Building Equity with Student Loans

[OldFolkDoc]

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Hi All,

So this is my first post in this forum but I've been lurking and searching for a while.

• Here's my personal situation:

I'm very likely going to be going to medical school in Portland, which is a growing housing market. I'm a traditional applicant, single and completely unattached, and I have about 50K saved. I'm fiscally conservative and I'd like to be unrestricted in my future geographical and specialty choices.

• Here's my question:

If I could qualify for a small home/condo loan, would it make sense to use my student loan dollars and small nest egg to make mortgage payments in order to build equity?

• Here are my thoughts for your evaluation:

Lets disregard any growth in the actual value of the property and speak only to the issue of equity and recoverability of used money. It seems like throwing my 'cost of living' student loan money into unrecoverable rent makes less sense than putting it into a mortgage where it is recovered upon sale and can be used for future home purchasing or to help repay the initial student loan.

Aside from the obvious financing hassle and tax issues, does this make sense not to simply burn the student loan money but to use it for the same housing purpose and at the same time ensure that I can recover at least some of it? What am I missing and why doesn't everybody do this?

I consider myself financially wise but ignorant regarding this type of issue. Any light that the collective intelligence could shed on this idea would be helpful.

-OFD

 

[randomlogik]

I think buying a home can be a great idea. My husband and I just bought our home this past fall. However, there are definitely plenty of hidden costs for owning a home. There is closing costs, insurance, and any repairs that need to be done. When you go to sell the home there are realtor's fees to pay. Also, while in medical school, if you have no income you won't even get the tax breaks. Considering todays housing market, who knows what the value of the home will be in 4 years. I know that if we had continued to rent instead of buy, it would have been cheaper. That said, I really enjoy our home. I like the fact that it is "ours" and we can make changes/upgrades to it.

 

[OldFolkDoc]

So this is the second time I've answered my own question, but the fallacy in my thinking lies in the fact that I didn't consider most of my mortgage payment would be to unrecoverable interest than to principle...

Here's a good way to think about it from this article:

"Mortgage interest is rent that you pay to your lender for the use of its money rather than to a landlord for the use of his house. Yes, the government picks up a portion of that with the tax deduction [DOESN'T APPLY TO MED STUDENTS WITHOUT INCOME], but most of your monthly payment neither builds equity nor is deductible. It just goes down the same black hole that sucks up any other renter's money. And it takes 20 years before a typical borrower pays more principal each month than interest."

So the problem with my idea is that by buying you're taking on the extra expenses (in both time and money) of owning, ie. hidden borrowing costs/maintainence/selling fees/etc. and most of the money you're paying into the mortgage is lost into interest anyway, so you might as well rent and not deal with the headaches if you're just going to lose the money either way.

The only way you come out ahead is if you have tenants (big headache/not a sure bet) or if your property appreciates greatly (again, not a sure bet).

Additional thoughts?

 

[The White Coat Investor]

So this is the second time I've answered my own question, but the fallacy in my thinking lies in the fact that I didn't consider most of my mortgage payment would be to unrecoverable interest than to principle...

You nailed it. Your ability to answer your own financial questions will pay off big in the future.

 

[DoctorWannaBe]

So the problem with my idea is that by buying you're taking on the extra expenses (in both time and money) of owning, ie. hidden borrowing costs/maintainence/selling fees/etc. and most of the money you're paying into the mortgage is lost into interest anyway, so you might as well rent and not deal with the headaches if you're just going to lose the money either way.

The only way you come out ahead is if you have tenants (big headache/not a sure bet) or if your property appreciates greatly (again, not a sure bet).

That is true, but keep in mind that there are more than just financial benefits to owning a home. If you like the idea of having a place of your own that you can do whatever you want in, then renting is not a good idea. I made this same decision 4 years ago when I started med school, and I think it was a great decision. My mortgage is much cheaper than the rental cost would be for a similar house. 65% of my mortgage goes to interest, 19% to principal, and 17% to property taxes. This amounts to ~$550 in interest, which in this city would get me a one bedroom apartment instead of my nice 3 BR house with a yard. Granted, your numbers will be different, but with interest rates being about what they were when I bought, it could be close.

Last time I checked, Portland was one of the few housing markets that were still growing, so you may still make a decent profit on your house in 4 years, and as long as the price doesn't drop too much, you shouldn't be in too bad of shape. Yes, there are expenses to owning a home and you should keep money around to plan for unexpected repairs, but if you have the time to fix it yourself or let a repairman in, it shouldn't be doable. In the end, I think you need to decide whether you are doing this for a financial reason (may not be worth it in 4 years) or for more intangible reasons.

Also think about what you will be doing with all that savings you have. If you aren't using it to pay for med school, you shouldn't be keeping it in cash. With the interest rates dropping today, you may not make that much on it in a savings account, and you may not make much in a mutual fund or the stock market because of the state of the economy. If you can't find a good investment for your cash, putting it into a house may be a good investment. Or if you don't buy a house, if you can't make more money on your cash than the interest your student loans are accumulating, you might consider taking out less loans and using your cash to pay for med school.

 

[Click Here!]

If you buy, you could also get a housemate or two. The rent they pay you would cover a sizeable chunk of the monthly mortgage/utilities.

Also, wouldn't your $50K cash affect your financial aid package? It won't if it's tied up in a house.

 

[OldFolkDoc]

Thanks for all of the great responses.

It looks like this question is moot as I just got word from UCSF and the housing prices there are even higher than my native LA.

Not to mention the fact that my 50K savings is probably looking much smaller after today's nosedive. Oh well. I suppose the good comes with the bad. Quite a 'super-Tuesday'.

-OFD