So I guess I'm an adult now?
April 7, 2012 9:02 AM Subscribe
Should a med student buy a house?
I'm a second-year MD/MPH student with the following loans currently in deferment:
- $90,430 Stafford (6.8%)
- $36,771 GradPLUS (7.9%)
As I have three more years of school, the total loan debt will increase to ~($300,000) by the time I'm finished. I am guaranteed to stay in Philadelphia for these three years, and will likely remain in the City for at least three more years to complete my residency (probably family med; not very competitive).
My grandmother is giving each of her grandchildren $26,000 (in two payments of $13,000, one year apart), and I am considering using my share to put a downpayment on a house in the coming months. My question is regarding the relative wisdom in buying said house compared to either 1) paying down my GradPLUS loan or 2) investing the money.
My current understanding is that even considering the interest that would accrue on the $26,000 of gradPLUS that I could pay off, it would not exceed the equity that I would build in a house (through the $26,000 + money that would otherwise go toward rent over three years). The model that led me to this conclusion was drawn up on a napkin and is almost certainly missing a number of variables.
What am I missing? Should I buy or continue renting? How should I think through this?
I'm a second-year MD/MPH student with the following loans currently in deferment:
- $90,430 Stafford (6.8%)
- $36,771 GradPLUS (7.9%)
As I have three more years of school, the total loan debt will increase to ~($300,000) by the time I'm finished. I am guaranteed to stay in Philadelphia for these three years, and will likely remain in the City for at least three more years to complete my residency (probably family med; not very competitive).
My grandmother is giving each of her grandchildren $26,000 (in two payments of $13,000, one year apart), and I am considering using my share to put a downpayment on a house in the coming months. My question is regarding the relative wisdom in buying said house compared to either 1) paying down my GradPLUS loan or 2) investing the money.
My current understanding is that even considering the interest that would accrue on the $26,000 of gradPLUS that I could pay off, it would not exceed the equity that I would build in a house (through the $26,000 + money that would otherwise go toward rent over three years). The model that led me to this conclusion was drawn up on a napkin and is almost certainly missing a number of variables.
What am I missing? Should I buy or continue renting? How should I think through this?
I think you should pay money on those loans. Normally I would say "Don't worry about the loans!" but $300k is a huge, huge amount to pay back and the monthly payment will be CRUSHING. Put that money toward the loans and rent a cheap, worry-free apartment/house. A house comes with all manner of surprise costs, and young doctors just don't make that much, honestly.
Also, are you really sure that you'll get a residency in the area?
posted by two lights above the sea at 9:17 AM on April 7, 2012 [2 favorites]
Also, are you really sure that you'll get a residency in the area?
posted by two lights above the sea at 9:17 AM on April 7, 2012 [2 favorites]
How much money will you have leftover after buying the house to put toward its repair/upkeep? A house is a huge expense.
posted by ThePinkSuperhero at 9:18 AM on April 7, 2012 [3 favorites]
posted by ThePinkSuperhero at 9:18 AM on April 7, 2012 [3 favorites]
Agreed--you would be "investing" and not buying a place to live, and that's as dangerous as any investment. Equity is not guaranteed, especially when you have a must sell date!
From what I read, Philly is in as much distress as ever with foreclosures. This affects you because foreclosed homes around yours will devalue, thus devaluing yours. In condos, your HOA dues and assessments may go up as other owners stop paying their own mortgage and dues.
If you may want to move in 3 years, I would rent. But that's me. Talk to a trusted CPA and run the numbers.
posted by PJSibling at 9:20 AM on April 7, 2012
From what I read, Philly is in as much distress as ever with foreclosures. This affects you because foreclosed homes around yours will devalue, thus devaluing yours. In condos, your HOA dues and assessments may go up as other owners stop paying their own mortgage and dues.
If you may want to move in 3 years, I would rent. But that's me. Talk to a trusted CPA and run the numbers.
posted by PJSibling at 9:20 AM on April 7, 2012
How much is your rent? If this money covers your monthly rent for 3 years, I'd be thankful that I don't have to worry about it and use it for that.
posted by katinka-katinka at 9:22 AM on April 7, 2012 [1 favorite]
posted by katinka-katinka at 9:22 AM on April 7, 2012 [1 favorite]
Whatever you do, don't put the money toward the loans. This is because:
1) Interest is simple, not compounded, on federal student loans. So you don't pay interest on the interest. (At least, this was the case when I consolidated my loans and moved into the IBR program 3 years ago.)
2) You may qualify for complete loan forgiveness if you do your medical work at some sort of non profit or government entity for 10 years.
3) Payments on student loan debt can be structured in at least 4 different ways, so don't assume that owing $300k in student loans is the same thing as having a $300,000 mortgage or $300,000 in credit card debt.
4) You may qualify for the loans being forgiven after 25 years if there's still an amount owing.
posted by Happydaz at 9:24 AM on April 7, 2012 [4 favorites]
1) Interest is simple, not compounded, on federal student loans. So you don't pay interest on the interest. (At least, this was the case when I consolidated my loans and moved into the IBR program 3 years ago.)
2) You may qualify for complete loan forgiveness if you do your medical work at some sort of non profit or government entity for 10 years.
3) Payments on student loan debt can be structured in at least 4 different ways, so don't assume that owing $300k in student loans is the same thing as having a $300,000 mortgage or $300,000 in credit card debt.
4) You may qualify for the loans being forgiven after 25 years if there's still an amount owing.
posted by Happydaz at 9:24 AM on April 7, 2012 [4 favorites]
Response by poster: Thank you all for the outpouring of advice, and please keep it coming-- these are exactly the things that I need to think about.
The biggest uncertainty is not so much the dream job aspect-- the dream job is here in Philly working with the communities I've been serving for the past few years. The uncertainty for me is related to the residency match-- there are ~30 family med residency positions across five programs in the city, and there are perhaps 6 applicants per position. I'll have a better idea of my competitiveness next week when I take a practice USMLE exam (think SAT for doctors).
Leftover money is a complicated concept. It's all loan money and I have a close-to-unlimited line of credit, so the answers "yes, lots" and "none at all" are both applicable in different ways.
Future income is also complicated. Family med residents make ~50k/yr, but are able to make income-based payments on the loans. The situation is additionally complicated by several state and federal programs that pay off the balance of my student loans after 10y working with the populations I plan on working with-- one would even forgive all loans after four years of service.
As for neighborhoods and repairs-- I'm looking exclusively at new renovations in the Fishtown/Point Breeze areas, both the targets of some major revitalization programs. Recognizing that the market remains unpredictable, I would at least say that I'm targeting my search for areas that have a higher likelihood of keeping their value.
Current rent payments are ~$500/mo, and predicted house payments within the range I'm looking (~100-130k) are around ~$700/mo. I would almost certainly be taking on a tenant (I have friends and family in the city and would only enter into such an arrangement with someone I knew).
posted by The White Hat at 9:28 AM on April 7, 2012
The biggest uncertainty is not so much the dream job aspect-- the dream job is here in Philly working with the communities I've been serving for the past few years. The uncertainty for me is related to the residency match-- there are ~30 family med residency positions across five programs in the city, and there are perhaps 6 applicants per position. I'll have a better idea of my competitiveness next week when I take a practice USMLE exam (think SAT for doctors).
Leftover money is a complicated concept. It's all loan money and I have a close-to-unlimited line of credit, so the answers "yes, lots" and "none at all" are both applicable in different ways.
Future income is also complicated. Family med residents make ~50k/yr, but are able to make income-based payments on the loans. The situation is additionally complicated by several state and federal programs that pay off the balance of my student loans after 10y working with the populations I plan on working with-- one would even forgive all loans after four years of service.
As for neighborhoods and repairs-- I'm looking exclusively at new renovations in the Fishtown/Point Breeze areas, both the targets of some major revitalization programs. Recognizing that the market remains unpredictable, I would at least say that I'm targeting my search for areas that have a higher likelihood of keeping their value.
Current rent payments are ~$500/mo, and predicted house payments within the range I'm looking (~100-130k) are around ~$700/mo. I would almost certainly be taking on a tenant (I have friends and family in the city and would only enter into such an arrangement with someone I knew).
posted by The White Hat at 9:28 AM on April 7, 2012
For 3-6 years? No freakin' way. $26K is not enough to get you much of a house (20% down on a ~$90k house after closing costs). In Philly,I'd guess that probably means you'd either be living in a pretty crappy house, or in a rough part of town, or have a long commute. Even if you waited 6 years to sell, you'd be lucky to get your $26K back out of it.
posted by jon1270 at 9:29 AM on April 7, 2012 [3 favorites]
posted by jon1270 at 9:29 AM on April 7, 2012 [3 favorites]
You're missing property taxes, which could be huge, depending on your locale. I pay 80% as much in property taxes annually as I do for my mortgage. You also need to budget for maintenance: Houses are expensive to keep up, especially if they're older. There's also overhead associated with selling the house: 8-10% of the total value that goes to the real estate agent. Paying down the loans is by far your best investment.
posted by qxntpqbbbqxl at 9:34 AM on April 7, 2012 [4 favorites]
posted by qxntpqbbbqxl at 9:34 AM on April 7, 2012 [4 favorites]
Best answer: Let me speak to a different issue, not related to whether or not it's a financially feasible arrangement. In the mid 90's, I bought a house just before I started working on a Masters in Social Work. I was 23 and had inherited enough money for the down payment, and bought a nice house with a monthly mortgage payment that was well below my rent. I owned the house for two and a half years... but ultimately, it was the upkeep that made me insane. Mowing the lawn, weed whacking, cleaning gutters... all the stuff that goes along with owning a house, was ten time more taxing when I was in school, doing internships, and working a part time job.
Then there was the maintenance cost. Even though my monthly expenses were manageable, any time something came up (new hot water heater, roof leak), I was struggling to pay to get it fixed on a student budget. The thing that pushed me over the edge was when a nearby tornado ripped off a a bunch of roof shingles. The insurance inspector found that the roof (which was about 5 years old at the time) had been improperly installed by the previous owner, and would only pay for half of the roof replacement. I ended up having to take out a student loan to pay the balance. The good news is that when I sold the house, I made a 16k profit after 30 months of ownership.
My question to you is less about can you afford the money, but rather, as a med student, will you be able to swing the other responsibilities that go with home ownership.
posted by kimdog at 9:40 AM on April 7, 2012 [17 favorites]
Then there was the maintenance cost. Even though my monthly expenses were manageable, any time something came up (new hot water heater, roof leak), I was struggling to pay to get it fixed on a student budget. The thing that pushed me over the edge was when a nearby tornado ripped off a a bunch of roof shingles. The insurance inspector found that the roof (which was about 5 years old at the time) had been improperly installed by the previous owner, and would only pay for half of the roof replacement. I ended up having to take out a student loan to pay the balance. The good news is that when I sold the house, I made a 16k profit after 30 months of ownership.
My question to you is less about can you afford the money, but rather, as a med student, will you be able to swing the other responsibilities that go with home ownership.
posted by kimdog at 9:40 AM on April 7, 2012 [17 favorites]
I'm failing to understand what mortgage company would possibly give any kind of mortgage to someone with no income.
Plus, besides all the things other people have mentioned (closing costs! taxes! repairs! emergency boiler replacements in the dead of winter!) I also suggest that if you're currently single, that is something that could change over the next few years, and it might affect your opinion on where you want to live and in what kind of house.
posted by emilyw at 9:44 AM on April 7, 2012 [1 favorite]
Plus, besides all the things other people have mentioned (closing costs! taxes! repairs! emergency boiler replacements in the dead of winter!) I also suggest that if you're currently single, that is something that could change over the next few years, and it might affect your opinion on where you want to live and in what kind of house.
posted by emilyw at 9:44 AM on April 7, 2012 [1 favorite]
Best answer: No. Do not do this. You cannot guarantee where you will match, for one thing. Probably and absolutely are not the same thing at all. I've seen "near guarantee" matches fall through, and people either scrambling or matching out of the area...and then try to solve the question of "what the hell am I going to do with my house?"
Sure it's anecdata, but I know an incredible number of residents and practitioners who own houses, condos and townhouses they are frustrated and stuck with because they changed their minds about aspects of their career and flexibility--or the decision to change was made for them. Or they started serious relationships and the current housing situation wasn't working out. Renting the houses out is a hassle, making decisions about your practice based on your owned house is a hassle. It's...all one more thing to deal with when you will already have a lot on your plate, and far less time than you do as an already time-crunched student. You will also have far less time to repair and maintain the house--even leaving money out of the equation.
Right now I am the one who fixes and maintains almost everything in my landlord's (my friend) house. I don't have the time, but I have slightly more time than he does as a student, and he's about to graduate and have even less time. He also does not understand the scope of things that break or need care in a house, or have the time to learn how to do them or the cash for an expert. I don't mean major roof repairs or anything. I mean day-to-day maintenance. No clue that dryers can catch fire if you don't maintain them properly--that being today's example. (I caught the problem before fire happened.) I do this because he's my friend, not because he's my landlord. Also, I don't want the house to burn down with us, our stuff and the animals in it. Last year, he offered me the opportunity to take over the legal/management aspects of renting out the house when he graduated. I turned him down. There is no rent break worth the paperwork and hassle.
Currently I'm not in your area, but I know practitioners in and around Philly who have gotten relatively sweet deals on rent because they rented from people who matched or got practice offers out of the area. And had to call their landlords when--for example--the flooding hit last summer. Not good.
posted by Uniformitarianism Now! at 9:48 AM on April 7, 2012
Sure it's anecdata, but I know an incredible number of residents and practitioners who own houses, condos and townhouses they are frustrated and stuck with because they changed their minds about aspects of their career and flexibility--or the decision to change was made for them. Or they started serious relationships and the current housing situation wasn't working out. Renting the houses out is a hassle, making decisions about your practice based on your owned house is a hassle. It's...all one more thing to deal with when you will already have a lot on your plate, and far less time than you do as an already time-crunched student. You will also have far less time to repair and maintain the house--even leaving money out of the equation.
Right now I am the one who fixes and maintains almost everything in my landlord's (my friend) house. I don't have the time, but I have slightly more time than he does as a student, and he's about to graduate and have even less time. He also does not understand the scope of things that break or need care in a house, or have the time to learn how to do them or the cash for an expert. I don't mean major roof repairs or anything. I mean day-to-day maintenance. No clue that dryers can catch fire if you don't maintain them properly--that being today's example. (I caught the problem before fire happened.) I do this because he's my friend, not because he's my landlord. Also, I don't want the house to burn down with us, our stuff and the animals in it. Last year, he offered me the opportunity to take over the legal/management aspects of renting out the house when he graduated. I turned him down. There is no rent break worth the paperwork and hassle.
Currently I'm not in your area, but I know practitioners in and around Philly who have gotten relatively sweet deals on rent because they rented from people who matched or got practice offers out of the area. And had to call their landlords when--for example--the flooding hit last summer. Not good.
posted by Uniformitarianism Now! at 9:48 AM on April 7, 2012
I would absolutely pay down the 7.9% loan instead.
First, you may not end up in Philly.
Just anecdata, but my BIL graduated from Harvard Med School in a field with "not much competition", too. His family lives in Texas: big state, he figured he would do his residency there and stay there to live.
He ended up with a residency in Tampa and now lives in what is quite possibly the smallest city in Pennsylvania.
He and my sis and their kids are very happy there, don't get me wrong, but there is NO WAY when he was a med student that he felt his career would take him in that direction. Tampa was not anywhere near the top of his list for residencies--and his grades were top-notch--and they never considered PA, wasn't even on their radar until a chance at a nice partnership came up.
So I fear your expectations of staying in the same area might be unrealistic right now.
You don't want to buy a house unless it is an investment you're sure you will use or sell at a profit. You can't be sure of the first, and you'll be paying more interest than equity to begin with, so the second is in question ats well. Also, you don't mention whether you are single or in a relationship, but your living needs will almost certainly chamge over time. Right now, you could easily rent a one-bedroom apartment, or even a room.
Investing is for people who have spare cash and can afford to hold off long-term until they pay off, or can take a hit and walk away with a loss if they don't.
YOU are in debt. this is not spare cash. It's just a way to pay some of that debt down.
posted by misha at 9:59 AM on April 7, 2012 [1 favorite]
First, you may not end up in Philly.
Just anecdata, but my BIL graduated from Harvard Med School in a field with "not much competition", too. His family lives in Texas: big state, he figured he would do his residency there and stay there to live.
He ended up with a residency in Tampa and now lives in what is quite possibly the smallest city in Pennsylvania.
He and my sis and their kids are very happy there, don't get me wrong, but there is NO WAY when he was a med student that he felt his career would take him in that direction. Tampa was not anywhere near the top of his list for residencies--and his grades were top-notch--and they never considered PA, wasn't even on their radar until a chance at a nice partnership came up.
So I fear your expectations of staying in the same area might be unrealistic right now.
You don't want to buy a house unless it is an investment you're sure you will use or sell at a profit. You can't be sure of the first, and you'll be paying more interest than equity to begin with, so the second is in question ats well. Also, you don't mention whether you are single or in a relationship, but your living needs will almost certainly chamge over time. Right now, you could easily rent a one-bedroom apartment, or even a room.
Investing is for people who have spare cash and can afford to hold off long-term until they pay off, or can take a hit and walk away with a loss if they don't.
YOU are in debt. this is not spare cash. It's just a way to pay some of that debt down.
posted by misha at 9:59 AM on April 7, 2012 [1 favorite]
Law student here, looking at a total debt load about 50% of yours. I would pay down those loans.
GradPLUS loans are a complete and utter rip-off. 7.9% is highway robbery and they are not dischargeable in bankruptcy. I also believe the above claim that they do not compound interest is technically true but slightly misleading.* Get out from under them as quickly as you can. You don't seem to place much idiosyncratic value on owning a home, since you phrase the issues in purely financial terms. If you're roughly equally happy renting for now, then by no means would I recommend buying a house. Even beyond the numbers, you have to factor in the fact that you would be responsible for dealing with all repairs yourself (potentially a big time burden that you won't want while in med school), and that there is no guarantee you'll be able to sell your house quickly, let alone lucratively, when you need to move.
This just sounds like a huge, unnecessary headache and a neutral-at-best, probably-poor financial decision.
*Here is a section of the relevant language from my GradPLUS master promissory note.:
posted by dixiecupdrinking at 10:14 AM on April 7, 2012 [6 favorites]
GradPLUS loans are a complete and utter rip-off. 7.9% is highway robbery and they are not dischargeable in bankruptcy. I also believe the above claim that they do not compound interest is technically true but slightly misleading.* Get out from under them as quickly as you can. You don't seem to place much idiosyncratic value on owning a home, since you phrase the issues in purely financial terms. If you're roughly equally happy renting for now, then by no means would I recommend buying a house. Even beyond the numbers, you have to factor in the fact that you would be responsible for dealing with all repairs yourself (potentially a big time burden that you won't want while in med school), and that there is no guarantee you'll be able to sell your house quickly, let alone lucratively, when you need to move.
This just sounds like a huge, unnecessary headache and a neutral-at-best, probably-poor financial decision.
*Here is a section of the relevant language from my GradPLUS master promissory note.:
I agree to pay all interest charges on my loan. I will be given the opportunity to pay the interest that accrues during a period of authorized deferment or forbearance. If I do not pay the interest, I understand that ED may capitalize the interest at the end of the deferment or forbearance, as provided under the Act.I believe that this means if you are deferring interest payments while in school (which you probably are, as GradPLUS loans begin accruing interest the day they are disbursed), those unpaid interest charges will be added to your principle balance when you enter repayment. So say you borrow $26,000 in GradPLUS loans in lieu of using your inheritance and say they accrue interest for three more years. Three years from now, your principle + capitalized interest will be $32,661, and that's the balance on which you will owe 7.9% annually.
posted by dixiecupdrinking at 10:14 AM on April 7, 2012 [6 favorites]
Another question to examine is what is your family situation. Are you single, married, with kids, are you going to have kids? If there is any chance that this situation will change in the next five years, that might have a huge effect on how suitable this house is for you. When you're stuck under a lot of debt and don't have much income, it will be that much harder to change.
posted by 3491again at 10:56 AM on April 7, 2012
posted by 3491again at 10:56 AM on April 7, 2012
I have student loans totaling around $300K (undergrad, law school, llm). About half at 6.8% the other half at 3ish%. Your minimum payments on your loans when you enter repayment will be approx. $4K/month on a standard repayment plan. Let me repeat that: four thousand dollars per month. Pay down accrued interest on these loans before you enter repayment (to prevent capitalization of that interest). Do not take on any additional unnecessary debt. Do not count on loan forgiveness (you may change your desired practice area; many of these programs have overall monetary caps or limited eligibility).
Think of it this way - any investment you put that $26K into would need to make over 7.9% for you to have a net gain at the end of the year. If you find such an investment, please let us know.
posted by melissasaurus at 10:57 AM on April 7, 2012 [8 favorites]
Think of it this way - any investment you put that $26K into would need to make over 7.9% for you to have a net gain at the end of the year. If you find such an investment, please let us know.
posted by melissasaurus at 10:57 AM on April 7, 2012 [8 favorites]
Think of it this way - any investment you put that $26K into would need to make over 7.9% for you to have a net gain at the end of the year.
Right. A risk-free 7.9%. Minus whatever utility you get out of owning a home. As I and others have suggested, that utility is in fact likely to be negative due to maintenance costs and headaches, plus the fact that it sounds like you can rent a place for less than your mortgage payments would be.
The more I think about this, the more convinced I am that it's a really bad idea.
posted by dixiecupdrinking at 11:26 AM on April 7, 2012
Right. A risk-free 7.9%. Minus whatever utility you get out of owning a home. As I and others have suggested, that utility is in fact likely to be negative due to maintenance costs and headaches, plus the fact that it sounds like you can rent a place for less than your mortgage payments would be.
The more I think about this, the more convinced I am that it's a really bad idea.
posted by dixiecupdrinking at 11:26 AM on April 7, 2012
Put it in the bank. Seriously you have no idea how much peace of mind it will buy you as you navigate the next few years.
posted by whoaali at 11:48 AM on April 7, 2012
posted by whoaali at 11:48 AM on April 7, 2012
I would put it in risk-free savings or CDs or something for the duration of the deferred interest period (usually while you are still in school). Then at the end of that time, you can reassess where things are and probably the smart move will still be (as others are saying) to pay down some of the loan debt.
But while the interest is being deferred, that loan money is basically free, so why pay it down right this instant?
posted by secretseasons at 11:53 AM on April 7, 2012 [2 favorites]
But while the interest is being deferred, that loan money is basically free, so why pay it down right this instant?
posted by secretseasons at 11:53 AM on April 7, 2012 [2 favorites]
But while the interest is being deferred, that loan money is basically free, so why pay it down right this instant?
The payment of interest is deferred but interest is still accruing.
posted by melissasaurus at 12:01 PM on April 7, 2012 [6 favorites]
The payment of interest is deferred but interest is still accruing.
posted by melissasaurus at 12:01 PM on April 7, 2012 [6 favorites]
It is no longer a good idea to assume a house will accrue equity. You could do that 30 years ago. You can't do that now. The housing market crash is ample evidence. There has been no indication that housing prices are rising, or will rise, and in some areas they're still falling.
Also, look at your apartment. Is everything organized? All your mess picked up? Dishes done? Do you find you have plenty of extra time to do housekeeping/upkeep/etc?
Now take the space that you currently have to clean/upkeep, and multiply that by at least three. And add a yard. And fixing a water heater, or figuring out why the radiators aren't turning on, or why a window is leaking, and basically all the stuff that your landlord is doing. Because in Philly you will probably not be buying a new house that was built by local artisan contractors who build everything to withstand a nuclear war. Which means you'll be buying an old house and will have to deal with all the old house stuff. The med school students I know barely have time to make their own food, much less clean an entire house and keep up yards and stuff. And I don't even mean keeping things perfect. I mean just keeping things at the basic level it will take that will keep your home from looking like a slum.
Also: even if you have the money to buy the house, do you have the money to fill it up with stuff? Or are you going to just leave parts of the house empty? And if you're leaving parts of the house empty, why are you buying a house anyway?
There isn't just the financial aspect to owning a home. You have to consider the practical day-to-day aspects of it as well.
posted by Anonymous at 12:17 PM on April 7, 2012
Also, look at your apartment. Is everything organized? All your mess picked up? Dishes done? Do you find you have plenty of extra time to do housekeeping/upkeep/etc?
Now take the space that you currently have to clean/upkeep, and multiply that by at least three. And add a yard. And fixing a water heater, or figuring out why the radiators aren't turning on, or why a window is leaking, and basically all the stuff that your landlord is doing. Because in Philly you will probably not be buying a new house that was built by local artisan contractors who build everything to withstand a nuclear war. Which means you'll be buying an old house and will have to deal with all the old house stuff. The med school students I know barely have time to make their own food, much less clean an entire house and keep up yards and stuff. And I don't even mean keeping things perfect. I mean just keeping things at the basic level it will take that will keep your home from looking like a slum.
Also: even if you have the money to buy the house, do you have the money to fill it up with stuff? Or are you going to just leave parts of the house empty? And if you're leaving parts of the house empty, why are you buying a house anyway?
There isn't just the financial aspect to owning a home. You have to consider the practical day-to-day aspects of it as well.
posted by Anonymous at 12:17 PM on April 7, 2012
Keep your life simple and your options open. You are going though a time of flux with no certainty at all about five years down the road. A house is a heavy, heavy anchor to take on when you are still largely at sea.
posted by seanmpuckett at 12:32 PM on April 7, 2012 [3 favorites]
posted by seanmpuckett at 12:32 PM on April 7, 2012 [3 favorites]
Best answer: I came here to say something very similar to what kimdog has already said. Because it's such a major decision, I will restate it nonetheless: Don't buy a house when you have this much going on in your life and when your future - except for including $300k+ in loan repayments - is so uncertain.
We bought a house in November of 2010. We spent about two months making repairs before we even moved in, including the following: getting lighting up to code; replacing furnace & duct work; replacing the roof; refinishing the floors; gutting the kitchen; replacing major plumbing; gutting the basement; and painting every room. Even with all of this done, this is what we've had to deal with in the last year and a half:
- Leaking roof due to an installation error; this section of the roof had to be re-done
- Sewer lines have roots growing through them; we have to call someone to snake the lines every 6 months. This is a stop-gap until we eventually cough up the $5000 (not a typo) it will cost to repair the lines. This is something that does not come up in home inspection unless the lines are already blocked, which they weren't.
- Very old tree may or may not be dying; if it dies, we will spend several thousand to cut it down. We had the largest trees inspected as part of our home inspection - it wasn't dying then!
- Decided to replace a sink. Plumber that we have used extensively and never had a problem with accidentally busted a pipe during the replacement. He had to take out a 3'x3' section of drywall in our bedroom in order to access and replace the pipe. We went without running water for 2 days and will now have to patch the drywall and paint.
- Typical yard work and maintenance, including: mowing the lawn, weeding, cleaning gutters, raking leaves, trimming hedges and ivy, etc.
The point of all this is, home ownership is not only very expensive, it's very time-consuming. Whenever we had someone come to work on the house, one of us had to be here to meet them. That's time away from work or school. Often we would receive a window of time when the person said he/she would arrive; this usually meant waiting for several hours, only to have them show up at the very end of the timeframe.
As others have mentioned, home ownership also involved property taxes. Our taxes went up significantly this last year; we had a large tax payment, and also had to increase the amount in escrow.
posted by pecanpies at 12:49 PM on April 7, 2012
We bought a house in November of 2010. We spent about two months making repairs before we even moved in, including the following: getting lighting up to code; replacing furnace & duct work; replacing the roof; refinishing the floors; gutting the kitchen; replacing major plumbing; gutting the basement; and painting every room. Even with all of this done, this is what we've had to deal with in the last year and a half:
- Leaking roof due to an installation error; this section of the roof had to be re-done
- Sewer lines have roots growing through them; we have to call someone to snake the lines every 6 months. This is a stop-gap until we eventually cough up the $5000 (not a typo) it will cost to repair the lines. This is something that does not come up in home inspection unless the lines are already blocked, which they weren't.
- Very old tree may or may not be dying; if it dies, we will spend several thousand to cut it down. We had the largest trees inspected as part of our home inspection - it wasn't dying then!
- Decided to replace a sink. Plumber that we have used extensively and never had a problem with accidentally busted a pipe during the replacement. He had to take out a 3'x3' section of drywall in our bedroom in order to access and replace the pipe. We went without running water for 2 days and will now have to patch the drywall and paint.
- Typical yard work and maintenance, including: mowing the lawn, weeding, cleaning gutters, raking leaves, trimming hedges and ivy, etc.
The point of all this is, home ownership is not only very expensive, it's very time-consuming. Whenever we had someone come to work on the house, one of us had to be here to meet them. That's time away from work or school. Often we would receive a window of time when the person said he/she would arrive; this usually meant waiting for several hours, only to have them show up at the very end of the timeframe.
As others have mentioned, home ownership also involved property taxes. Our taxes went up significantly this last year; we had a large tax payment, and also had to increase the amount in escrow.
posted by pecanpies at 12:49 PM on April 7, 2012
Please pay off your loans first - this is the wiser financial decision for a number of reasons:
1. You have no idea how much that house is going to appreciate or depreciate. You may lose money in three years, the current housing market seems very unpredictable.
2. You're also thinking down payment, but how much are the closing costs in your area? In my area, closing costs were $15,000 on top of the down payment. $26,000 doesn't seem like enough to cover both a down payment and closing costs. Plus - if you don't have income, how are you going to pay for annual maintenance costs? What if a pipe bursts, your refrigerator breaks, or your A/C breaks down in the middle of the summer?
3. There is no guarantee that you will be matched to the residency that you want (even if there are 5 programs in Philly). I have several family members in the medical field and understand that it's not just about how smart you are and what your scores are, it's also about the interview and if you are a good fit personality-wise. You could be the top of your class but not be a good fit with the programs that you are interested in personality-wise and end up in Kansas. Trust me, it happens. I know several people who tried really hard to stay in the big cities that they went to med school in, and only one out of five managed it. One of them transferred back to the city after internship, the others stayed in their residencies in other cities. It's too unpredictable, there is no guarantee you'll be in Philly in three years.
posted by echo0720 at 12:51 PM on April 7, 2012
1. You have no idea how much that house is going to appreciate or depreciate. You may lose money in three years, the current housing market seems very unpredictable.
2. You're also thinking down payment, but how much are the closing costs in your area? In my area, closing costs were $15,000 on top of the down payment. $26,000 doesn't seem like enough to cover both a down payment and closing costs. Plus - if you don't have income, how are you going to pay for annual maintenance costs? What if a pipe bursts, your refrigerator breaks, or your A/C breaks down in the middle of the summer?
3. There is no guarantee that you will be matched to the residency that you want (even if there are 5 programs in Philly). I have several family members in the medical field and understand that it's not just about how smart you are and what your scores are, it's also about the interview and if you are a good fit personality-wise. You could be the top of your class but not be a good fit with the programs that you are interested in personality-wise and end up in Kansas. Trust me, it happens. I know several people who tried really hard to stay in the big cities that they went to med school in, and only one out of five managed it. One of them transferred back to the city after internship, the others stayed in their residencies in other cities. It's too unpredictable, there is no guarantee you'll be in Philly in three years.
posted by echo0720 at 12:51 PM on April 7, 2012
My current understanding is that even considering the interest that would accrue on the $26,000 of gradPLUS that I could pay off, it would not exceed the equity that I would build in a house (through the $26,000 + money that would otherwise go toward rent over three years).
Oh, also, you're not thinking of this in the right way. The equity you build in a house is Future Price of House minus what you bought it for which is unknown. You would compare this number to the accrued interest on $26,000 of your loans. But since it's an unknown, you can't.
The rent that you would pay otherwise should not be a consideration.
posted by echo0720 at 12:55 PM on April 7, 2012
Oh, also, you're not thinking of this in the right way. The equity you build in a house is Future Price of House minus what you bought it for which is unknown. You would compare this number to the accrued interest on $26,000 of your loans. But since it's an unknown, you can't.
The rent that you would pay otherwise should not be a consideration.
posted by echo0720 at 12:55 PM on April 7, 2012
Coming back in to say this about Happydaz's comment and "Whatever you do, don't put the money toward the loans".
As you know, I disagree.
1. Simple interest is still interest, and it still accrues.
2, 3, 4. You may qualify for this in 10 years, or that in 25. Maybe.
Meanwhile, that whole time, you have that debt in the back of your mind. You have that debt affecting your credit rating. It weighs on you. Living with debt is incredibly stressful.
We paid off our house and cars years ago, and have been debt-free ever since. We know upfront if we can afford something we want. We needed a car, and went to a dealership. Instead of having monthly payments with interest, we bought it outright and walked away. Because we are in this place, we can ensure that our sons--one of whom is in college--don't incur debt of their own from student loans, too.
It's incredibly freeing to be able to say that. It took a long time to get to this point. I would not wish living under the shadow of debt, for a single day longer than you have to, on anyone.
posted by misha at 2:06 PM on April 7, 2012 [1 favorite]
As you know, I disagree.
1. Simple interest is still interest, and it still accrues.
2, 3, 4. You may qualify for this in 10 years, or that in 25. Maybe.
Meanwhile, that whole time, you have that debt in the back of your mind. You have that debt affecting your credit rating. It weighs on you. Living with debt is incredibly stressful.
We paid off our house and cars years ago, and have been debt-free ever since. We know upfront if we can afford something we want. We needed a car, and went to a dealership. Instead of having monthly payments with interest, we bought it outright and walked away. Because we are in this place, we can ensure that our sons--one of whom is in college--don't incur debt of their own from student loans, too.
It's incredibly freeing to be able to say that. It took a long time to get to this point. I would not wish living under the shadow of debt, for a single day longer than you have to, on anyone.
posted by misha at 2:06 PM on April 7, 2012 [1 favorite]
I don't think you have enough data to make this decision, or even to really think about it. You will need figures for closing costs, property taxes, an annual repair and maintenance budget (you are probably not going to be mowing your own lawn), home insurance and enough life insurance to settle debts. You need those numbers.
See also this article about a similar situation.
posted by DarlingBri at 2:43 PM on April 7, 2012
See also this article about a similar situation.
posted by DarlingBri at 2:43 PM on April 7, 2012
Best answer: This is quite a complex issue, so I'll just add a few things to the copious responses above. I'm just going by my impression of your issue, but you're doing well to consult a large number of people like this.
A few pointed out your investment hurdle (for you to consider buying a house) is 7.9%. I'd add that this is a risk-free, after-tax return. 10y US Treasury was 2.06% yesterday - that's your risk-free investing benchmark. You sound like you may well qualify for the plethora of tax breaks on home purchase and capital gains, but know that tax law may change to your detriment while you own the house. In any case, the huge gap between 7.9% and 2.06% should give you pause.
Let's assume home prices rise by 3% per year (close to long-term trend), you're 3.1x levered (mortgage debt / (equity + closing costs)), and your carrying cost of a home exactly equals your rent. Big leap of faith, I know. You'd be earning ~12%. Of course, you carried huge debt, and so you were running an exceedingly high risk that you'd lose your shirt on this investment.
This is just the tip of the iceberg in doing the financial analysis on a home purchase. But I think we can stop here and say it's difficult to advise on buying a home, particularly when you'll scarcely find the time to devote to maintaining this big investment of yours.
Now, (1) you may qualify for loan forgiveness as you point out, (2) you may end up getting student loan interest payment tax deduction, (3) you may have a very well-thought out logic as to why the home prices in your area must appreciate, etc. I am also sympathetic to the idea that the $26k would give you liquidity once your unlimited line of credit spigot turns off (does it ever for doctors?). But if I were you, I would either hold the money or pay down your debt.
posted by ccl6yl at 2:52 PM on April 7, 2012 [1 favorite]
A few pointed out your investment hurdle (for you to consider buying a house) is 7.9%. I'd add that this is a risk-free, after-tax return. 10y US Treasury was 2.06% yesterday - that's your risk-free investing benchmark. You sound like you may well qualify for the plethora of tax breaks on home purchase and capital gains, but know that tax law may change to your detriment while you own the house. In any case, the huge gap between 7.9% and 2.06% should give you pause.
Let's assume home prices rise by 3% per year (close to long-term trend), you're 3.1x levered (mortgage debt / (equity + closing costs)), and your carrying cost of a home exactly equals your rent. Big leap of faith, I know. You'd be earning ~12%. Of course, you carried huge debt, and so you were running an exceedingly high risk that you'd lose your shirt on this investment.
This is just the tip of the iceberg in doing the financial analysis on a home purchase. But I think we can stop here and say it's difficult to advise on buying a home, particularly when you'll scarcely find the time to devote to maintaining this big investment of yours.
Now, (1) you may qualify for loan forgiveness as you point out, (2) you may end up getting student loan interest payment tax deduction, (3) you may have a very well-thought out logic as to why the home prices in your area must appreciate, etc. I am also sympathetic to the idea that the $26k would give you liquidity once your unlimited line of credit spigot turns off (does it ever for doctors?). But if I were you, I would either hold the money or pay down your debt.
posted by ccl6yl at 2:52 PM on April 7, 2012 [1 favorite]
Best answer: I think a lot of people in here are thinking of your medical school debt as being very similar to student debt for a bachelor's or a non-professional master's, but the options for forgiveness and income-based repayment for med school debt vs. nearly every other kind of student loan debt really alters the financial accounting. I wouldn't buy a home or pay down my loans in your very specific situation.
If you have undergrad debt, find out if that debt will be forgiven along with your med school debt if you go that route. If not, pay those loans down.
Otherwise, I would stick that 26k in a retirement-investment vehicle over the next three years. I've heard the rule of thumb that doctors are a decade "behind" their peers in terms of retirement savings, since the years they spend in training + residency are years they generally can't build an investment portfolio.
It would be pretty sweet if, 15 years from now, you had a healthy retirement portfolio PLUS you qualified for loan forgiveness.
posted by Snarl Furillo at 3:18 PM on April 7, 2012 [6 favorites]
If you have undergrad debt, find out if that debt will be forgiven along with your med school debt if you go that route. If not, pay those loans down.
Otherwise, I would stick that 26k in a retirement-investment vehicle over the next three years. I've heard the rule of thumb that doctors are a decade "behind" their peers in terms of retirement savings, since the years they spend in training + residency are years they generally can't build an investment portfolio.
It would be pretty sweet if, 15 years from now, you had a healthy retirement portfolio PLUS you qualified for loan forgiveness.
posted by Snarl Furillo at 3:18 PM on April 7, 2012 [6 favorites]
Best answer: I am a doctor who bought a house in med school. I advise you NOT to buy a house.
I had special circumstances. I was able to take a mortgage privately from my parents (which also minimized closing costs) and I was able to rent the (3 bedroom) house to other med students and use their rent to pay the mortgage + property taxes, as we lived in a place where buying a house was less expensive. I was also extremely lucky to manage to sell my house to a speculator about 3 months before the housing bubble burst.
Do not assume you will be in Philly for residency or that you will be doing family med. Primary care is much more appealing to med students prior to getting the clinical exposure in the trenches. I changed from OB/GYN to emergency medicine in April of my 3rd year, as soon as I got the chance to try out working in the ED and realized I loved it. Before that I had been so certain I was going into OB that I had already secured my letters of rec and researched all the regional residency programs. Also, the Match is a tough game and making assumptions is very difficult with it. Everyone knows people who tried to match to the same location without officially couples matching who ended up screwing themselves. If you don't mind going unmatched then sure, only rank 2 or 3 programs, but that would scare the hell out of me. Scrambling is no joke, it's horrible.
If you have income, I second Snarl Furillo that opening a Roth IRA is a great idea for your future (you cannot contribute to an IRA if you have no income, from what I understand, someone else can correct me if I am wrong...). Max it out! You'll be able to keep contributing to the IRA throughout residency. You can use the remainder of the money to pay down the 7.9% interest loan. Remember, you can't claim economic hardship deferment during residency anymore, you'll be forbearing and it's much less friendly towards you. I had $185,000 in loans when I graduated, was very aggressive about paying them down throughout residency and I still have a ridiculous amount of debt despite being several years out of residency now. I still will not have these paid off for about 8 years at this rate. It's mind boggling how fast interest accrues on these loans, and with forbearance, the interest gets capitalized into the principal of the loan when the period of forbearance is up. So at that point you're paying interest on interest!! tl, dr: Trust me, you will not regret paying down your loans.
posted by treehorn+bunny at 6:15 PM on April 7, 2012 [4 favorites]
I had special circumstances. I was able to take a mortgage privately from my parents (which also minimized closing costs) and I was able to rent the (3 bedroom) house to other med students and use their rent to pay the mortgage + property taxes, as we lived in a place where buying a house was less expensive. I was also extremely lucky to manage to sell my house to a speculator about 3 months before the housing bubble burst.
Do not assume you will be in Philly for residency or that you will be doing family med. Primary care is much more appealing to med students prior to getting the clinical exposure in the trenches. I changed from OB/GYN to emergency medicine in April of my 3rd year, as soon as I got the chance to try out working in the ED and realized I loved it. Before that I had been so certain I was going into OB that I had already secured my letters of rec and researched all the regional residency programs. Also, the Match is a tough game and making assumptions is very difficult with it. Everyone knows people who tried to match to the same location without officially couples matching who ended up screwing themselves. If you don't mind going unmatched then sure, only rank 2 or 3 programs, but that would scare the hell out of me. Scrambling is no joke, it's horrible.
If you have income, I second Snarl Furillo that opening a Roth IRA is a great idea for your future (you cannot contribute to an IRA if you have no income, from what I understand, someone else can correct me if I am wrong...). Max it out! You'll be able to keep contributing to the IRA throughout residency. You can use the remainder of the money to pay down the 7.9% interest loan. Remember, you can't claim economic hardship deferment during residency anymore, you'll be forbearing and it's much less friendly towards you. I had $185,000 in loans when I graduated, was very aggressive about paying them down throughout residency and I still have a ridiculous amount of debt despite being several years out of residency now. I still will not have these paid off for about 8 years at this rate. It's mind boggling how fast interest accrues on these loans, and with forbearance, the interest gets capitalized into the principal of the loan when the period of forbearance is up. So at that point you're paying interest on interest!! tl, dr: Trust me, you will not regret paying down your loans.
posted by treehorn+bunny at 6:15 PM on April 7, 2012 [4 favorites]
I suppose my attitude toward loan forgiveness is biased, because I entered law school intending to do loan forgiveness-eligible work and will leave, in all likelihood, working in the private sector. Things change. But I can see this argument for putting the money into some sort of investment account. It does not in any way justify buying a house.
posted by dixiecupdrinking at 12:08 PM on April 8, 2012
posted by dixiecupdrinking at 12:08 PM on April 8, 2012
Response by poster: I think that just about clinches it. I'll forgo the homebuying until I'm a little more firmly rooted (geographically, financially, &c). As for the money, I don't think I'll be paying off the loans. Rather, I will find a safe place to invest them (T-bill/CD/&c) until I start my residency, at which point I'll be able to have some liquidity available at a time when I would otherwise have close to none. Whatever the opportunity cost of not paying down the 7.9% GradPLUS loans, it's one that will largely be felt at a time when I'll have comparatively more agency and a much larger salary.
Again, thanks to everyone for all the great advice. This is not the first time I've come to AskMe with an important question, and it's not the first time I've received such thoughtful answers from caring people. This is a great place.
posted by The White Hat at 8:16 AM on April 9, 2012 [2 favorites]
Again, thanks to everyone for all the great advice. This is not the first time I've come to AskMe with an important question, and it's not the first time I've received such thoughtful answers from caring people. This is a great place.
posted by The White Hat at 8:16 AM on April 9, 2012 [2 favorites]
This thread is closed to new comments.
That said, I think the more important question is how certain are you that you will stay in Philadelphia for more than three years? In your question you say it's "likely" -- you have to find a way to be honest with yourself about that likelihood when you consider buying a house. People don't usually get into trouble when they buy a house and stay there 10 years. They get into trouble when they buy a house and then are forced to sell it 3 years later, at a time when the housing market is bad. It's not good to have to choose between selling your house at a loss, and moving for your dream job. Given that "moving for your dream job" seems pretty common for MDs finishing their training, I'd be wary about buying a house in your position. Then again, family practice might just make it possible for you to stay in the same city... if you're sure that's where you want to be.
posted by vytae at 9:14 AM on April 7, 2012 [1 favorite]