductible as well.
 
Ill be the contrarian and tell you a great piece of advice assuming that you are not risk adverse and are not stretching yourself beyond thin......


"You DONT'T wait to buy realestate,You Buy realestate and WAIT!"

I say not only go with an ARM, go with an Interest only ARM....it will be cheaper and give you more bang for the buck!

There are several caveats and strategies to this approach but needless to say, you can have your money working 2x as hard as everyone elses.

I say go for it!👍
 
Time for my semi-annual, contrarian, buying a house is stupid post. Renting is a GREAT idea during residency.

When you buy, you
1) pay property tax
2) pay (and have to schedule, manage, etc,) all repairs
3) are subject to large and unpredictable expenses (somewhat mitigatable by home warranties)
4) Have to pay 6% or so commission if you want a real estate agent to sell your house. Over 4 years, the equity built simply by paying your mortgage will be effectively wiped out by this commission. (Given that the market has completely tanked, there's a good chance your house will now appreciate over 4 years, but it might also tank another 2 years before making it back to today's prices)
5) Qualify for a tax deduction that is near useless to most residents. To deduct mortgage interest, you have to itemize. In that case, you LOSE your standard deduction - $11,000 for a married couple. So the first $11K of interest nets you a big zero tax deduction. Most people will have some other deductions (state income tax, personal property tax) but not many. Your effective deduction will likely be half or less of the amount paid in mortgage interest. And in your first tax year of residency, making half a year's salary, you'll probably be deducting against a 15% marginal tax rate. (nb - if anyone wants a better deal, send me a dollar and I'll send you 20 cents back. Any amount. No limit!) If you have a sugar daddy (or momma) spouse, the numbers may work better for you.
6) You're not throwing money away, paying someone else's mortgage, etc. Get a real estate book and see how rental prices are set. Rents are set to generate a small profit over the long term given the costs of owning and maintaing the property balanced against the appreciation of the property and the tax advantages of depreciation (generally at a 35ish% marginal tax rate.) Bottom line: your rent won't come close to the cash flow needed to own and maintain the property. i.e. renting is a good deal.
7) It's a great opportunity to "invest" - nope, sorry here too. The market over the last several years has provided some spectacular returns. That's over and was essentially a bubble. But you can make a reasonable return. Let's say you buy a $200K house and sell if for $250 4 years later (probably too generous, but let's run the number anyway.) So after 4 years you still owe 190K on the loan, 6% commission is 15K, so you net $45K (250-15-190). Well, guess what. You're now an attending and make $45K every 2 months. It's not going to be transformational amount of money you made. (And again, that 45K "profit" doesn't take property tax, repairs, etc into account.

So why should you ever buy a house? Same reason you buy Starbucks rather than Maxwell House ... because you like it better and you have the money.
 
I'm in the "rent" camp. I'm single, live in an expensive city, and don't have any assets, so I didn't really have a choice. That said, many of my friends that bought in other cities have had to replace furnaces, redo roofs, and pay unexpected city "assessments" for repaving, doing sidewalks, etc. The person that made the point about fixed, knowable wastage (rent) being better during residency than the unknowable (maybe profit, maybe loss, maybe catastrophic expenses for repairs) makes a really good point. Also, by renting, I can live in a WAAAAYYYYY cooler part of town than if I bought. As previous homeowners, you already know all this, though, and having a spouse with money changes the dynamic a little.

Here's a calculator for the rent vs buy debate, but it's fairly simple and doesn't take into account the ARM and eventual increase in your rate:

http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy_calc.asp?Section=YPTH

One other thing that hasn't been mentioned is whether or not you want to do a fellowship. You may not want to now, but in 4 years, you might a) realize you WANT to subspecialize or b) realize you NEED to subspecialize in order to get the job you want in the city you want. This could mean an extra 1-2 years at residency pay, which might also change your dynamic a little. If you end up doing your fellowship (and making fellow money instead of attg money) in a different city, selling your house becomes a much bigger deal/urgency.

And, as MMD always likes to point out, earnings may not stay as high (overinflated?) as they are right now.
 
cchoukal said:
I'm in the "rent" camp. I'm single, live in an expensive city, and don't have any assets, so I didn't really have a choice. That said, many of my friends that bought in other cities have had to replace furnaces, redo roofs, and pay unexpected city "assessments" for repaving, doing sidewalks, etc. The person that made the point about fixed, knowable wastage (rent) being better during residency than the unknowable (maybe profit, maybe loss, maybe catastrophic expenses for repairs) makes a really good point. Also, by renting, I can live in a WAAAAYYYYY cooler part of town than if I bought. As previous homeowners, you already know all this, though, and having a spouse with money changes the dynamic a little.

Here's a calculator for the rent vs buy debate, but it's fairly simple and doesn't take into account the ARM and eventual increase in your rate:

http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy_calc.asp?Section=YPTH

One other thing that hasn't been mentioned is whether or not you want to do a fellowship. You may not want to now, but in 4 years, you might a) realize you WANT to subspecialize or b) realize you NEED to subspecialize in order to get the job you want in the city you want. This could mean an extra 1-2 years at residency pay, which might also change your dynamic a little. If you end up doing your fellowship (and making fellow money instead of attg money) in a different city, selling your house becomes a much bigger deal/urgency.

And, as MMD always likes to point out, earnings may not stay as high (overinflated?) as they are right now.
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Good points, especially about moving for a fellowship, but really, people buy and sell simultaneously all the time. True it's more of a pain than just giving notice, but definitely doable. One thing I didn't think about is the differences in location that may factor in. For example, in my area, there aren't many choices for rental properties in decent areas w/ good schools, etc., whereas buying an affordable house gets you in a nicer area. Not true in many areas of the country where you have to make some serious change to get out of the hood.

I guess if I was single or married w/o kids, renting would make more sense, but having two school age kids changes things a bit.

Really it's more about the whole "king of the castle" probably than anything. 😀
 
InGasWeTrust said:
I say not only go with an ARM, go with an Interest only ARM....it will be cheaper and give you more bang for the buck!
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Most people that get interest-only ARM loans do so because they're just plain stupid and want to get way more house than they could otherwise afford, prodded on by greedy lenders. Most just aren't intelligent enough to clearly understand all the implications - which brings us to the current mortgage "crisis".

Cheaper is relative. And stupid lasts forever.
 
oudoc08 said:
I guess if I was single or married w/o kids, renting would make more sense, but having two school age kids changes things a bit.

Really it's more about the whole "king of the castle" probably than anything. 😀
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Those are both really good reasons to buy.

That having been said, you might be able to find a well-located house that is theoretically for sale (in the sense that it hasn't sold in many weeks) whose owner would be willing to rent just to stem the cash flow.
 
A few things to take into consideration:

1) “building equity” is terribly overrated. Money is money, whether in a home, or in stocks. Over the long run, investing in an index fund will probably get you better returns, not to mentioned your returns wont get eaten into by the cost of the mortgage. The advantage of financing a home purchase is leverage, but of course, this probably wont do you any good in this market.
2) even if you can afford a rate increase after your residency, this isn’t something you want. Its throwing away money. Mortgage rates are very low right now, and nobody can predict the future. Remember, in the 80s rates were over 15%. Its probably a good idea to lock these rates.
3) if you have private loans (or credit card debt), your best investment would be paying off as much of your private loans as possible. Its doubtful you will get equivalent returns in any other market.
4) Its pretty easy to do a cost benefit analysis of rent vs. mortgage (pro mortgage- interest deduction, possible appreciation + leverage, cap gains aren’t taxed. pro renting- no property tax, don’t have to pay for heat/ repairs, no interest payments, no closing costs etc.)
5) If you (or anyone) can only purchase a home with the help of “physicians loans” its probably a good idea to hold off on a purchase. don’t worry, housing prices aren’t going anywhere right now.
 
I say buy low and sell high.


If you can't decide when that is, buy shortly after everyone says sell and sell shortly after everyone says buy. It has worked for me with the market.
 
parto123 said:
A few things to take into consideration:
5) If you (or anyone) can only purchase a home with the help of “physicians loans” its probably a good idea to hold off on a purchase. don’t worry, housing prices aren’t going anywhere right now.
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Bleh. I'm going to use the physicians loan when I finish. I don't think anyone else can beat their package deal. I could get some other non-physician loan, but then I probably wouldn't get the house I wanted.
 
I must say that this thread is quite entertaining to say the least. Its very interesting to see how drastically different people's personal philosophies are with money and real estate.
It sounds like theres a lot of people on here who are a bit overly cautious with the decision to rent vs. buy. I think given the current housing crisis we've witnessed over the last couple of years, there's good reason to feel this way and avoid buying until you have tons of cash in the bank. However, I feel that the "ideal" conventional/traditional way of buying a house is completely unrealistic for most people in our situation, unless you are able to borrow money from rich relatives. It would take most people years to save up that kind of cash, even once you're an attending. Why spend 3-5 years or more throwing your money away to pay someone elses mortgage when you could just have your own.
The key to avoiding disaster in a normal, steady housing market is buying in the right place at the right time and living well below your means. Additionally, in our situations we should not buy anything thats in need of any repairs or foreseeable repairs for at least 3-5 years. Thats one reason why condos are a great option for residents in my opinion. You just have to factor in a monthly condo fee every month when determining what you can afford. And of course, as everyone has already said multiple times, avoid the "stupid" loans like interest only.
Personally, I think 5/1 or 7/1 arms are actually a pretty smart idea for residency. Over a 3-5 year period you don't have to put much of anything down on the house except for closing costs (which you should negotiate to be as cheap as possible). You pay a pretty good interest rate compared to conventional rates and in 3-4 years when you get done with residency you can either refinance or sell. And if you're lucky, you'll get back everything you paid for it plus some.
Sure, the market may crash on you in that time frame, but it would have done the same even if you went with a conventional loan. At least with the 5/1 arm you didn't have to put down 20% of your own hard earned cash. The worst case scenario is you have to hold on to the property and either rent it or pay the mortgage while waiting for the market to improve. Since you'll be an attending by that point, whats an extra $900/month mortgage going to do for you other than piss you off?
As long as you buy well below your means, avoid predatory loans, and buy in the right place at a good price its hard to lose.
I also want to add that its not just the sub-prime loans that are causing the current market crash, but more so its the greedy nature of americans who just had to have a house way bigger than they could ever afford. If you can have the self-discipline to live below your own means in everything you do, your financial situation will be light years better than 95% of the people around you. And that goes for people making 30K a year as well as people making 500K a year.
Everything above is the optimistic, less patient, risk taking side of my brain speaking. :clap:

My pessimistic, cautious, and wiser side of my brain is telling me I'm crazy at the same time. Perhaps I should just rent as cheap of a place as possible, save up some money and have the peace of mind knowing that I have cash in the bank. But, then again, will I really ever be able to have peace of mind knowing that I have over 250K in student loan debt staring me in the face?😱😕
 
My two cents-

I am firmly in the "buy" camp, and I want to weigh in on why I think some of the "rent" people are wrong. There are some good reasons to rent, but I disagree with a lot of the arguments given.

1. "Are you SURE that your salary is going to be THAT much higher in 5 years?"
Um. . .Yes. Pretty much across the board most residents can count on their salary about tripling if not more once residency is over. Yes I could become disabled or my residency could fold but I'm not going to live my life making decisions based on extremely unlikely catastrophic possibilities.

2. Avoid physician loans
Why? You can get competitive rates with no PMI. If you can afford the monthly payment I don't see the rationale behind avoiding this. Banks are willing to give loans to residents with no down payment for the very reasons I stated in #1--we will make good money and it is very unlikely that something catastrophic will happen to prevent that.

3. You could lose money
Well, I prefer to take a chance on losing money by owning than have the guarantee of losing money by paying rent. Take my own case for example. I bought a $200k townhome when I started residency, and pretty much I bought right at the peak of the bubble. Fortunately my area hasn't really been affected much or had a big downturn in prices. But lets say prices do go down, lets say at the end of my residency I can only sell it for 170K. Woe is me! I lost $30,000! Actually I would have lost a bit more than that if you factor in all the interest I have paid in the meantime. But compare that to the smart renter who didn't buy and paid $800 rent a month for 4years and lost a total of $38,400 Who is better off? Well the result is pretty much the same. But at least with buying there is a chance the house will appreciate. Lets say I end up selling it for $250,000, I make a nice profit. With Rent you are guaranteed to lose. You do have the security of choosing the price of how much you lose every month, but you definitely lose.

One decent argument for renting is that you could take the difference between that $800 rent and my $1100 monthly payment and invest it. If you were to do this wisely you could indeed make a good profit, but the stock market can crash just as easily as the housing market so there is no guarantee there either.

4. The tax benefit isnt that great
The poster who mentioned this gave the example comparing the standard deduction for a married couple, $11,000. For a married couple with not many more itemized deductions it really wouldn't be that much of a difference. But for a single person its huge!! I don't know the exact number for the single standard deduction, but its somewhere in the 5-6k range, so you pretty much double your deduction. Single people also have an advantage in buying in that its much easier for them to rent out an extra room or two. If you don't mind having a roommate, being on the receiving end of rent is great. I did this in the first year of my residency before I got married and the extra $600/month was very nice.

5. Houses dont appreciate
Yes they do. The housing market definitely has ups and downs but over time they generally do quite well. Sometimes they just keep up with inflation, but often times they keep well ahead.

6. You have to pay 6% commision when you sell it
No, you don't. You can sell your house yourself and this has gotten easier and easier recently. Just go to forsalebyowner.com and they explain how you can sell your house yourself for a fraction of the cost of an agent.

7. The housing market is down
Umm. . .what better time to buy? Its a buyers market out there, go find a house you like and make a lowball offer. The worst that can happen is that they'll say no. There are a lot of houses that have been on the market for a long time and that makes for "motivated sellers."

Other reasons for buying:
-You build a relationship with a bank, and a good credit history, assuming you make your payments.
-You build equity. One poster gave an example and said that the $45K you might build while in residency wouldn't be that much once you are an attending. To me $45k is a lot. I don't think that will change in a couple of years.
-It just plain feels nice to have your own place.

There are definitely times when renting is appropriate. If you live in one of the areas where real estate prices are insanely high, it would be harder to make monthly payments on a house and renting would be a reasonable option. Unfortunately those are the same areas where you end up throwing much bigger piles of cash down the rent hole.

Again, if you are single and you can put up with a roommate, I would strongly consider buying regardless of where you are.
 
odieoh said:
3. You could lose money
Well, I prefer to take a chance on losing money by owning than have the guarantee of losing money by paying rent. Take my own case for example. I bought a $200k townhome when I started residency, and pretty much I bought right at the peak of the bubble. Fortunately my area hasn't really been affected much or had a big downturn in prices. But lets say prices do go down, lets say at the end of my residency I can only sell it for 170K. Woe is me! I lost $30,000! Actually I would have lost a bit more than that if you factor in all the interest I have paid in the meantime. But compare that to the smart renter who didn't buy and paid $800 rent a month for 4years and lost a total of $38,400 Who is better off? Well the result is pretty much the same. But at least with buying there is a chance the house will appreciate. Lets say I end up selling it for $250,000, I make a nice profit. With Rent you are guaranteed to lose. You do have the security of choosing the price of how much you lose every month, but you definitely lose.

One decent argument for renting is that you could take the difference between that $800 rent and my $1100 monthly payment and invest it. If you were to do this wisely you could indeed make a good profit, but the stock market can crash just as easily as the housing market so there is no guarantee there either.


6. You have to pay 6% commision when you sell it
No, you don't. You can sell your house yourself and this has gotten easier and easier recently. Just go to forsalebyowner.com and they explain how you can sell your house yourself for a fraction of the cost of an agent.

7. The housing market is down
Umm. . .what better time to buy? Its a buyers market out there, go find a house you like and make a lowball offer. The worst that can happen is that they'll say no. There are a lot of houses that have been on the market for a long time and that makes for "motivated sellers."
Click to expand...

1 -Your calculations are not so good. Let's say you buy, with 0 down, a 200k place. You do residency in 4 years and then move. Let's assume you pay 1100/mo as you say. You then sell for 170k. After paying 52k in "mortgage payment", you owe the bank another 30k. All in all your "buying is better than renting" approach cost you 82k, with absolutely no equity at all. Then factor in at least 1.5k in property taxes, a couple hundred in insurance, another couple hundred to take care of the yard, another couple hundred to paint, another couple hundred in repairs/yr. I can see the 82k ballooning up to 90k.

Our "renting is better than buying" friend paying 800 at the end of 4 years paid 38k. The renting guy is doing better by 50k! Who is throwing money away? That's not taking into consideration weather he invested the extra 300/month or not.

2 -6% commission fee- If you sell by your own, then buyers will ask you to knock off 6% of your price. Either the realtor keeps it or the buyer keeps it. Not you. Now, assume on the above example you sold for 170k and had to knock off 6% off. You are f..ed!! Totally f..ed!

3 -Housing market is down and it will be downer for the next 5-10 yrs. This bubble took 5 yrs to blow up. The least you can expect is that it will take 5 years to deflate. But, people don't like to accept that they made a mistake buying at ridiculously high prices. They will try to get their money back by listing their place at ridiculously high prices. That's why I think it will take 10 years for the market to go back to normal. Plus, the economy is so bad right know that the government it throwing money at people now. It used to be that average Joe had a way of dealing with bad times. For the last 30 yrs Joe has been dealing with a worsening economy. Work more hours, less vacation, week-end part time, wife goes to work, tap on house equity,... Now all has been exhausted. There is no quick fix right now. House prices are only going down.
 
Allow me to retort...

1. no argument
2. no argument
3. Yes, it's a risk/benefit calculus. You don't include the time and money involved in maintaining a house, insurance, taxes, lawn upkeep, utilities, potential big repairs, etc. It's just not a slam dunk that owning is better financially than buying unless prices rise substantially
4. Financially better for singles ... agree. Still think the tax deduction is way overblown. Say you pay 10K in interest that nets you an additional 5K of income deducted at 25%. You just spent 10K to save 1250 in taxes. I keep telling you, send me $10K and I'll give you $1500 back. As for being a landlord, that does alter the situation.
5. Long term isn't relevant. It's a 4-5 year term. In that block, it's anybody's guess.
6. I think a FSBO while trying to move to a new city/new job is unlikely for most people, but that's certainly a way to really turn the economics of short term ownership around if you can do it.
7. Agree mostly. Hard to say where bottom is, but seems pretty likely it will at least be back to where it is now in 4 years.

As for building credit history - plenty of ways to do that. A really good one is getting an attending job and having your partner call his banker.

$45K is a lot ... you can't have it both ways. Either you get a huge salary increase when you finish residency ... in which case $45K is not going to be a life changing amount of money. Or your salary doesn't increase and $45K means the same to you then as it does now.

And the whole throwing money down a hole analogy ... where do people come up with this. You pay money and get a place to live. Same concept with food, clothes, cell phones, movie tickets, etc. Likewise interest, property insurance, new water heaters, time spent mowing the lawn.
 
odieoh said:
5. Houses dont appreciate
Yes they do. The housing market definitely has ups and downs but over time they generally do quite well. Sometimes they just keep up with inflation, but often times they keep well ahead.
Click to expand...

Does quite well. Is 0.4% return good?

Now show me any hard core evidence to disprove this.

From the NY times http://www.nytimes.com/2006/03/05/magazine/305tulips_shorto.1.html

This sort of thing isn't surprising to Shiller, who says he believes that the notion that real estate is a terrific investment comes in part from the long-term nature of most purchases. You know that your grandmother paid $15,000 for her house in 1951, and it's now worth $250,000. That sounds grand, but most of the increase is simply matching inflation. An analysis Shiller made of home prices in the U.S. going back to 1890 showed an average annual increase of a meager 0.4 percent. By way of contrast, Jeremy J. Siegel of the Wharton School of Business has calculated that over a 200-year period, the stock market had an average annual real rate of return of 6.8 percent. It's only in recent years, Shiller says, that huge increases in real-estate prices have become the norm and that people have come to expect them.
Click to expand...
 
Those statistics are really useless if think about it. Its an average over decades. Remember that averages take in to account both the highs and the lows. Sure the average may only be 0.4% rise annually, but thats actually pretty good considering that number takes into account inflation, neighborhoods turning in to ghettos, forclosures, market lows, etc. Even in the face of all this, the return is still positive.
Again, as long as a property is bought in a desirable area at a good price, you are more than likely going to come out ahead when you resell.
As mentioned above, it is a buyer's market right now. Why would you wait 4-5 years through residency for the market to improve when you're just going to have to pay higher prices at that point? You can truly fight for a lower price right now and if you stay there for 5 years or more, the market is likely going to get better (especially since George W. is going to be out of the equation:laugh:).
 
urge said:
1 -Your calculations are not so good. Let's say you buy, with 0 down, a 200k place. You do residency in 4 years and then move. Let's assume you pay 1100/mo as you say. You then sell for 170k. After paying 52k in "mortgage payment", you owe the bank another 30k. All in all your "buying is better than renting" approach cost you 82k, with absolutely no equity at all. Then factor in at least 1.5k in property taxes, a couple hundred in insurance, another couple hundred to take care of the yard, another couple hundred to paint, another couple hundred in repairs/yr. I can see the 82k ballooning up to 90k.

Our "renting is better than buying" friend paying 800 at the end of 4 years paid 38k. The renting guy is doing better by 50k! Who is throwing money away? That's not taking into consideration weather he invested the extra 300/month or not.
Click to expand...

Sure, if the market continues to drop and he can't sell the house for more than 170, he will lose more money than the guy that rented. But, as he was trying to point out, the guy that rented is garaunteed to lose 38K, where as the guy that buys could potentially get back everything he paid plus some. For me I'd rather take a chance at getting my money back than wait 4-5 years paying someone else's mortgage.
As far as it taking another 5-10 years for the market to recover, sure thats a possibility, but no one can predict that, just like no one could have predicted things getting as bad as they are now 4-5 years ago.
Its a gamble, real estate is not always a safe investment, but its potentially a very profitable one.
 
urge said:
3 -Housing market is down and it will be downer for the next 5-10 yrs. This bubble took 5 yrs to blow up. The least you can expect is that it will take 5 years to deflate. But, people don't like to accept that they made a mistake buying at ridiculously high prices. They will try to get their money back by listing their place at ridiculously high prices. That's why I think it will take 10 years for the market to go back to normal. Plus, the economy is so bad right know that the government it throwing money at people now. It used to be that average Joe had a way of dealing with bad times. For the last 30 yrs Joe has been dealing with a worsening economy. Work more hours, less vacation, week-end part time, wife goes to work, tap on house equity,... Now all has been exhausted. There is no quick fix right now. House prices are only going down.
Click to expand...


I think this could very well be the truest thing ever written on these boards. This so called great economy of the last 30 years......

not that it makes me feel any better, it actually makes me feel worse.
 
Originally Posted by urge
1 -Your calculations are not so good. Let's say you buy, with 0 down, a 200k place. You do residency in 4 years and then move. Let's assume you pay 1100/mo as you say. You then sell for 170k. After paying 52k in "mortgage payment", you owe the bank another 30k. All in all your "buying is better than renting" approach cost you 82k, with absolutely no equity at all. Then factor in at least 1.5k in property taxes, a couple hundred in insurance, another couple hundred to take care of the yard, another couple hundred to paint, another couple hundred in repairs/yr. I can see the 82k ballooning up to 90k.

Yes, your math here is more correct I admit. However, this really is a worst case scenario (OK the absolute worst case would be complete meltdown of the economy, but in that case both renters and buyers will be screwed). Like I said, I bought at the top of the bubble, and so far the bubble bursting hasn't resulted in falling prices, mainly it has just consisted of prices not going up like I hoped. I realize in some areas prices have gone down and that leaves some buyers in a bind If they are forced to sell. Unless you are a flipper though, there's really no reason to sell. Even if the housing weakness continues when I finish my residency, I will just rent the place out and have renters pay my mortgage until the market improves. Claims that the market will continue to be bad for 10 years are completely unfounded. Its possible that it will be the case but nobody knows. People were screaming about a housing bubble since the 2000, 2001. Were they right. . .well 6 years later they were right. In the meantime there were a lot of people who made a lot of money in real estate. If you yell bubble for long enough, eventually you will be right but that doesn't make you a genius. Take almost any area of the country and look at what a house cost in 2000, and compare that to what it cost now- even after prices have dropped you would still make a profit most of the time.

OK I'm rambling now. Bottom line, buying a house does entail risk, but there is potential a great deal of reward. I feel like it has been worth it. I guess everyone has to decide for themself, I certainly concede there are valid arguments for renting.
 
jacksparrow82 said:
Those statistics are really useless if think about it. Its an average over decades. Remember that averages take in to account both the highs and the lows. Sure the average may only be 0.4% rise annually, but thats actually pretty good considering that number takes into account inflation, neighborhoods turning in to ghettos, forclosures, market lows, etc.
Click to expand...

It's a pretty elegant piece of research if you read it. The guy studied what has been the good part of amsterdam for 300 years. Conclusion was the same. Real estate appreciates very little if at all over the long term - and the trend is sinusoidal. The potential for big losses very nearly cancels that for big gains.

As for why to buy later rather than now? Because you'll have much more time, much more money, much more flexibility in choosing where to live and likely a much longer ownership horizon.
 
jacksparrow82 said:
But, as he was trying to point out, the guy that rented is garaunteed to lose 38K, where as the guy that buys could potentially get back everything he paid plus some.
Click to expand...

Your math fails to account for interest expense, taxes, maintenance, repairs, utilities frequently covered in rent (water, trash, etc), real estate agent fees.

Those are all guaranteed losses for owning.
 
Pilot Doc said:
It's a pretty elegant piece of research if you read it. The guy studied what has been the good part of amsterdam for 300 years. Conclusion was the same. Real estate appreciates very little if at all over the long term - and the trend is sinusoidal. The potential for big losses very nearly cancels that for big gains.

As for why to buy later rather than now? Because you'll have much more time, much more money, much more flexibility in choosing where to live and likely a much longer ownership horizon.
Click to expand...

Do you have a link for this article? I scanned back through and I didn't see one, though this thread is starting to get long so I could have missed it.
 
That is indeed an interesting article. A couple of thoughts- I guess one thing that hasn't been mentioned in the buy vs rent discussion is the fact that you can eventually pay your house off and at that point you no longer have a monthly payment yet the house continues to appreciate, even if only at the rate of inflation. Obviously that doesn't really come into play for most people buying a house for residency, as most of us will move way before we pay off our residency houses, but something to think about for the long run.

Along those same lines, I feel real estate will always be a great vehicle for an investment. Perhaps not your primary residence, but certainly rental properties. With rentals leverage comes into play-- ie you can put $40k down on a $200k house, have someone else pay your mortgage via rent, and watch it appreciate. Even if it appreciates only at the rate of inflation, you get the benefit of appreciating the entire 200K even though your initial cost was 40k. And in recent years appreciation has been much greater than just the rate of inflation. Yes there are taxes and maintenance costs etc etc but if properly managed and tenants properly screened you can make a ton on real estate.
 
I can’t believe all these people saying renting is a wise option. This is completely absurd in my humble opinion. Renting is plain foolish if you can avoid it.

Housing prices are down now. This equals a great time to buy. Equivalent to the buy low and sell high, stock people.

A PITI (principal, interest, taxes, and insurance) payment really is not that much different that a rent payment. Not to mention a portion of that is building equity (like a little savings account). Then the Interest is tax deductible, which could very well save you thousands of dollars a year depending on where you fall in the tax brackets. And if you do make money when you sell your home, guess what, no capital gains tax. As opposed to all the money you make investing in the market. If you do build some equity, take a home equity loan to pay off some student loan debt and now you have another tax deductible source as student loans are not for most of us.

As far as the ARMS go, I prefer the 5/1 arms. You get a very low interest rate around 5.5 now (this means you build equity faster) and they do have life of the loan caps which essentially is the max a interest rate you can ever have right now that should be around 10%. So your protected form the 15% 1980 rates mentioned. Also you can get an ARM that adjusts yearly and they do have yearly maximum changes that can happen, I believe it is only a couple %.

Worst case scenario you after 6 years you pay 5.5% for five of those years and 7.5% for the sixth year. Best case you pay lower than 5.5% on the sixth year as would be the case if you had financed and 5/1 ARM five years ago. I am of course assuming most residents will move from their residency location within 6 years.

No PMI, good rates, and ARM options ideal for our situation. Obviously, don’t over extend your self with your PITI payment and budget on the life of the loan cap % and not your initial interest % for your PITI.
 
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