Should I buy a house in residency?

It’s that time of year again. Spring is in the air, match day is over, and people are preparing to move and start residency. This time of year, graduating medical students often start to talk about taking that next big life step and buying a house. The challenge, of course, is that residency can end up being a terrible time to buy a house. Today we will talk a little bit about buying a house in residency, including some things to consider as you try to decide whether now is the time to become a homeowner.

The big picture:

A lot of people say that they will buy a house in residency and then stay in that house as an attending, but the fact is that the house you will get a mortgage to buy as a resident making $50k/year, with no kids or with very young kids, is probably not the house you are going to want to live in when you make $200k/year and have more or older kids. There is also a good chance that when you finish your residency, you will want to move at least a short distance to your new job, even if it’s in the same general area. So think about how long your residency is, and assume that you will be moving at the end of your residency.

The real estate market goes up and down all the time. My husband and I bought a house when we moved for me to start medical school. We bought it for $145k, on a 30-year mortgage with 0% down. In the 5 years since we bought that house, its value has ranged from $130-160k (based on zillow.com’s zestimate, which seems to be moderately accurate). We were planning all along to rent it out after I finished school so that wasn’t a huge deal, but what if we had to sell it when it was worth $130k?

The way mortgages work, they add up all of the interest that you would be expected to pay on the loan over the 30-year lifetime, and they structure the payments so that you pay most of the interest in the first several years, and then start paying off more of the principal. Our total loan was about $148k starting off, since we rolled in some of our closing costs. You would think that after paying the mortgage on time for almost 5 years we would have paid off about 5/30th (i.e. 1/6th) of the value, or about $25k. In fact, due to magic or mortgage payments, we still owe about $137k – we have only paid off about $11k of the actual mortgage principal!

It’s also important to consider the costs of re-selling the home when you are ready to move, since this house is probably not going to be your “forever dream home.” In most markets, the seller pays both the buyer’s and seller’s agents, which costs about 6% of the price of the home. There are also usually some fix-its and curb appeal projects that need to be done, so the overall cost of selling a home is typically estimated to be about 10% of the value of the home. In other words, if you sell your house for $130k, expect to only actually get $117k.

So, what if you graduate and are ready to move on, and the house that you paid $145k for is now only worth $130k, so you’re only going to take home $117k from the sale, and you owe $137k? Well, you had better come up with the extra $20k if you want to sell the home. 

What does all of this mean? It means that, the shorter your residency, the less of your mortgage principal you will have paid off. This makes you more susceptible to downswings in the market, because you have less equity in your home to absorb the hit (remember that equity = value of the home – value of any loans agains the home including the mortgage). So, the shorter your residency, the higher the odds that you will end up having a write a check (possibly a big one) in order to sell your house. 

It’s also to remember that one of the big reasons people buy houses is because “Otherwise I’m just throwing my rent down the drain. I would rather pay an $800/month mortgage than $800/month in rent.”

There are two problems with that logic. First, your rent includes maintenance and repair expenses like fixing broken appliances, and it’s “insurance” against big fixes. Your landlord can’t come to you and say “Hey, the roof started leaking, that’ll be $5k.” You pay your rent and that’s it. With a mortgage, all you get for your money is a payment on the loan. Maintenance and repairs are extra, and it’s impossible to predict when, how often, and how much you will have to cough up. As a homeowner, you need to have some extra cash to cover these sorts of unpredictable expenses.

The other problem is that you might end up having to write a check for $20k to sell your house in the end, in which case the mortgage stops seeming like such a good deal.

So, in general, who is a good candidate to buy a home?

  • Long residency (more chance to pay off a bigger chunk of the mortgage before moving, and would lose more money in wasted rent). I’m talking about people doing 5-7 year programs, but maybe 4-year programs.
  • Financially secure enough to pay to get out of a mortgage if you need to (spouse has a job, etc)
  • Loans aren’t crazy – can afford surprise maintenance and repair expenses

Who really shouldn’t buy a home?

  • Short residency, including people who are going to spend one year in one location and the next 3 somewhere else. Buying a house when you’re moving after just 3 years is a big risk.
  • No savings or other financial resources to cover unexpected expenses

We will continue to explore other aspects of moving, homeownership, and mortgages in the next several posts, so stay tuned!

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