Home ownership is often a big goal for Deerfield clients. There’s a sense of pride that a lot of people feel when buying a home, and I get it. Home ownership is really ingrained in our culture as a goal that many people strive toward, and there are definitely benefits that come with owning versus renting. Home ownership often gives you the freedom to change things about your home or property that renting doesn’t. It also gives you more lifestyle freedom in some cases. For example, having pets in a rental might be prohibited, or it could come with some hefty pet fees each month.
However, a lot of people are worried about buying a home when they’re still carrying student loan debt. The truth is that, if you’re a young professional (particularly if you are a physician), you may be paying down your student loans for several years.
It can be emotionally draining to put all of your other savings goals on hold until your student debt is out of the way. So, asking whether or not you should buy a home while you still have loans isn’t necessarily the right question. Instead, figuring out whether or not buying a home fits into your financial plan, and matches up with your lifestyle values, is a good first step. Let’s start by walking through a few home-buying rules to follow.
The 5 Year Rule
It’s a pretty common financial rule that, if you’re going to buy a home, you need to wait until you know you’ll spend five or more years living there. This allows adequate time to recoup your purchase costs, etc.. Additionally, the way mortgages are structured, you’ll pay a large portion of your mortgage interest in the first few years. So, there’s a possibility that you won’t actually make money if you resell your house – even if you resell at a higher price than you bought the home for.
Taking Your First Job?
If you’re taking your first job out of medical school, it’s quite possible you won’t remain in that same location long-term. Even if you love where you live and work, buying a home could potentially limit your flexibility and career growth.
Early on in your career, the flexibility that renting provides can be a major positive. It gives you the freedom to pack up and leave, to take a job that more closely aligns with your values, to relocate to be near family – or to build whatever kind of life you envision for yourself. Owning a home can have emotional and lifestyle benefits, but it definitely limits the options you can take in the future without risking your finances.
Don’t Buy During Residency
This point ties into the idea that you need to maintain some flexibility and freedom to build a life that you love after medical school. Even if you have the opportunity to buy a home during residency, don’t do it! Even if you’re planning to use the home as a rental property after you graduate, that situation comes with its own set of financial concerns and implications. Plus, do you want a rental property hanging over your head while you’re starting a new, busy career as a physician?
Buying a Home is a Lifestyle Choice
One thing to keep in mind is that buying a home is not an investment – it’s a lifestyle choice. Many advisors will tell you all about the financial benefits of home ownership, and some of them are true. It’s true that when you own a home or property, you’re building equity and therefore increasing your net worth.
However, the immediate benefits of home ownership aren’t good enough to qualify as a true “investment.” Homeownership is a long-play. You want to make sure that you’re buying because owning a home matches the lifestyle you envision for you and your family, not because you think that renting is “throwing money away.” The truth is that buying a home and selling it too soon could actually cause you to lose more money than if you had just stayed the course and continued renting.
Limit Your Mortgage Payment
Physicians and other professionals who are a few years into their career and ready to settle into the area they live often have a healthy amount of disposable income. Banks will approve you for a hefty mortgage that’s way larger than what you should reasonably be taking on. Even if you have a 20% down payment saved (in order to avoid PMI – private mortgage insurance) for a high-priced home, it’s smart to limit your total mortgage payment.
As a rule of thumb, limiting your total monthly home payment to 35% of your net income (at the absolute most) is a good idea. That includes principal and interest, as well as any taxes and insurance on the home. This is especially true if you’re a first-time home buyer who still has some outstanding student loan debt. Remember – every dollar tied up in housing is a dollar that can’t be used for other goals.
Is buying a home on your financial bucket-list? You’re not alone. In 2018, 64.2% of Americans were homeowners – and that number seems to be staying consistent. Although there are times when renting is the best option, planning for a future home purchase can make sense if it aligns with your lifestyle and values. Want help planning for your big home-buy? Schedule a call today. The Deerfield team would love to help you build a goals-based plan that helps to create a life you love.