Today’s post will walk you through our thought process in buying our next home. We will discuss selling our current house, taxes and fees to be paid, and when/why our timeline for finding a home will start.
When is the Right Time to Buy the Next House After Residency & Fellowship?
Previously, I had a pretty hard and fast rule about when we would buy our next house: when our student loan debt is gone. Originally, this was going to take two years.
However, it dawned on us at some point that we couldn’t just wake up one day and say, “Today is the day that we will buy a house!” In addition to that, we have also discussed how we must move before my little girl starts the next grade at her current school. So, we needed to give ourselves time to look.
With a bit of whiplash, we very quickly learned the opposite lesson, too. Don’t start looking for a house until you are ready!
In our family, I manage the big picture of the finances, the investing, and the debt repayment plan. My wife pays the bills and takes care of a lot of the particular concrete tasks. We’ve always been good at filling each other’s gaps.
Given my big picture responsibility, I recently gave my wife the “go-ahead” to start looking at homes. I thought it would take some time to find some good ones.
Two weeks in, we had already gone to see five different homes. My wife was texting and emailing me daily with new homes to consider. Pandora’s box was officially open.
The Cost of a Home
After opening Pandora’s box, I spent some time determining if this was actually a smart financial decision for us. Too often, people ask “can we afford it?” I think the better question is, “How much will this decision impact our financial goals?”
We wanted to stay within 1.5 to 2 times my annual base salary (~$300,000). So, this puts us in the ballpark of a $400,000-$600,000 house. We currently live in a very low cost of living area, and so it’ll likely be in the lower end of that range.
After figuring out the ballpark we were looking in terms of the total price, I reached out to a few home lenders and received several different monthly payment and interest rate quotes for various term conditions. After these initial offers, our monthly mortgage payment looked like it would run around $2500 per month on a $400,000 house.
However, I’ve never wanted to take 30 years to pay a mortgage off. So, we would likely plan to put more money into it, say $3,000 a month. With our current mortgage payment of $650, we would have to come up with $2,350 somewhere else.
Looking at our budget, there was just no way to accomplish our goal of becoming financially independent in our mid 40s, pay off our debt in two years, buy the house, and stay married. With my wife recently starting a full time job, buying a house was simply going to put too much stress on our finances, family, and our marriage.
The only real option was to slow down our student loan payments in order to make up the difference, and with the success we have had this year, we just weren’t willing to do that.
Pumping the Breaks
This led to an obvious decision. We needed to stop looking at houses. In order to achieve our financial goals, we need to be saving approximately 30% of our gross income, which would not be possible if we bought a house.
When is the right time to buy the next house? Not right now. It just isn’t the right time. We did make a compromise, though. We have now decided that we shouldn’t look now, but we also cannot wait until the day we need to buy a house to start looking either.
So, our time-line will start when we are down to $50,000 in student loans because at this point we will have enough money between the equity from our current house and our savings to pay off that debt immediately if it was necessary.
Selling Our Current Home
Our current home, an 1100 square foot house with a one-car garage currently has 7 inhabitants (five humans, and two dogs). We purchased it for $120,000 in the summer of 2009, and it has a current value somewhere between $125,000 and $130,000. We currently owe about $98,000 on the mortgage.
With the above numbers, let’s say that we sold our home for $128,000 and owed $98,000 = $30,000 in profit. Sounds good, right? Well, we haven’t taken into account the taxes or the commission paid to the realtors, brokers, and lenders yet.
Fortunately, home sales are a tax-free event as long as you are not making a massive profit (more than $250,000 if single; $500,000 married) and have lived in that house for 2 of the last 5 years. We are making peanuts on our current home – $30,000 if we are lucky – in comparison to those kind of numbers.
Even though we won’t be taxed on the profit that we make, we will still have to pay the people and the fees involved in selling the home. Roughly, this usually costs about 10% including the buying and selling realtor both getting 3% (total of 6%).
So, from our $30,000 profit from our $128,000, we can expect to see $20,000 of that. In addition to the $30,000 emergency fund that we have, this accounts for how we came up with the $50,000 time point on our student loans before we can start looking.
The Next Step
With the picture painted above, you might guess that we are in a race to get to $50,000 in student loans remaining. We currently have $72,800. With our monthly payment now at $5500 per month, this will take us 4 months to get to without including any bonus pay that I might receive.
When we sell the home above, we would put the money from selling the house towards our debt and then have $30,000 remaining with $30,000 in our emergency fund. That would be a very tempting time to simply pay off the remaining balance. However, that would leave us with no emergency fund.
That is a future problem that I currently don’t have to deal with right now.
When is the right time to buy the next house? Well, until we get to $50,000 we will stick to the plan, keep building our wealth in a crazy fast fashion, and enjoy being happy in our little home.
How soon after finishing training did you buy a home? What criteria did you have? What advice would you have to someone following along the path behind you? Leave a comment below.
TPP
Great post. Wondering for those of us that live in high cost of living are (willingly for family, support, being close to grandparents) how are we to achieve this goal. For example rent of an apartment is about 2500$ a month. A mortgage is significantly mor expensive. I was wondering what multiple factor you would use for your income for the amount of house to buy or how to modify for the HCOL?
That’s a tougher question to answer. I certainly think you should probably have student loan debt paid off beforer buying (there is nothing wrong with renting).
As for numbers, I really wouldn’t want to spend more than 25% of my take home pay or 20% of my gross monthly pay on a mortgage.
It all depends on how much money your family is bringing in each month and the stability of your job.
In the end, if you are able to manage your monthly expenses, pay taxes, save 20-30% of your gross monthly pay towards building wealth (paying off debt, investing, etc), and still want to buy a home then just be reasonable with whatever money is left.
But fill up the tax bucket, emergency fund bucket, retirement bucket, and student loan/debt bucket before you consider how much you can afford. Don’t do it the other way around.
I commend you for your ability to not cave into emotions and just be logical about the whole process.
I do warn though about keeping an eye on the interest rate climate. If we continue to start creeping up you may end up paying a lot more in interest over long run. But your time line seems to be fairly quick so I doubt it would be major impact.
Definitely a good point. It’s been climbing and just bad timing for us. Hopefully it won’t continue to climb much higher!!
Good article. Like you I just finished anesthesiology residency (graduated in 2017). We have somewhat of a unique situation in that I took a job in a slightly less desirable location to take advantage of the huge income bump you can get via geographic arbitrage. The problem in my location is that apartments are insanely expensive because of a shortage and booming economy (we were paying $2000 a month for a 2 bedroom apartment when we moved here). Our solution was to use a zero down physician loan (15 year mortgage with same mortgage rate as a normal mortgage). This allowed me to quit paying 2k/month in rent and instead build equity, while at the same time avoiding a delay in paying off student loans that would have happened if I needed to save up for a house down payment.
Everyone’s situation is different. As are all markets.
Above all, I am all about intentional decisions. It looks like you had all of the information, and made the best choice for you and your family with the information you had. Never gonna fault that, even if it’s different than what I would have done, though I am not saying that’s the case!
Also I forgot to mention I now live less than a mile from work, which makes home call much more tolerable. That was actually one of the big reasons for my decision to buy. Keep up the good posts!
Makes total sense to me! And thanks. Keep coming back 🙂
A point about rising interest rates: they will affect the housing prices, as those will likely fall. You might want to continue super-saving a while longer – even a year or two will make a difference. For a European the size Americans consider small is almost amusing. (We have 1300 for 4 and it’s definitely a lot higher than most in this area.) A lot of it is just ”nice to have extra space”. That said here we do not have the concept of a ”master bedroom”, bedrooms are typically quite same size, there’s only one living room (no formal/tv) etc so the same sq footage goes a lot further.
Congrats on a level headed analysis. I realized after we bought this home that it would have made more sense to spend that on a few more investment properties and keep renting. We love this house but renting was good too – I got blinded by renting being expensive relative to mortgage. With investment properties our income would have been much higher. The powers of hindsight 😉
Yeah, I think this goes to the point about contentment in general. Most people in the states think that if they buy the bigger house, nicer car, etc… It’ll make them happier.
My wife and I love our little house. And, in fact, our two oldest have both said recently how they would really miss our house if we moved. I am not sure what we have done if my little girl didn’t have to change school zones because living in this house allows us to save so much money every year. We are content here, for sure.