What to do?

Discussion in 'Finance and Investment' started by cbtk18, 05.15.14.

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  1. cbtk18

    cbtk18 10+ Year Member

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    I have med school loans of about $250k currently in IBR at ~7%. No other significant debts. About to start year two of a 6 year residency. I have a wife a kid. Just got married last May and we have a new 4mo old baby girl. We currently have about $100k between us ($80k from wife's recent inheritance and $20k from mine) in liquid assets. At this time we are planning on using most of that money for a down payment on a roughly $300k house

    The question I am having a hard time answering is: are we crazy on not using that money to pay down my loans? The rent in the area compared to home prices are insane and we are really wanting to buy. Should we pay down as much on the loan then just shoot for one of those 100% doctor mortgages? Also, since the majority of our money is from my wife's family, I think it may be difficult to convince her to use it to pay my personal loans (again, we are recently married).

    I had hoped to someday use PSLF and work for a hospital, but that seems it will be unlikely that I should count on that.

    Any suggestions?
     
    Last edited: 05.15.14
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  3. krl7044

    krl7044 2+ Year Member

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    You can probably quality for physician loan with 0-5% down. Why would you put down anything more than that? Yes, it would make sense to pay down your loans first. I would keep at least some of that money for emergencies. I also am not sure whether buying right now is a good idea vs. renting, so I hope you've done this calculation. White Coat Investor blog has several articles on physician loans: http://whitecoatinvestor.com/physician-mortgage-loans-whats-currently-available/
     
  4. thesauce

    thesauce Senior Member 10+ Year Member

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    I second the physician mortgage. Then sock away 6 months of expenses, then 401k to company match, then ROTH, then put the rest toward loans.
     
  5. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD Partner Organization 10+ Year Member

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    Why are you buying a house that costs 6 times your gross income? Does that seem smart to you? You mention rent in the area is insane so I would assume you are in the Bay Area or NYC, except there are no houses that cost $300K there. You being in an area where houses cost $300K and yet rent is "insane" seems highly unlikely to me. Perhaps if you name the metropolitan area we can scour Craigslist and see what you're calling "insane." It sounds more like you've got $100K burning a hole in your pocket. Since you don't expect to use PSLF (be sure about this of course) I would use most of that $100K to pay down your loans. A guaranteed 7% return is nothing to scoff at. If she doesn't want to do that (which isn't logical since you're now married and its "our money" not "her money"), well, do something else that's smart like put it in Roth IRAs or use it for a down payment. And tell her family that you won't be sharing your income in 5 years with her since it came from your side of the family.

    Regarding Konstantin's comment (and I think Konstantin's great BTW), I disagree. I think there are lots of great reasons to put down a big down payment. You get a lower rate, lower fees, fewer points and unless you use a doctor mortgage, no PMI. You also have some equity in the place in case of a down turn or in case you need to sell earlier than you plan for some reason. Your mortgage payments are also lower since the mortgage is lower. Lots of good reasons. Doesn't mean that's the best use of your money (paying down the student loans almost surely is, with Roth IRAs a close second) but it wouldn't be foolish to use it for a down payment.

    I think you really ought to spend some time thinking about why you want to buy. If you're like most med students/residents, your reasoning behind that decision may not be perfectly sound. Read this article for more details:

    whitecoatinvestor.com/10-reasons-why-residents-shouldnt-buy-a-house/

    I mean, you've got 5 years so this will probably work out okay for you, but it's not like it's a super-smart financial idea for you to buy a house right now. I mean, I bought my house for a steal in the depths of the housing bust (2010) and it's only appreciated about 10-15% in 3 1/2 years. Buying for just 5 years and counting on doing better than renting requires your house to appreciate at a higher rate than that. Also, be sure you're not making the classic mistake of comparing a mortgage payment to a rent payment. There's a lot more costs involved in home ownership than the mortgage payment. In fact, a real estate investor will tell you that typical expenses are about 45% of what the gross rent would be. So imagine what it would cost to rent a similar house in your area, multiply it by 45% and add it to the mortgage you're looking at. That's a more realistic comparison, and doesn't even take transaction costs into account. Of course a mortgage payment should be less than rent. It should be much less.
     
    Last edited: 05.16.14
  6. krl7044

    krl7044 2+ Year Member

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    Great points. Just to clarify, I'm actually not against putting the money down. On the contrary, I'm an extremist - I believe in paying cash for a house if possible. But not in this case! As discussed by Jim above, the money can be put to better use!
     

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