Physician's loan 0% down no PMI

[Doctah315]

Hello Mustachians,

I am a longtime reader but this is my first post. I am a soon to be medical school graduate that will be starting a 5 year surgical residency in southern NJ. I am contractually obligated to be in the area for at least 5 years and have a guaranteed (or as near to guaranteed as possible) salary starting at $50,800 with 3% raises each year.

I am considering buying a townhouse using a physician's loan which is available at 0% down, without PMI. Since I will likely be moving after 5 years, and at that point will  be in a significantly different financial situation with an attending's salary, I am considering a 7/1 ARM with a rate of 3.125%.

Other financial info

• 16K in cash
• 5% of salary plus 8% employer match going to 403b
• student loans are about 300K on income based repayment with max payment of $400 a month during residency, hopefully forgiven after 10 years of payments

What do the advanced mustachians think of this situation? I know 0% down is generally considered a poor choice, but how does my unique situation with no PMI change your opinion?

[arebelspy]

Depends on your risk tolerance. 

I'd go for it, if I were you.  But I'm aggressive.  And you're young, so I think you should be aggressive too.

Many will hate the 0% down.  Others will hate the ARM.  (There will be significant overlap between the two groups.)

Don't buy one larger than you need.  Live frugally.  Don't let lifestyle inflation get you.

It will depend on how much self control and discipline you have.  Will you save/invest as much as possible in the next few years?  If so, you'll have options when you want to move, when that ARM resets, etc.

Others will come in with some different perspectives.  Listen and consider them all and decide what's right for you, because there is no one correct "right" answer for everyone.

[Bank]

I don't have a problem with the 0% down, and the loan is at a tasty rate, but I'm not sure I'd do what you're thinking of doing for the following reasons:

- Purchasing and selling a house are expensive.  Up to 3% in fees when you buy and 5% when you sell.  That requires pretty good appreciation to overcome.  The shorter your time horizon, the less time you have to make up your transaction costs.

- You could, of course, overcome the short holding period problem by renting it out when you move in 5 years.  But do you want that headache?  You will be working long hours in a new town at a new job.  Do you want to be a landlord, much less and absentee one?  Plus, if you hold for longer than 7 years you run the risk of that rate resetting to something truly unpleasant.

- Forget about the future, do you want this headache now?  As a surgical resident, you will be working even more insane hours than you probably will as an attending.  Easily two full time jobs worth.  Do you want to add home ownership and its responsibilities to your to do list?

If you're psyched to get in there, or renting is unaffordable in the area, go ahead and best of luck.  But if I were you, I would rent with roommates and build that $16K stash up to a nice down payment on a house you plan to settle in for some time.  But that's just me.

[James]

I think you should look into the idea further.  How much is rent compared to payments on a house you would be willing to purchase?  Are you willing to be super frugal?  If so, then go the route of renting something super cheap and saving your money in investments through Roth, 401k, etc. 
 
 I agree with Bank that your time will be spent on other things, not having a house to care for can greatly decrease your stress.  But if you other option is to rent a nice house or apartment that will cost more than your possible mortgage payment, then I might encourage the risk of home ownership.

Do you have family?  If so that would also push toward the purchase, since a family can really benefit from a nice little house that gives privacy, etc.

Without family you might want to get another resident on board renting, that way part of the principle is paid down by those rental payments and your risk is decreased.

[Devils Advocate]

You most likely won't spend hardly anytime in your residence I would speculate.  Therefore perhaps an efficiency apt. may be the way to go if you don't have a family. 

If you have a family I think you should go ahead and buy a modest home with the loan you discussed.

Good job on the residency!

DA

[Doctah315]

Hi All,

I appreciate your replies. I have considered the cost of renting vs buying. Southern NJ, I'll be outside of Camden, is quite expensive in terms of rent, a decent one bedroom is around 850 per month. Rooms for rent start around 700. The mortgage on the townhome I am considering would be 1050 a month plus 80 in HOAs. I fully intend to get a roommate for the first three years of residency which should bring in 600 or so a month. After that my fiance will be moving in as she will have completed her residency in NYC.

I do agree that the time and effort it takes to maintain a home is very important to consider, however, I think it will be worth it to know that I am building some equity.

[James]

That makes a lot of sense financially to have a roommate, with that covering half the mortgage and a 0% loan you should do quite well even if the housing market stays where it is.  Even if it drops more and you loose everything you put into the house, you probably won't be out any more than you would be with a rental.  And the up side is damn good.


I made it through anesthesia school with a wife who had our second child half way through my first year, and we owned a house that had issues come up.  It works, and it was so nice to have instead of some small rental.

[arebelspy]

If you're willing to put up with a roommate, I'd say buying is definitely the way to go.  And if you're willing to save, there's no need to put any more money down (you can always pay down principal if you feel that's the way to go), since there's no PMI.

You still might want to consider a fixed mortgage, since rates are so low right now, and even if you move in 5-7 years you can keep it as a rental.  But the ARM is a valid choice as well.

[Doctah315]

You still might want to consider a fixed mortgage, since rates are so low right now, and even if you move in 5-7 years you can keep it as a rental.  But the ARM is a valid choice as well.

I agree that a fixed mortgage would be ideal with current rates and likely worth a slightly higher interest rate. Sadly, there is only one lender that offers the physician's loan program in Camden county NJ and they only offer 5/1 or 7/1 ARMs. At this point I feel more comfortable with the 7/1 ARM which would gives me additional flexibility during the transition from residency to either a position in a fellowship program or as an attending physician.

As a side note, I have found it extremely interesting to apply all of the ideas/principals laid forth by MMM and on these forums to a career in which my salary is likely to quintuple in 5 to 7 years. I really hope I can continue to "live like a resident" during my time in practice and quickly accumulate a significant 'stash (student loans notwithstanding) so that I can focus more of my practice on the disadvantaged population. In my young career I have already seen too many docs who have clearly fallen prey to lifestyle inflation and end up working in positions they hate just to keep up with the Jones'.

Kindest regards.

[gooki]

I'm with the others - if you can get a room-mate you like, you don't overpay for the home, and keep your lifestyle modest, then it makes a lot of financial sense to buy.

[Bank]

Yes, it sounds like with renting that unaffordable you are far better off buying.  How can you turn down positive cash flow (over renting) each month?  Hopefully your HOA dues will relieve you of some of the burdens of home ownership too.

By the way - congratulations on both your accomplishments to date and your long-term goals.  I don't know your age, but if you are mid or late twenties like the typical med school graduate, you have got your head together in a way I wish I had at that age.

[Ipodius]

On the face of it, buying sounds like a good deal. But I'd plug all the numbers plus your best estimates into a rent vs buy calculator (eg http://www.nytimes.com/interactive/business/buy-rent-calculator.html ) and see what the financials are like. Based on what you've said, I'm guessing buying will be more cost effective.

Otherwise, another thing that's important to consider is what the rental return on this apartment would be, both now and an estimate for 5 years time. If the unit has a decent rental return, then that mitigates a lot of your risk - both the general market plus rental market would need to tank for you to lose out.