Even when purchasing a home makes sense, it is critical to realize that a home purchase is mostly a consumption item, not an investment. Larger homes require more money to heat, cool, maintain, furnish, landscape, insure, upgrade, and clean. Try to buy a home closer to what you truly need rather than everything you could possibly want. Although a mortgage lender may approve you for a home costing four to five times your gross salary, you would do well to make sure your mortgage is less than two times your gross income. So if you make $250,000, the general rule is that your loan amount should be less than $500,000.
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ACEP Now: Vol 34 – No 10 – October 2015In recent years, many lenders have started offering “physician mortgage loans.” These are loans that banks will give to a physician that allow them to avoid private mortgage insurance (PMI). PMI protects the lender against you defaulting without your putting down a standard 20 percent payment. These loans usually also offer special underwriting that will allow you to close with just a contract rather than proven earnings and may take your student loans into special consideration. It is important to realize that these lenders aren’t doing you a favor out of the goodness of their hearts. These loans have slightly higher fees and interest rates than comparable conventional mortgages. The banks are also well aware that your risk of default is very low and hope you will then use their bank for your banking, investment, and insurance needs. A physician loan can make sense but only if you are using the money you would have used for a down payment for a better financial purpose, such as paying off high-interest student loans or making retirement account contributions. If you aren’t already using 15–25 percent of your attending gross salary to build wealth (ie, saving or paying off debt), then purchasing a home, with or without a physician mortgage loan, probably isn’t a great idea until you get your financial house in order.
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9 Responses to “Tips for Physicians on Buying a Home the Right Way”
February 8, 2017
PhilIs there a general rule of thumb of either equity position and/or number of years into a given mortgage term (either 15 or 30 year) when you lose the benefit of the mortgage interest deduction?
Or to state it another way, one “loses” the marginal tax benefit that comes with a mortgage when your principal payments increase (and interest payments decrease).
February 8, 2017
James M. Dahle, MD, FACEPNot really. It’s a bit complicated in that some people never had a tax benefit if their total itemized deductions are less than the standard deduction. Others might still be able to consider the last penny of mortgage interest they pay as deductible if they have enough other itemized deductions.
But when a low interest rate mortgage gets down into a five figure range, you’ve got to start wondering if it is worth keeping that mortgage around. A 3% $100K mortgage only provides $3000 in interest a year to deduct, so perhaps a tax benefit of about $1000 for a typical doc. Yet in order to get that you might be making payments of $20-40K or more a year. The improvement in cash flow might be worth giving up the deduction.
March 8, 2017
Luke SmithI, like many rookie buyers apparently, had no idea that a mortgage payment should be significantly lower than your rent. It made sense when I read your breakdown of where rent money goes though. I bet that taking the time to choose a real estate agent who really has your best interests in mind would be a good way to ensure that you are really getting the deal you want.
March 9, 2017
James M. Dahle, MD, FACEPUnfortunately, most realtors are exceptionally good at selling homes and not so good at analyzing whether you would be better off renting instead. Not to mention there is no incentive for them to do so. It’s like going to a barber and asking if you need a haircut. You need to make that determination either by yourself or with the assistance of an unbiased advisor.
I also find it interesting that your website has the name of a real estate firm in it. I’ll bet most people reading your comment here on ACEP NOW would not have assumed you worked in the real estate industry. Lack of that sort of disclosure is unfortunately very common in the financial services industry.
July 18, 2017
Derek DewittMy wife and I are looking to buy our first home but don’t know where to start. I like that you recommend multiplying the mortgage by 1.8 to get a more accurate account of what you’ll be paying. We’ll have to keep this in mind when looking for houses and possibly change our approach if renting ends up being much lower than that number. Thanks for the tips!
September 2, 2017
Gloria AndreThank you for your post
September 9, 2017
Rachel FramptonYou are so right. A mortgage should be way lower than the average rent. If you are paying the same price than buying a home may not be for you. That’s why it’s so important to find a real estate agent who is willing to put your needs over their commission.
November 19, 2017
Gary ParkerI am completely agree with @Rachel-Frampton. Because when you are purchasing a home, it is critical to realize for others that a home purchase is consumption item, not an investment. It is a dream of somebody. Thanks for sharing it with us.
August 6, 2018
Richard DavisI agree most first time home buyers are hesitant to buy a new house because they think that a home purchase is mostly a consumption item, not an investment. However, it is always great to have a house that you can really call your own home. Great blog by the way. Thanks for sharing.