Homeownership: Rewarded by the IRS and encouraged by financial advisors, owning one’s home has long been celebrated as both the cornerstone of the American dream and the central pillar of lifelong financial security. But is it always the right option? In a rapidly shifting economic landscape, is homeownership, particularly for residents, fellows and even physicians in their early years of practicing, always the wise choice? In some cases, maybe. In many other cases, the answers may surprise you.
In truth, there’s no one-size-fits-all answer to this question. However, the criteria on which to weigh your decision remain fairly standard. Before diving deeper, ask yourself the following questions:
What do you have saved for a rainy day? Crucially, if an unexpected misfortune interrupted your earning capability, would you be able to maintain:
As a homeowner, being unable to pay these bills could land you in trouble. You’ll need a minimum of 3-6 months of emergency funds to keep you afloat. Renters, on the other hand, have fewer worries. For more information, check out our Emergency Fund Guide.
As a potential high net worth individual, many banks may offer a mortgage with less than a 20% down payment. Before taking the deal, consider the following:
You'll likely need PMI (private mortgage insurance), to shield the lender from a potential loan default (in the worst-case scenario) and having to sell your house to recover the outstanding balance in a down market.
If lenders need insurance to counterbalance the risk associated with a low down payment, then you should pause to consider how risky it is to you.
Overall, lower down payments mean higher monthly payments, and may even influence the loan interest rate.
Debt Level and Debt-to-Income Ratio
Your debt level and debt-to-income ratio plays a major role in determining both your eligibility for a mortgage and the terms of the loan. Naturally, better credit scores and lower debt increase the likelihood of securing a loan with favorable terms.
Residents, fellows, or those still early in their careers understand that debt and student loan repayments are a natural part of the landscape. Yet still, lenders may tell you “you can afford this loan” or “you can qualify for that house.” Of course, they may be right. Nevertheless, this is the time to don your thinking cap, and view lender offers with a healthy degree of caution. If you're serious about creating financial independence, a healthy rule of thumb is to only consider a house payment you can afford that includes:
PMI and any HOA fees
No more than 25-30% of your monthly take-home pay.
These safety margins leave room for other financial goals that are important to you.
Whether it be gold, crypto-currency, or any other investment, the key to successful investing is appreciation. Owning a home is no different. And, like the aforementioned commodities, the key question is this: Are you in it for the long game?
Data indicates that remaining in your house for five years equates to a 50/50 chance your property will appreciate in value. After seven years, that probability increases to 75/25. After factoring in the unexpected (pandemics, recessions, real estate booms, etc) these timeframes can vary significantly. Nevertheless, the point remains the same: The longer your timeframe, the better the chances for a positive financial outcome.
Once the basic questions are resolved, it’s time to dig deeper and consider the following points:
What’s your Why?
What is driving you to buy a home vs renting one? Ask yourself:
Is cultural programming, or the prevailing wisdom influencing your choices?
Homeownership may indeed be “the American Dream.” But is it your dream?
Are you pursuing your own, individual financial goals, or modern society's definition of them?
When you were young, at what age did you know whether your family was renting or owning a home?
Did this affect your conclusions regarding whether homeownership is the most stable choice for a growing family?
In many cases, the conditions for financial stability extend beyond just owning a home. In the modern economic landscape, renting a home can provide plenty of stability. Conversely, homeownership does not guarantee it.
Counting the Costs – All of Them
Renting a home vs owning is rarely an apples-to-apples comparison, and other “fruit” should be considered when doing the math. However, the essentials remain the same.
Typically, renting costs tend to be more predictable, and include:
Fixed monthly payment.
Certain utilities or other fees.
A renter’s insurance (which is usually lower than a homeowner's property insurance.)
Typical homeownership costs include:
Occasional larger upgrades.
Anything else not covered by a rental agreement.
Owning: Additional “Pros”
Investment - First and foremost, owning a home is indeed an investment. Every mortgage is a step closer to owning the property outright. Conversely, every rental payment is money you’ll never see again.
Equity - After your mortgage is paid, whatever you clear, or “net” when selling is called equity. If you’ve played your cards right, the equity can be significant.
Tax Breaks - In many cases, property taxes are deductible from income. Additionally, if you have a mortgage, and if you itemize, you may deduct the interest on that loan.
Freedom - As a homeowner, you can do with the place as you like. Decorate, renovate, go solar – the sky’s the limit (HOA covenants notwithstanding).
Privacy - As the owner, you decide who gets a key. When you rent, the actual owner gets a key too.
Pride - “Ownership,” and the associated sense of responsibility that comes with maintaining and improving your home can be deeply satisfying and highly motivating.
Renting: Additional “Pros”
Mobility - Hate your commute? Don’t like your neighbors? Friends live across town? When your rental lease is up, the world’s your oyster – make a change.
Flexibility - Renegotiating or parting ways with a landlord is easy. Doing the same with a bank or lender is much more difficult.
A One-stop Repair Shop - What happens when the washer dies or a pipe springs a leak? Busy, home-owning medical professionals must phone around, and remain home to wait for help to arrive. In contrast, renters simply call their landlord.
Most physicians who partner with Earned eventually own a home. In many cases, they own several. However, for most residents and fellows, renting is a much safer bet. Generally speaking, residents or fellows should only choose homeownership if they can meet the following criteria.
Your Financial Position
You have a down payment of at least 20%.
You have adequate emergency reserves and disposable income.
Your Debt Level and Debt to Income Ratio
You have limited student and consumer debt.
Your debt-to-income ratio allows for a monthly mortgage payment close to or less than 25-30% of your monthly take-home pay.
The average homeowner needs a home to appreciate 15-18% to break even. This does not include maintenance, repair, or improvement costs. Meanwhile, you'll need to keep your home attractive to buyers. An ultra-busy, 3-5 year residency makes this difficult in an average market. However, if you can hold over a long enough time frame, the odds of property appreciation outpacing costs increase considerably.
A Set, Stable Location
Do you like, or even love the area in which you're studying? Are you happy to stick around? Is the commute okay? Do the amenities, community, and schools make it the kind of place you'd like to raise a family? Essentially, do you see a future there? If so, then this goes a long way to extending the aforementioned “time frame” required to watch your property appreciate.
You have An Accurate Comparison
Around 45% of collected rent goes towards costs above and beyond the mortgage. If you consider renting expensive, ask yourself how much more could owning be? To find out whether owning is a better choice for you, you'll need to gather a complete and accurate picture of the total expenses associated with renting Vs owning.
Your Tax Profile
Can you itemize property taxes and mortgage interest more than the current standard deduction? If so, this favors homeownership.
Your “Time and Hassle Index”
As a resident, fellow, or practicing physician, time is a precious resource. Would you rather enjoy your free time, or spend it on home maintenance and improvements? If the latter sounds too difficult, can you recruit family or pay others to handle it? If so, you're in a better position concerning homeownership.
We know this can appear complicated. Which is precisely why we’re here for you. Talk to our team at Earned. In the meantime, here are a few starting points.
Take an inventory – emergency fund, debt-to-income, down payment, credit score, etc.
Look at your options – available homes, mortgages, rental locations, terms, etc.
Do the math – all the math – you want a complete and accurate comparison
Score your favorability
Seek good advice and gather your team – we’d love to help. Consider us here
Successful outcomes are more likely with a good decision framework. Stay after it!
Congratulations! You’re asking the right questions and taking solid steps to secure better outcomes. If we can help you navigate any of this, please reach out to us.
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