Pharmacist: Pay off loans or buy a home for equity?

[tp25]

Hi All. I'm hoping to get advice from someone who owns a home and has school debt. Here's my situation. I owe 210,000. I've refinanced with a fixed 4.7% ten year repayment plan and pay about 2,200 per month. I take home about 7,800 per month after taxes and everything else (health insurance, life insurance, 401k, etc). I have a decent amount saved up from being frugal and living at home and having very little expenses (car insurance, etc). At this point, I want to buy a home around 500,000 to build equity (mortgage would be about 3000 factoring in all the fees besides upkeep). I want to sell down the road or rent it out, and pay my loans off using that. I live in Seattle and the real estate market is growing and I worry if I wait, it'll get more and more unaffordable. Anyone with experience that can shed some light? Is this an awful idea?

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[radio frequency]

That's a lot of debt, but you seem to have things under control. Can you rent out rooms to roommates to help pay the mortgage costs down even more? How much would your monthly mortgage/PMI/taxes/homeowner's insurance payments be in total, plus upkeep costs?

Are you contributing to a 401k and/or IRA?

 

[confettiflyer]

Hey yo, same situation as you. A few clarification questions:

1) What's your top line gross pay?
2) Is the home you want $500k, or is the final mortgage going to be $500k?
3) Are you planning to put 20% down?
4) Does that $3000/mo factor in your mortgage + property tax + insurance + HOA (if applicable) + maintenance? Because the mortgage itself would be about $1800-$2000/mo based on prevailing rates.

I take home a bit more than you (~$9000/mo w/ 401k max out) with my 1st job and have a ~$600k mortgage ($2800/mo P&I only). It's definitely doable for you based on what I'm assuming. That leaves you $2600/mo for living expenses, that's plenty of room to maneuver.

I'm giving you the greenlight, BUT...

What worries me is the statement you made about the RE market

I live in Seattle and the real estate market is growing and I worry if I wait, it'll get more and more unaffordable.

I saw this same quote floating around in 2004-2006 before the big bust, just replace Seattle with any other metropolitan area in the US. It's an absurd idea, if you're priced out, just wait, either wages have to rise or prices have to fall. Nature abhors a vacuum, and this is the economic equivalent of one. Buy a house because the fundamentals for you are there (that you have a stable job, will stay in the area for 5+ years, generally like the area, and the cost to buy does not exceed the cost to rent (adjusted for personal factors, like school district vs. private school, and other possible intangibles that make this decision difficult).

How would you feel if there was a 10-20% drop in house prices right after you buy? Regret and indigestion are normal responses...but if it happened to me, I'd say "that sucks" and shrug it off, my payment is locked in for 30 years and I'm pretty sure I'm not going anywhere.

Now that I put that out there, and assuming your fundamentals are present, I think buying a home is a wise choice and financially feasible here. Feel free to PM me if you wish (I'm just on the mobile app a lot and it doesn't show PM's very well).

 

[radio frequency]

@confettiflyer I think you are right about Seattle prices, with the caveat that locals aren't driving the prices anymore. At this point, prices in Seattle are mostly driven from international investors, mainly from mainland China, trying to secure places to park their money outside of their country. Of course, if China has a downturn or changes laws to make it harder to get money out of the country, Seattle will see big drops.

 

[tp25]

@confettiflyer I think you are right about Seattle prices, with the caveat that locals aren't driving the prices anymore. At this point, prices in Seattle are mostly driven from international investors, mainly from mainland China, trying to secure places to park their money outside of their country. Of course, if China has a downturn or changes laws to make it harder to get money out of the country, Seattle will see big drops.

Hey yo, same situation as you. A few clarification questions:

1) What's your top line gross pay?
2) Is the home you want $500k, or is the final mortgage going to be $500k?
3) Are you planning to put 20% down?
4) Does that $3000/mo factor in your mortgage + property tax + insurance + HOA (if applicable) + maintenance? Because the mortgage itself would be about $1800-$2000/mo based on prevailing rates.

I take home a bit more than you (~$9000/mo w/ 401k max out) with my 1st job and have a ~$600k mortgage ($2800/mo P&I only). It's definitely doable for you based on what I'm assuming. That leaves you $2600/mo for living expenses, that's plenty of room to maneuver.

I'm giving you the greenlight, BUT...

What worries me is the statement you made about the RE market



I saw this same quote floating around in 2004-2006 before the big bust, just replace Seattle with any other metropolitan area in the US. It's an absurd idea, if you're priced out, just wait, either wages have to rise or prices have to fall. Nature abhors a vacuum, and this is the economic equivalent of one. Buy a house because the fundamentals for you are there (that you have a stable job, will stay in the area for 5+ years, generally like the area, and the cost to buy does not exceed the cost to rent (adjusted for personal factors, like school district vs. private school, and other possible intangibles that make this decision difficult).

How would you feel if there was a 10-20% drop in house prices right after you buy? Regret and indigestion are normal responses...but if it happened to me, I'd say "that sucks" and shrug it off, my payment is locked in for 30 years and I'm pretty sure I'm not going anywhere.

Now that I put that out there, and assuming your fundamentals are present, I think buying a home is a wise choice and financially feasible here. Feel free to PM me if you wish (I'm just on the mobile app a lot and it doesn't show PM's very well).

Gross pay plus other income I receive (which is also steady) is about 140k. I'm a fairly recent grad, but I can't imagine my salary increasing that much more. At least not significantly... I also receive bonuses (0-25% of my salary), but that varies from year to year depending on how well the company does. I'm hoping I can pay my loans off faster with bonuses, although I'm not solely relying on this. I put in the maximum amount my company matches to my 401k...

I'm looking in the 500k range, but won't buy if it's more than 550k for the final mortgage. I plan on putting at least 20% down, and 3000 is factoring in all the fees. I will not buy a home if I don't have at least 2-3k to manuever...

But my concerns are, will the housing market crash, or will prices keep rising. When is a good time to buy? With the amount of loans I have, I can't afford to buy a home and lose equity on it. I'm not in a rush and don't mind staying at my parents home or renting once I've paid down more of my loans... but I want to make the leap and buy if I can profit. I will pm you if I have further questions! Thanks for your advice! I'm not planning to buy right at this moment, but I've been thinking about it... 🙂

 

[BMBiology]

I don't think it is a good time to buy.

If prices in Seattle are going up because of Chinese nationals, then you are going to run into trouble when they pulled back (this will happen).

Remember, whenever you buy a house, you are already down 10% off the bat (cost of buying and selling a house). If you are OK with another 10-15% drop (when the Chinese pulled back), then go ahead.

I hate HATE losing money. It is going to be like a fire in a movie theatre. Everyone is going to run for the door when it happens. Expect prices to go down as fast as it went up.

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[tp25]

That's a lot of debt, but you seem to have things under control. Can you rent out rooms to roommates to help pay the mortgage costs down even more? How much would your monthly mortgage/PMI/taxes/homeowner's insurance payments be in total, plus upkeep costs?

Are you contributing to a 401k and/or IRA?

Yes that is... I started pharmacy school at a young age and had other agendas. I did not prioritize tuition costs as a factor in my decision, unfortunately. 3k is including all the fees... not including upkeep costs. I'm not sure how much that would be. I put in the max that my company matches to my 401k. I would be open to renting out rooms. My concern is whether the housing market will crash in Seattle. I would be extremely regretful with my decision. With the amount of loans I have, I can't afford to lose equity on a home. I'm not planning to buy at this very moment, but have been thinking about it... 🙂 I know it's feasible, but is it the right decision financially? I know there are many, many factors to consider, but I want to own eventually. Just trying to decide when is the right time. Even if it becomes more difficult for international investors to buy with tighter laws and regulations, there's still the influx of transplants who are here for Amazon and Microsoft and other big companies, and that I don't think will change. I'm a Seattle native and I've seen it grow significantly over the last ten years.

 

[radio frequency]

So...I've been watching this housing market for ten plus years. I think if you are planning to stay put for fifteen or more years, it's fine to buy. I think in fifteen years, you'll be absolutely fine, even if Chinese nationals pull out (the last recession was more of a minor dip in the Seattle market -- yes, things went down, but not by 50% even). Don't buy if you have a shorter horizon; it's too risky when you don't have tons of equity.

Don't buy planning to profit, because there's absolutely no way to know if that will occur (and I think your house isn't generally a good place to profit anyway, as there are so many costs associated with buying and selling that it really eats away at your profits...plus, you always need to live somewhere). Don't count on Amazon and Microsoft alone to prop up housing prices. While they make good salaries, they aren't generally a lot better than yours, and many moving to work at Microsoft are on H1B visas, recently from India, and I assume they aren't always from wealthy backgrounds with tons of cash already. Amazonians are usually younger and may not have much yet either.

Can you live rent free with your parents? You can earn a guaranteed 4.7% annually (they're costing you almost $10k this year alone) just by paying off your loans. Doing so will give you even more financial wiggle room, too.

 

[confettiflyer]

Everyone has some good points above. It does sound like you're gunning for a profit, that's not a bad goal but the problem is housing is a lousy investment over time. Unless you have the precognition of Warren Buffett, you should buy with the expectation that your house price tracks inflation, and you're buying because of the reasons I listed above.

Houses shouldn't be viewed as investments, just tax advantaged living quarters that give you the privilege to spend even more money on things you weren't counting on.

It sounds like you're comfortable at your parents' house...if I were you, I'd stay there, build up a nice down payment/emergency stash, and wait for a major life event to push you into a home (marriage, kids, dream job 100 miles away, etc...) you won't be "priced out forever" as they used to say (I hate HATE that phrase)


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[pezdispenser]

$210,000 student loans + $500,000 mortgage = $710,000 in debt really scares me.

Read up about 'back-end ratio' or 'debt-to-income' ratio, which is the total of the monthly housing payment and all other debt payments divided by your monthly gross income. e.g. http://www.thetruthaboutmortgage.com/dti-debt-to-income-ratio/

The standard is 36% but you can go up to 45% with additional documentation or a higher interest rate. Your $2,200 student loan payment eats into that a fair bit, so a $3,000 housing payment puts you right at the max. I don't recommend that because after you take out your taxes and other expenses, you won't have very much cash flow left.

At some point you should also fully max out your 401k ($18,000) if you're only putting in 5-6% up to your employer match right now.

 

[Slippers]

I have absolutely 0 experience buying/selling homes, so I can't help you there. One question I do want to ask though (like confettiflyer mentioned): are you currently married or is this something you would like to consider in the future? Any other potential life changes? You never know how that might change your plans as far as wanting to move to a different area. Of course, even if you buy the house, then decide you want to move elsewhere later on, you can still sell it. But if you're not sure on your degree of permanency as far as living in Seattle, owning property there might end up being more so a pain in the butt to deal with rather than profit providing.

My personal plan to live in low cost apartment and keep my expenditures to mostly necessities with a little bit extra per month for fun/entertainment. But yes, I'm a student, and I totally admit I have yet to pay the entirety of my bills using money that is actually mine, so I'll see how that goes. 😉 But that's my plan.
You said you make 7800 per month (post tax) which is about 93600 per year. And have 210K in loans. Can you live off 30K per year? That leaves 63,600 per year to put toward loans. After 3 years, your loans would be almost gone.

Another annoying thing about owning a house is that if something breaks, you have to fix it. If you rent, and AC breaks/shower not working/oven goes out etc., usually landlord will replace it for you if it is included. If you buy the home, you'll also have to probably buy fridge, washer, dryer, furniture, TV, bed, which can add up.

Another question: how confident do you feel about job security at your current employment? I know that with federal loans, you can do deferment and other such things during times of unemployment. I've never owned a home, so I've no idea on what options you'd have for deferment of mortgage payment, but I imagine they aren't nearly as generous.

Sincerely,
Person who has never actually owned a home

 

[mentos]

Just adding to the points above. Don't buy a house based on the market or treat it as an investment. It generally takes 7-10 years to break even after all the fees, property taxes, insurance, repairs/maintenance, etc. Buy a house because you are ready to afford it and you want to live in it for many years. There are many new expenses that new homeowners don't expect. You'll have to get furniture, you might want to paint, probably some new TVs with surround sound, a new grille, a fire pit, lawnmower, etc. Also, do you really want to live with roommates? I know I was sick of roommates in my mid 20s, but I also didn't want to live in a big house all by myself. So I waited until I was married to buy.

I personally wouldn't buy a home with 210k in loans but that's just me.

 

[Rouelle]

*Disclaimer: I know nothing about the Seattle market*

Have you considered buying a more modest home (maybe $200K -$300K), living there 10-15 years, and paying off student loans while also paying on the house? You could look into a 15 year mortgage, or make double principle payments, during that time. Once your student loans are paid off, sell house #1 (which is almost free and clear), buy $500K house with a monster down payment, and use all of the money you once used for student/home loan to pay off house #2 quickly.

This way is safer and leaves you with a lower chance of getting yourself into trouble, but you're still gaining equity in something tangible.

 

[Lnsean]

There's no such thing as buying a home for equity...you buy a home when you're ready to settle down and because you want the home. Speculating on home appreciation is not good. Overall, home prices will continue to rise through your lifetime but there will be peaks and valleys. I'd pay off your remaining debt first.

 

[radio frequency]

*Disclaimer: I know nothing about the Seattle market*

Have you considered buying a more modest home (maybe $200K -$300K), living there 10-15 years, and paying off student loans while also paying on the house? You could look into a 15 year mortgage, or make double principle payments, during that time. Once your student loans are paid off, sell house #1 (which is almost free and clear), buy $500K house with a monster down payment, and use all of the money you once used for student/home loan to pay off house #2 quickly.

This way is safer and leaves you with a lower chance of getting yourself into trouble, but you're still gaining equity in something tangible.

$200-300k homes don't exist there right now, except in places that are unsafe or have terrible schools or homes that are falling apart or are condos.

 

[sakigt]

I bought in 2005 when I was single and prices were going up so fast I didn't want to be priced out.

DONT. FING. DO IT.

"Throw money away" on a nice, reasonable apartment and make extra student loan payments.

 

[TheBlaah]

As someone who buys/leases out homes, I have to agree with the above posters. You're not in a good position to buy a home now with your current student loans, and especially not at that price. I'm not sure what the current rent rates are in Seattle, buy buying a house for 500k for the purpose of renting it out/selling doesn't make sense. Even with increasing house prices due to international buyers and increasing mortgage rates, you're better off waiting until your life warrants a home.

 

[tp25]

$200-300k homes don't exist there right now, except in places that are unsafe or have terrible schools or homes that are falling apart or are condos.

Hah, exactly. This doesn't exist, unless I want to live in a shack in a bad neighborhood that's outside Seattle. I'd be lucky to find a decent home in Seattle for 500k.

 

[Rouelle]

Wow. Almost makes me appreciate living in a horrible place just because the housing is affordable.

 

[tp25]

As someone who buys/leases out homes, I have to agree with the above posters. You're not in a good position to buy a home now with your current student loans, and especially not at that price. Even with increasing house prices due to international buyers and increasing mortgage rates, you're better off waiting until your life warrants a home.

Thanks all. Def not in a good position to buy, and I'm aware, but wanted your input. You all brought up some very valid points! Looks like I'll stay with my parents until I'm 30 and pay my loans off the responsible thing to do...

 

[Prepharm1214]

How is the take home pay in this topic ranging from 7800-9000 per month. I gross 140k/year and after taxes, health insurance and 401k (not even maxed), I'm actually banking only about 6200 per month. With bonus and holiday pay for the year it comes out to 7000/month

 

[radio frequency]

Thanks all. Def not in a good position to buy, and I'm aware, but wanted your input. You all brought up some very valid points! Looks like I'll stay with my parents until I'm 30 and pay my loans off the responsible thing to do...

There's no shame in that. Believe me, your future self will thank you for this decision and you will also have more options because of this choice.

 

[radio frequency]

How is the take home pay in this topic ranging from 7800-9000 per month. I gross 140k/year and after taxes, health insurance and 401k (not even maxed), I'm actually banking only about 6200 per month. With bonus and holiday pay for the year it comes out to 7000/month

There's no income tax in WA state. It makes a difference in take home pay. Of course everything else is taxed up the wazoo.

 

[tp25]

There's no income tax in WA state. It makes a difference in take home pay. Of course everything else is taxed up the wazoo.

I also have other income, without it my take home is about 7k without bonuses etc. But yes there is no income tax in Washington.

 

[PumpkinSmasher]

How is the take home pay in this topic ranging from 7800-9000 per month. I gross 140k/year and after taxes, health insurance and 401k (not even maxed), I'm actually banking only about 6200 per month. With bonus and holiday pay for the year it comes out to 7000/month

Depends a lot on the state taxes and healthcare costs. My health insurance is excellent and my cost is very low but my state income taxes are 9% on everything over 10k. I claim no exemptions. My take home after maxing out fsa and 401k is 5600/month. My salary is 120k/year. No overtime or bonuses

 

[tp25]

$210,000 student loans + $500,000 mortgage = $710,000 in debt really scares me.

Read up about 'back-end ratio' or 'debt-to-income' ratio, which is the total of the monthly housing payment and all other debt payments divided by your monthly gross income. e.g. http://www.thetruthaboutmortgage.com/dti-debt-to-income-ratio/

The standard is 36% but you can go up to 45% with additional documentation or a higher interest rate. Your $2,200 student loan payment eats into that a fair bit, so a $3,000 housing payment puts you right at the max. I don't recommend that because after you take out your taxes and other expenses, you won't have very much cash flow left.

At some point you should also fully max out your 401k ($18,000) if you're only putting in 5-6% up to your employer match right now.

Thank you! This is very helpful information, especially for new professionals deciding on schools. I am well aware of me debt to income ratio. Mine is about 2x... If I were to buy right now I would be scraping along. I guess I just have to stop worrying so much about the real estate market and make certain sacrifices and live with the 'rents 🙂

 

[tp25]

As someone who buys/leases out homes, I have to agree with the above posters. You're not in a good position to buy a home now with your current student loans, and especially not at that price. I'm not sure what the current rent rates are in Seattle, buy buying a house for 500k for the purpose of renting it out/selling doesn't make sense. Even with increasing house prices due to international buyers and increasing mortgage rates, you're better off waiting until your life warrants a home.

Thank you for your advice!

 

[gwarm01]

Man, I'm just saving up and waiting for the market to crash again. I currently live in the house I bought in college around 2008. It was about $110 for a new construction 3-bed, 2-bath (god bless the south I suppose). It's more than enough for me. I could easily get by with a 2-bed or 1-bed with a nook for the computer.

I was in pharmacy school during the crash. I was lucky that my house didn't lose any value (god bless the south again I suppose. There was never any demand so no bubble formed), but I spent my intern years looking at realtor.com and seeing these great places for rock bottom prices. Then I graduate and the bubble started inflating again!

My hope is that things calm down again and I can get that nice condo on the beach. I don't need a lot of space, but I want the location. I'm not looking to flip it or anything. I'd like to find a decent job in my preferred location and just ride it out for a long while. At this point I feel like the largest challenge will be finding the right job in the right location.

 

[flavor123]

.

 

[lord999]

The housing market even without Pacific intervention is fairly stable due to Seattle's local economy anyway (and is also subsidized by hipster trust funds as well). Like everyone else above, you can afford to wait. You're in the upper income level already, and you can't buy is a situation that quite of number of Swedish, Beacon Hill, and Harborview employees have despite their income. This will pass like everything else. It's not that I think things will get notably cheaper in Seattle, but there's a limit to the increases at this point as there's a fair number of jumbo loan defaults (>$590k) that are the talk of the town right now.

The other thing to note about Seattle is that in much of the city limits housing stock is old (pre-WWII and Levitown suburbs) which is kind of like having an additional $50-100k in a short amount of time to fix up particularly for the electrical (to bring to modern code) and heating systems (a sizable number of homes pre-1990s do not have air conditioning, so that's not figured in). I'd actually have something like $30k AFTER the down payment to deal with immediate refurbishment issues if you are buying a Queen Anne or something of that vintage in the city.

Also, if Boeing or the tech industry has another Y2k downturn, that's really when you want to go in. I do see tougher times for Microsoft in particular, and Amazon has never been a nice place to work. Boeing makes front page news all the time threatening to move from south Seattle.

 

[rph3664]

Pay off your loans. Period.

 

[steveysmith54]

speaking of loans. From what I read, balances on PAYE, REPAYE, IBR type of plans are still taxable, Know who what will happen with that?

 

[jadedphysiotherapist]

speaking of loans. From what I read, balances on PAYE, REPAYE, IBR type of plans are still taxable, Know who what will happen with that?

I've heard of a bill wishing to terminate that. Trump is proposing a 15 year plan at 12.5% income with a wipeout afterwards......well, after he stops talking about walls and takes a vacation every week.

The Pslf program however from what I've heard has a potential 57200 cap forgiven I believe. In October of 2017, the first discharges will occur. You can predict reform will start to occur from there depending on the amount. I highly doubt those grandfathered into the program will have the carpet ripped out from beneath them. If so then physicians from private schools will lead an onslaught and people will realize it's a serious issue finally.

Hi All. I'm hoping to get advice from someone who owns a home and has school debt. Here's my situation. I owe 210,000. I've refinanced with a fixed 4.7% ten year repayment plan and pay about 2,200 per month. I take home about 7,800 per month after taxes and everything else (health insurance, life insurance, 401k, etc). I have a decent amount saved up from being frugal and living at home and having very little expenses (car insurance, etc). At this point, I want to buy a home around 500,000 to build equity (mortgage would be about 3000 factoring in all the fees besides upkeep). I want to sell down the road or rent it out, and pay my loans off using that. I live in Seattle and the real estate market is growing and I worry if I wait, it'll get more and more unaffordable. Anyone with experience that can shed some light? Is this an awful idea?

Real quick.....500k!!!!!!!! Dude, way to high right now.

Thanks all. Def not in a good position to buy, and I'm aware, but wanted your input. You all brought up some very valid points! Looks like I'll stay with my parents until I'm 30 and pay my loans off the responsible thing to do...

I suggest paying your loans down for three years and build an excellent credit score. You can get 1-2% on your house mortgage and that is actually dischargeable into bankruptcy. You've got it together with your takehome pay and can just build for a higher downpayment as well as savings esp for a used car if you tank while you're paying the loans down.

My debt is staying five figures but my field doesn't hit your pay unless rural, added prn work on top of FTE, director, entrepreneurship, or ortho mill with techs (shady). Upon getting out I'm staying in a 1-1 aprt.

You don't have to stay with your parents and could just move closer to work. I'm in a very very very low COL for aprts and townhomes though so the cost is around 700-1200 a month for nice ones. 2000 for top notch. Currently with roommates with a cost between 400-600. Many just live with roommates in an aprt or house and actually pay as low as 390....lol....Hope it all goes well with whatever you decide.

 

[confettiflyer]

I'd love a $500k house in a nice neighborhood with good schools. Bargain!


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[radio frequency]

I'd love a $500k house in a nice neighborhood with good schools. Bargain!


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Even that isn't really available. For the nice nice neighborhoods with really good schools, it's usually $700k (on the cheap side with lots to fix) to $900k. We're not even talking about nice houses in this price range.

 

[ldiot]

You're over 200k in debt and want to go 700k into debt in order to buy a house when real estate is at an all time high and mortgage debt is as high as 2008 levels? And you plan to use the "profit" on the house to pay off your school loans? Bonafide genius.

 

[whitwhit]

its choosing the lesser of two evils. Pay off the debt.