A big part of the American Dream is owning a home. Five years ago we started living the dream of homeownership, and we can attest that it’s nice having your own home, especially one that is completely paid off. However, it’s not always a dream being a homeowner, and sometimes it’s not the best decision to buy a home. In this week’s blog we discuss five reason against and for purchasing a home.
Before we dig into the reasons for or against home ownership, we’ll assume you are an attending physician and out of residency for at least a year. We would argue it’s almost never a good idea to buy when you’re in residency or have just started your attending position. Home ownership can take some time, energy, and money, none of which you have while in med school or residency. You’re also better off waiting after you start your first attending position to make sure the job is a good fit before planting roots by purchasing a home.
5 reasons NOT to buy a house.
Reason #1: you have no down payment. Buying a house when you’re broke is never a good idea, and yes, you are broke when you have piles of student loan debt and a negative net worth, despite having a six-figure income! The good news is you won’t be broke for long if you focus on getting out of debt. When you have no money to put down you are just asking for trouble. One A/C or heater going out, having to deal with a plumbing repair or a leaking roof will put you in a challenging spot that often leads to pulling out your credit card and going deeper into debt.
Reason #2: you have too much debt compared to your income. A good rule-of-thumb when knowing if you can afford a house is to determine if you can pay a 15 year fixed rate mortgage payment (principal, interest, taxes, and insurance) on less than 25% of your monthly take home pay. If you can’t you might be “house poor”. In other words, too much of your monthly income will be going to make the mortgage payment leavings you less to attack your debt and pay for basic living expenses.
Reason #3: you have no emergency fund savings. We recommend having at least 3-6 months of expenses saved in an emergency fund before even thinking about buying a home. Buying a house with no available savings to cover emergencies (personal and home related) is an invitation for trouble. You can’t predict emergencies, but you can prepare for them to some degree financially with an emergency fund.
Reason #4: you don’t qualify for a traditional fixed rate mortgage. The best and lowest cost way to buy a home is with cash, but we understand that’s not likely to be possible for many of you. However, if you have to finance, the best option is a fixed rate 15 year mortgage. You may not qualify for this type of financing if you have bad credit, which could lead to a variable rate mortgage or interest only mortgage, both of which will lead to higher interest paid and a much longer time to pay off.
Reason #5: you anticipate getting married in the near future. Buying a house with someone you’re not married to is a really bad idea. Do a Google search for “buying a house with boyfriend or girlfriend gone bad” and you’ll uncover a lot of horror stories. Breaking up is hard enough without a house in the middle of all the emotional pain. We would argue it’s always better to get married and then purchase together. There’s something about moving into your boyfriend now husband’s house or vice versa that never seems to feel right. It will likely always feel like his/her house and not our house.
5 Reasons to buy a house.
So what are some good reasons to buy a house? There’s many, but here are five good reasons we’d suggest you could use to make an argument it’s time to buy.
Reason #1: you have no debt, a 3-6 month emergency fund, and a sizeable down payment. When we purchased our home five years ago we had zero debt, a full six month emergency fund, and 20% to put down, which made the home buying process more enjoyable. Having a solid financial foundation to work from makes the buying process so much better. You’ll also find lenders will be lining up to give you a good rate on a 15 year fixed rate mortgage with a big income and no debt.
Reason #2: you don’t plan to move in the next five years. In most markets it will take at least this much time to make back what you have to pay in closing costs and interest. There are exceptions to this reason if you’re living in a super-hot market where housing prices are rapidly rising, which leads to the next reason.
Reason #3: you live in a super-hot real estate market. When prices are on the rise you may want to consider buying to keep from having to pay more for a house. The downside is you will probably be competing with many buyers for houses that will likely sell above asking price.
Reason #4: mortgage rates are going to go up. Rates for mortgages are not likely to go down much further than they currently are any time soon, and if you’re buying with borrowed money the longer you wait the higher your rate will likely be.
Reason #5: to help build wealth. In general, housing prices rise 2-3% each year, and most millionaires have about one-third of their wealth in the equity of their home. In some ways, buying a home is a way of investing and building net worth, especially once you’ve paid it off. By continuing to rent you will guarantee the need to always have a monthly housing expense, but owning a home at some point when the mortgage is paid off you will significantly reduce your living expenses (unfortunately you will always have insurance and taxes).
Are you ready?
So, are you ready to buy? Far too many doctors make the mistake of buying too early for a variety of reason, none of which are good ones. Even worse is buying a house while in residency when you have absolutely no time to deal with house problems. Our path to becoming debt-free millionaires has been based on the aforementioned reasons to not buy and to buy.
We spent several years paying off debt and saving an emergency fund before buying a home. What we bought indirectly was patience that led to better decisions once we had the cash to buy. With no debt and buying a house well under what the bank was willing to lend us (we estimate they would have given us close to $2M) we were able to pay our home off in just three years.
The adventure now continues as we’ve decided to sell and find a much larger home that we are going to be able to pay cash for. Patience will pay off if you have it. Don’t rush the process and you will move faster from where you are to becoming a debt-free millionaire doctor.