Ownership has advantages, but debt levels and contracts are considerations, according to Jeff Witz, CFP.
I’m beginning my urology career, and my spouse and I are trying to decide if we should buy a home or continue renting. Which is the better option?
The decision to purchase a home or continue renting is a difficult one. Many early-career physicians struggle financially through medical school and residency (perhaps a fellowship too), and once they are an attending physician, want to increase their standard of living dramatically. This often includes purchasing a home. Buying a home has advantages, but it also has its risks and may not be for everyone.
The advantages to purchasing a home are fairly straightforward. You can build equity in the property. The value of the property may appreciate, acting as an investment. However, just like any investment, there is the risk that the value drops instead of rises. There may also be state and federal tax benefits to homeownership.
Also by Jeff Witz, CFP: Why you should resist the urge to sell in a down market
The downsides to home ownership are also fairly straightforward. There are added expenses such as homeowner’s insurance, a flood policy, homeowners association fees, property taxes, and higher utility bills. You are responsible for repairs and remodeling. Additionally, home ownership makes it very difficult to relocate.
Those are the more obvious pros and cons, but the debate between homeownership and renting is often more complicated for physicians. Debt levels can be a serious concern. The 2018 median student loan debt for physicians entering their first year as an attending was $200,000. As an attending, a physician’s payments are likely going to jump up dramatically compared to their income-based payments during residency. Physicians should use caution and learn what their student loan responsibilities will be before taking out a mortgage.
Physicians can also be enticed by physician loans. These loans offer low-to-no required down payment, as well as favorable interest rates and terms. For some physicians, these can be excellent options. However, for others, it can result in unsustainable levels of debt. Not paying a down payment means a higher overall debt level, faster interest accumulation, and higher monthly payments. If a physician has $200,000 in student loans and takes out a $500,000- to $800,000-physician loan to purchase a home, they could find themselves $700,000 to $1,000,000 in debt before they’ve worked a day as an attending.
Next:"It is also important for physicians to remember their contracts when considering homeownership"It is also important for physicians to remember their contracts when considering homeownership. Most first-time attending physician contracts are for 3- to 4-year periods. Following the first contract, many physicians look for new employment that is a better fit. This can result in looking for opportunities away from where they just purchased a home. Owning a home can make relocation difficult.
Additionally, most physician contracts only guarantee a salary for the first 2-3 years and then transition to a relative value unit structure. Many physicians see a drop in their income during this transition. If this drop is not planned for, a once-affordable mortgage may not be moving forward.
Physicians should ask themselves if they really need to purchase a home right away or could they be better served renting for a few years. Renting could buy time to determine if their current location is where they will put down long-term roots and buy time to save for a down payment that produces a manageable mortgage payment amount.
Overall, there is no one right answer. We recommend speaking with your financial adviser about the pros and cons of home ownership.
Should I take money out of my investment accounts to put a down payment on a house?
The general rule of thumb is, if you think you can earn a higher long-term rate of return on your investments than the interest rate being charged on the mortgage, it makes sense to keep the money invested and pay the mortgage from cash flows. Interest rates currently remain relatively low (about 4%, as of April 1, 2019). Depending on your investment allocation, outperforming current interest rates over a 30-year period should be achievable.
However, if the money is absolutely needed to make a down payment so the monthly cost of purchasing the home is reasonable, then a withdrawal can be OK. Do not tap into an emergency fund to make the down payment. This money should come from a different source.
Mr. Witz is educational program director at MEDIQUS Asset Advisors, Inc. in Chicago. He welcome readers’ questions and can be reached at 800-883-8555 or email@example.com.
The information in this column is designed to be authoritative. The publisher is not engaged in rendering legal, investment, or tax advice.