We Bought a House in Residency
The debate about buying a home as a resident is real. I get it; there are many different opinions out there about what to do for housing during your residency. There are many motivating factors to juggle when you desire to “own” a home. I say “own” because in my opinion you do not own something until you have paid for it 100% in full. This post is a real example of the thought process behind buying our home in residency, referenced with some actual numbers from our purchase. The ultimate answer to the question “Should I buy a house in residency?” is up to you.
Before we begin, let’s look at a graph that some really smart economists made regarding home prices in the United States in the past 100+ years. It would have been a poor decision to buy a house in 2008, especially as a resident or medical student! This data is referenced here.
Agreeably, there is an overwhelming sense of need to purchase a house after finishing medical school. Just like my dental hygienist stated the other day regarding purchasing her first home while cleaning my teeth: “you know, (teeth polishing noises in the background) finally starting real life.” I argue that there are basically two motivating principles to drive a resident/medical student to buy a house:
- Keeping up with “the Joneses” (really perceived personal satisfaction)
- Investment opportunities or thrifty money saving strategies
What does the phrase “Keeping up with the Joneses” mean anyway?
Apparently, there is a movie called “Keeping Up with the Joneses.” Watch at your own risk, I haven’t seen it.
The phrase implies to me that your purchase habits and outward appearances are motivated by the purchase habits and appearances of your friends/peers. Many medical students or residents will want to buy a house solely based on this principle because many of their friends/peers (residents or not) are living in purchased houses.
Bad idea. Avoid this motivation to buy a home.
Also, owning your home provides a certain achievement satisfaction, similar to when you bought your first car. Hooray, you now have access to more debt! Not much to celebrate here.
There are many that may say: “But, I have (x) amount of kids! I can’t raise them in a small apartment!”
To this I also agree, but renting a house during residency is a completely appropriate option that will satisfy space needs while avoiding more debt. You do not need to own a house in order to live in a house.
Investment opportunities and thrifty money saving strategies
This is where I feel a significant benefit can be found for purchasing a home if you plan on living in it for more than three years. [Author update: I will likely change this to five years when the new tax bill passes] Frankly, a home as an investment/money saving tool was my main motivator for buying a home.
Now, when Mrs. MWD and I were discussing our living situation upon entrance into residency, I was definitely the proponent to purchase a home. [I really wanted to buy one in medical school because others in my class were doing so, Mrs. MWD talked me out of it, I am glad she did.] We were starting a 5 year residency program and had secured our permanence for 5 years.
Our money saving strategy for a home purchase was to:
- Help us save as much of our earnings as possible, and
- Keep our living expenses within our monthly budget
You may ask: how would buying a home accomplish these two goals?
To show how much we could save our earnings by purchasing a home, I simply calculated the difference between our monthly rent versus mortgage payment of a similar house.
[If I posted a screenshot of my convoluted home purchase Excel spreadsheet you would likely stop reading forever, so for simplicity sake you get this table regarding actual earnings saved of buying our home versus renting.]
Essentially this table shows that if we rented our home, we would have paid $72,000 in rent over a 5 year period. Our mortgage payment less any interest buy down would cost us $41,400 over a 5 year period, leaving with a difference of $30,600 over 5 years of earnings saved by buying a home.
Our mortgage principle buy down was considered money we paid ourselves every month by buying the home, even though its only $12,000 over a 5 year period, that’s not money I want to give to some landlord. I would rather keep that for myself.
Well, what about keeping our down payment money in a savings account? That would have made us shy of $1,500 over 5 years. Not that much compared to the amount we gained on our home value over the same period. BUT, if that money would have been invested in an index fund over the same period, it would have yielded several thousands of dollars. Essentially, the $12,000 we “paid” ourselves in principle buy down would be a wash considering investment opportunities leaving $20,100 our true amount of earnings saved by buying a home.
Our monthly budget was significantly affected because of the difference in mortgage payment versus rent payment. Our rent payment (low estimate) would be about $1,200 and our mortgage payment has ended up at $890 a month. Roughly, at least a $300 (or around 10% of monthly earnings averaged over 5 years) difference allowable for other expenditures or savings per month. That is a big chunk of change for a resident, and it allowed us more wiggle room to maintain a stable inflow and outflow of monies without being in the red every month.
Mortgage calculator that I use at Bank of America.
Be aware, the monthly payment that we factored into our budget at time zero was $799 a month – our quoted monthly mortgage payment. But with increasing property values our property taxes went up, which led to an increase in our escrow required per month, and ultimately led to a mortgage payment of close to $900 a month. This variability must be taken into account in your finance plan prior to any home purchase. I did not know at the time of loan origination that they could increase the monthly escrow amount. My naive self at the time thought that the mortgage payment would never change over the life of the loan. Thankfully, we had budgeted a little wiggle room monthly so this did not affect our lifestyle, and our kids could still eat which is always a plus.
Investment opportunities of a home purchase in 2013 seemed very intriguing. The housing bubble had burst, and in 2013 home values were slowly ticking up. It was hard to make risky investments with large sums of money, but my unsophisticated real estate crystal ball predicted that it would be very hard for us to not get our down payment back after 5 years of home value increase – so it was worth a shot.
Rising home values has proven to be a win for this frugal MWD family. This graph from Zillow.com shows what has happened to the average home values in the United States over the past 10 years. Based on my calculations, our home value has gone up 42% in the last 5 years – much better than any other investment vehicle.
Our Thrifty Home Purchase
This is the home we bought:
Source: The Thrifty Surgeon Excel Spreadsheet.
One may question why we purchased the house with what is called a Physicians Mortgage or Doctors Mortgage when we had a 20% down payment. Well, this allowed us to secure a loan prior to receiving any actual paychecks; all they required is a signed contract from my employer demonstrating the future earnings. No need to provide pay stubs. This also allowed us to obtain our loan 30-60 days prior to me getting my first residency paycheck with this mortgage type. Thus, we were allowed to close on and move into our home before the chaos of intern year began July 1st, 2013. A conventional loan would not have allowed us to do that. Physician Mortgages also have other benefits which include: no Private Mortgage Insurance (PMI) fees and a reduction in your down payment required to get the loan (ours offered to have us put 5% down). There are other mortgage options, not as good as the Physician Mortgage for residents in my opinion, but these will not be discussed in this post.
Consider These Prior to Buying House
- Do you have a 20% down payment?
- Do you have the flexibility in your monthly budget to accommodate an increase in your monthly mortgage payment?
- Do you have access to the correct mortgage that will provide you the most benefit?
- Do you have a good credit score (i.e. above 700)? If you don’t know check out this Experian Blog Post.
- Are you in a buyers housing market (and hope the market goes up)?
- Are you buying more home than you can afford?
- Do you have a substantial emergency fund?
- Will you be living there 3-5 years?
What were the benefits of buying a home?
Not too many. Being able to trim our ugly tree so it stops hitting the house is nice, I don’t have to bug a landlord about that. Oh, and that clown teetering at the top of a ladder in December? Yeah, that is me putting up Christmas lights however we want – always fun for the kids.
Take home point: Ultimately, if purchasing a house looked like it was going to be too risky of an investment, we would have rented. The purchase has worked well for us – I hope the sale goes smooth! Please take into account these simple factors, that I considered prior to our home purchase, and make an informed decision about what is best for you/your family.
Extra: One of my inspirations has an excellent post on why residents shouldn’t be buying houses. Head over there for a great read and see what the White Coat Investor thinks about purchasing a home.
Stay tuned for We Bought a House in Residency, Part 2 after our home sale for our detailed earned income from our home investment.
What do you think? Did you buy a house in residency? How did that go for you? Comment below, I would love to hear from you!