What should I do with $50k? Pay off student loans or make a down payment?

[PassingDays11]

So, I'm graduating medical school this May and beginning internship mid-June. I am currently in the housing market after making a thorough budget estimating costs of being a homeowner. I plan on staying in the city where my residency program is indefinitely as my wife and I grew up there.

I will owe around $260k of principal in student loans (32k at 8.5%, 22k at 7.9%, 190k at 6.8%, and 16k at 5%) plus about $24k in interest! I plan on doing Income Based Repayment and possible consolidation on some of these.

We are considering a mortgage of around $200k. My dilemma lies in what to do with around $50k we have recently been blessed with in the form of inheritance. Should we do a doctor loan with no down payment and pay off the highest interest student loans? Should we use the money to make a 20% down payment and pay for closing costs in order to get better loan terms? Or should we do something different?

I guess I'm not sure if there is much advantage on going with a more traditional mortgage when there seem to be very good physician loans now with no down payment, no PMI, no repayment penalty, etc.

Thank you all so much for your input/help!!!

---

Members don't see this ad.

 

[Gute]

Does your wife work? What is her income?

Smartest move is to eliminate the highest interest rate debts first, but I am unsure what sort of deal you can work out if you use your money toward a down payment for your mortgage.

 

[PassingDays11]

Does your wife work? What is her income?

Smartest move is to eliminate the highest interest rate debts first, but I am unsure what sort of deal you can work out if you use your money toward a down payment for your mortgage.

Thanks for the reply.

She is a teacher so she will make in the 30-35k gross per year range IF she can find a job in the area. I'm trying to budget so that I don't have to count on her contribution too much just in case she can't find one. My income will be about as reliable as in can be and I figure I can moonlight after 1st year for a little more.

That's what I was thinking (i.e. paying off debt with the highest interest rate first), but does anyone have anything different/additional to offer?

 

[Bobblehead]

So, I'm graduating medical school this May and beginning internship mid-June. I am currently in the housing market after making a thorough budget estimating costs of being a homeowner. I plan on staying in the city where my residency program is indefinitely as my wife and I grew up there.

...

I guess I'm not sure if there is much advantage on going with a more traditional mortgage when there seem to be very good physician loans now with no down payment, no PMI, no repayment penalty, etc.

I think purchasing a house with a $200,000 mortgage as a physician is very reasonable since you plan on living in the area for the forseeable future. With mortgage rates at the current historic low, borrowing as much of that $200,000 as possible to free up your cash for additional opportunities/necessities (paying off high interest student loans/emergency funds) is also a reasonable decision.

With respect to necessities, does the $50,000 exclude available emergency funds for house repairs, short-term disability, illness, etc? What about all of the start-up costs of furnishing your house, fixing something that was missed on the home inspection, etc. What if you have a kid unexpectedly? These could certainly be all be plausible scenarios. Remember that while it feels good to pay off a loan entirely, it may not necessarily be the overall "best" financial move.

A compromise may be to consolidate what you can to a lower rate and then pay down a smaller, high interest loan so you'll at least "earn" that much of a return.

You could use your spouse's income towards things that would be nice to do (save for retirement, pay down the student loans faster) but could potentially be dropped in a financial crisis.

 

[235750]

I plan on staying in the city where my residency program is indefinitely as my wife and I grew up there.

I bought a house right before starting medical school. Best decision I ever made, although there were bumps in the way

The answer to your question (should I buy?) is the same to every real estate purchase: location, location, location. I would not buy in most cities in the south or west. Denver, Atlanta, hell most of Texas...these places have a glut of property that look to be a buyers market for quite some time. NYC, LA, Philly, Chicago: these all seem to be reasonably hopeful locations.

But assuming you've found a nice city with a property in an area that isn't too expensive, but not crumbling either...well, why not? If you're going to be there for the indefinite future, go for it. Rates are great. Owning a house can be a great investment, if you pick your city/house correctly.

And if you're willing to tolerate roommates, you might be able to live for free like we do. We've reduced a lot of our debt with renting the house out whilst living in it, and med students/residents are really great tenants.

Good luck to you in whatever decision you make.

Edit: in regards to your wife helping to pay the mortgage, that might not be necessary. Our mortgage (20 yrs) is about $850 so really we could get away with only my loan disbursement if need be.

 

[walli]

Since your wife's income is uncertain and you are about to start a new job, you should place 6 months of living expenses in a bank account as an emergency fund. Unless you really know the area and plan to stay past residency, you probably would be bettor off not buying a house. Renting will most likely be cheaper. Plus you might decide to move after a year or two and if you buy a house you have to sell it , which can take time most likely be at a loss, since you probably will not have enough appreciation to cover closing cost and the realtor commission until after at least three or four years. Any money left over after the emergency fund should go to paying of your dept.

 

[dpmd]

You should be able to get info on what sort of differences you will see in your mortgage based on how much down payment you put down. I'm not familiar with the terms of the doctors loans, but you should check these and compare to traditional/FHA loans to make sure the rates are comparable. Where the 200k mortgage sit in terms of how much of your income the monthly payment+property taxes will be? Seems high unless your salary is pretty high. Or is that what you figure you will need to pay to get a place?

Another option would be to find a cheap apartment or house to rent now. Use some of the inheritance to pay all the accrued interest plus some of the highest interest rate loans (keep some for emergency purposes-a few months of expenses at least). See how things go paying your IBR payment, plus rent, plus everything else you need to pay in life. If you have enough money left each month to make up the difference in what you ARE paying versus what you would have been paying without leaving having to break into your emergency funds, then you can feel secure about buying a house (and will have a better idea of WHERE to buy as well). Keep in mind that even if you plan on staying in the same area it doesn't mean you will need to (or even want to) stay in the same house.

 

[touchadream]

One considerable pro is that interest rates have almost NEVER been this low, so I would take advantage of the longest mortgage, and probably the largest you can afford, pay part of student loan on a reasonable schedule, use any of wife's income toward that, (promise her the moon for doing that), and keep an emergency fund invested in something smart. I recently got a refi at 3.68% and don't intend to pay it down more quickly. The correlary to low rates is that they have to go up, because they can't go below 0%, so waiting...Even if your wife can't find a job teaching, she can tutor, there is a high demand now for those, as there is a lot of pressure on school kids to do well and parents are willing to pay.

 

[ChainStreet]

So, I'm graduating medical school this May and beginning internship mid-June. I am currently in the housing market after making a thorough budget estimating costs of being a homeowner. I plan on staying in the city where my residency program is indefinitely as my wife and I grew up there.

I will owe around $260k of principal in student loans (32k at 8.5%, 22k at 7.9%, 190k at 6.8%, and 16k at 5%) plus about $24k in interest! I plan on doing Income Based Repayment and possible consolidation on some of these.

We are considering a mortgage of around $200k. My dilemma lies in what to do with around $50k we have recently been blessed with in the form of inheritance. Should we do a doctor loan with no down payment and pay off the highest interest student loans? Should we use the money to make a 20% down payment and pay for closing costs in order to get better loan terms? Or should we do something different?

I guess I'm not sure if there is much advantage on going with a more traditional mortgage when there seem to be very good physician loans now with no down payment, no PMI, no repayment penalty, etc.

Thank you all so much for your input/help!!!

very simple answer. What is your expected time frame for holding the house? For example lets assume it is 7 years because thats the average time.

In both mortgage scenario you can see the cost from your pocket in seven years. Cost will include anything other than the principle because principle is not your cost that is your equity. You can take interest, closing cost(excluding principle advance payments), points etc....

Just tally them up for both scenario and compare which mortgage loan comes out ahead for your intended holding period.


Once you know which is cheaper and total cost then you can see what's the cost for your student loan. If cost of loan is more then pay the student loan but if it is less than the mortgage cost then take the mortgage.

Basically you are comparing three scenarios and determining which one saves you the money most.

Now if the student loan and mortgage cost comes in similar range then I will go with the mortgage simply because house prices have been crushed and interest low is historically low now which allows you to get a place but make sure that you do plan to stay there 5-7 years minimum.

Hope my answer helps.

 

[cpants]

Since you have the cash for some sort of down payment, I would look at an FHA loan or traditional mortgage rather than a 100% physician loan. These 100% loans come at a stiff price. You will have to pay high fees and likely higher interest rates.

 

[attendingDO2003]

My dilemma lies in what to do with around $50k we have recently been blessed with in the form of inheritance.

Spence: I dunno, a wallet? A money-clip?
http://www.tvfanatic.com/quotes/shows/scrubs/season-2/

Seriously, not on loans. Those might disappear for a variety of the reasons discussed above. Even if they don't, your interest is gonna be very low on a student loan relative to what it could be making elsewhere (house/mf/etc.).

 

[freaker]

Another option is to at least consider placing some of this money in a Roth IRA. You'll have a lot of time for this money to compound, you'll be in a very low tax bracket, and will be ineligible for a ROTH in a very short time period.

If you invested $10,000 of this in a ROTH IRA (5k for you, 5k for your wife) and got a very conservative 6.5% annual average rate of return, you'd have ~$141k of tax free retirement savings by age 65. Note the advantage of a ROTH is that it's tax free when drawn upon, tax sheltered, and can be drawn upon prior to age 59, unlike a 401k/403b.

Very shortly the government will come after your income with fangs fully ready to have a feast on you. You only have a limited time before you're no longer eligible for a ROTH. Just a thought.

 

[freaker]

I would not buy in most cities in the south or west. Denver, Atlanta, hell most of Texas...these places have a glut of property that look to be a buyers market for quite some time. NYC, LA, Philly, Chicago: these all seem to be reasonably hopeful locations.

The argument against the above is that the locations you list as "hopeful" still have property values that are still grossly inflated above what a family can realistically afford, i.e. <25% of family gross income in housing payments. There's still plenty of room for prices to fall in the above markets and a glut of foreclosed properties waiting to hit the market. This is especially true of Los Angeles.

The last place you want to be in as a resident is underwater, especially if you would even consider having to take a fellowship in another location or practicing in another location.

In many regards, I'd consider Texas a much safer bet in terms of housing because I wouldn't anticipate a drop in property values there to be likely or substantial. Housing remains affordable, and one can build equity over time. Los Angeles or other over-priced markets still carry a great deal of risk of continuing to degrade with time. Chicago real estate, for instance, has continued to degrade at roughly 2% monthly. If that trend continues, no amount of payment on a low-downpayment property is going to add enough equity to catch up. If you're certain you won't move, perhaps. Otherwise, a move in 3-5 years might not be possible given how underwater you are if real estate prices continue to drop.

 

[The White Coat Investor]

So, I'm graduating medical school this May and beginning internship mid-June. I am currently in the housing market after making a thorough budget estimating costs of being a homeowner. I plan on staying in the city where my residency program is indefinitely as my wife and I grew up there.

I will owe around $260k of principal in student loans (32k at 8.5%, 22k at 7.9%, 190k at 6.8%, and 16k at 5%) plus about $24k in interest! I plan on doing Income Based Repayment and possible consolidation on some of these.

We are considering a mortgage of around $200k. My dilemma lies in what to do with around $50k we have recently been blessed with in the form of inheritance. Should we do a doctor loan with no down payment and pay off the highest interest student loans? Should we use the money to make a 20% down payment and pay for closing costs in order to get better loan terms? Or should we do something different?

I guess I'm not sure if there is much advantage on going with a more traditional mortgage when there seem to be very good physician loans now with no down payment, no PMI, no repayment penalty, etc.

Thank you all so much for your input/help!!!

#1- I wouldn't buy a house in residency. Even if you stay in the same city, I only know one doc living in his residency house, and that's only because its on the same street as his sisters-in-law. You're almost sure to upgrade when your income quadruples. You don't mention your specialty, but 3-5 years is at best a break even proposition. There won't be much tax benefit as a resident either. I suggest you reconsider renting. Read more on my blog:
http://whitecoatinvestor.com/personal-finance/the-doctor-mortgage-loan/

#2- Guaranteed 8.5% investment? Where do I sign up?

 

[dpmd]

#1- I wouldn't buy a house in residency. Even if you stay in the same city, I only know one doc living in his residency house, and that's only because its on the same street as his sisters-in-law. You're almost sure to upgrade when your income quadruples. You don't mention your specialty, but 3-5 years is at best a break even proposition. There won't be much tax benefit as a resident either. I suggest you reconsider renting. Read more on my blog:
http://whitecoatinvestor.com/personal-finance/the-doctor-mortgage-loan/

#2- Guaranteed 8.5% investment? Where do I sign up?

You blog talks about mortgage insurance but doesn't reflect the newer rule which does allow you to deduct private mortgage insurance. Not that it changes things a ton. Just thought you might want to update that section. It is nice, since when we bought our current house we didn't have a big enough down payment to avoid it (despite the fact that I looked for a place that would put total payment at around what we were renting for-reason we decided to buy was I wanted a place with a yard, and all the house rentals had pretty high monthly rent considering home values, probably due to the drop in prices).

 

[The White Coat Investor]

You blog talks about mortgage insurance but doesn't reflect the newer rule which does allow you to deduct private mortgage insurance. Not that it changes things a ton. Just thought you might want to update that section. It is nice, since when we bought our current house we didn't have a big enough down payment to avoid it (despite the fact that I looked for a place that would put total payment at around what we were renting for-reason we decided to buy was I wanted a place with a yard, and all the house rentals had pretty high monthly rent considering home values, probably due to the drop in prices).

#1) It's only deductible if you itemize.
#2) It's only deductible if you already itemize more than the standard deduction
#3) It's only deductible if you make less than $50K ($100K married)
#4) Those who make less than $50K don't have a very high marginal tax rate, so the deduction isn't worth all that much.
#5) It might not be deductible for long.

So, yes, it's deductible, but that doesn't change much on my recommendations.

Be sure to look at ALL COSTS before deciding to rent instead of buy. Take into account some unfortunate situations, such as having to carry an empty property for months until it sells. I had to pay mortgage and maintenance for 3 months after I moved out for the first house I bought. I'm into month 16 with the 2nd. It doesn't take very many months of that to eat up all the tax benefits and appreciation you get buying a place.

You're buying a house to get a yard? Really? No rentals have yards? Not to be snarky, and this might be a great time to buy a house with low interest rates and much better prices than the last few years, but I'd think long and hard before diving in.

Seen this?

http://www.nytimes.com/interactive/business/buy-rent-calculator.html

 

[dpmd]

#1)
You're buying a house to get a yard? Really? No rentals have yards? Not to be snarky, and this might be a great time to buy a house with low interest rates and much better prices than the last few years, but I'd think long and hard before diving in.

Seen this?

http://www.nytimes.com/interactive/business/buy-rent-calculator.html

Already bought. Mortgage, insurance, and property taxes is still less than what people are renting out similar homes for. That is why I bought. Trust me, I did think long and hard, especially since this is the second place we bought (also have a condo in LA that we rent out-timed things well for that one too and despite the drop in prices the value is still more than we bought it for). Things are planned out so that we can actually carry both mortgages indefinitely on just my husband's income (not live well, but at least not lose either place) if something happened where I couldn't work. If we both couldn't work it would be an issue of course, but we would make it for 6 months at least before having to resort to things like help from family or whatever (reminds me I need to work on getting disability insurance). That was always my worst case scenario plan when choosing to purchase, and factored into how much we spent. I know other people who paid for one place what I paid for both combined, without the income to back it up. That is a dumb move. Of course, the area I live actually allows you to get a nice place for very little compared to other locations. Does not apply for most people, and I agree for the vast majority of residents buying is not the best plan.

 

[shantster]

This thread is interesting because I've been debating the same thing depending on where I end up next year. However, the big question I don't see answered is how long is the OP's residency? To me there's a big difference between considering buying a house when I'm starting a 3 year residency vs a 7 year residency. Do you plan to do a fellowship after too? Is it guaranteed you would stay in the same location or would you be willing (or prefer to) go elsewhere for the fellowship?

If you have no plans to stay long term or be in a longer residency, I don't see a house to be a good buy. Given that the market is still down and probably won't perk up that quickly, you don't want to be stuck with a mortgage payment on a place that you aren't living in. Plus it might not break out to being a better deal financially with a shorter time in the house between the mortgage taxes, insurance, brokers fees (possibly both sides), etc. vs. just renting in an area.

 

[toothdr5]

Since your wife's income is uncertain and you are about to start a new job, you should place 6 months of living expenses in a bank account as an emergency fund. Unless you really know the area and plan to stay past residency, you probably would be bettor off not buying a house. Renting will most likely be cheaper. Plus you might decide to move after a year or two and if you buy a house you have to sell it , which can take time most likely be at a loss, since you probably will not have enough appreciation to cover closing cost and the realtor commission until after at least three or four years. Any money left over after the emergency fund should go to paying of your dept.

I agree with Walli.

 

[chavtwo]

I agree 100% with Walli.