Buying a home after residency is a common financial topic among residents nearing graduation. It was a major conversation topic in our Squirrel Hill apartment during the last couple of years of Kerry’s residency.
You want to avoid becoming house poor, but also want a nice place to raise a family in. The question becomes, “How much is too much?”
If you want room in your budget for other things, you have to take a good inventory of what those other things cost. There is an excel file attached to the end of this post to help with that.
You can save your family much financial stress and still get a home you love by planning and knowing the real cost of owning a home.
When you are building your purchase price budget, don’t forget to include property taxes.
Look at the difference in property taxes between $400,000 homes that are only a short drive away from each other.
In this case, you would pay a 60% premium to live across the county line.
To put this in perspective, that extra $258 per month equates to adding $57,000 to the purchase price, assuming a 30-year mortgage at 3.5% interest. Except this $258 per month doesn’t end with your mortgage.
You may find it’s worth it if you prefer a particular school district, but being aware of how much extra you would pay helps you make an informed decision.
If you want a ballpark idea of what property taxes are for a home in a specific location, try one of the calculators available online. Once you find a specific house, you can find records for that home.
Local Income Tax
Some areas within the city limits of Pittsburgh have a 3% local income tax rate. Most other regions of the Greater Pittsburgh area have a rate of 1%.
A physician with a $180,000 salary would pay an extra $300 per month to live in a 3% area versus a 1% area. As a result, that equates to adding $67,000 to the purchase price, assuming a 30-year mortgage at 3.5% interest.
Local income tax and property taxes are stealth expenses. Not all homes of the same price truly cost the same.
A special perk available to those planning on buying a home after residency is a physician mortgage. The appeal of a physician mortgage is that it allows you to skip the fixer upper.
It does so by not requiring a down payment and waiving the cost of private mortgage insurance (PMI) in exchange for an adjustable interest rate, a higher interest rate, higher closing costs, or some combination of the three.
If you don’t have the time to spend on a fixer upper or the savings to put down on a home big enough for a growing family, then a physician mortgage can be appealing.
If you choose this route, it would be wise to save 20% of your purchase price as soon as reasonable to allow yourself to refinance with a conventional mortgage and no PMI if the right opportunity presents itself.
A conventional mortgage can require as low as a 3% down payment. Any amount under 20% will require you to pay extra each month for PMI.
If you have adequate savings available, then a conventional mortgage could make more sense in the long run.
The cost of homeowner’s insurance is highly dependent on the replacement cost of your home, the amount of liability coverage you want, the deductible, and the state you live in.
The average premium to replace a $400,000 home, with $300,000 of liability coverage, and a $1,000 deductible in the Pittsburgh area is $1,839 per year in 2020.
If being sued for liability concerns you, then it’s not a bad idea to look into an Umbrella policy.
Umbrella insurance is a type of personal liability insurance covering claims in excess of regular homeowners policy coverage.
A $1 million policy costs about as much as Netflix. If that helps protect you and keep you from worrying, then it’s well worth the cost.
You are now the landlord. If the furnace breaks, are you able to replace it?
Depending on the size of the home, you could be looking at a $10,000 expense. A home warranty can be nice to have for the first year to avoid any major surprises. Just be sure you know what it covers and what it doesn’t.
After residency, buying a home (or not) is one of the most financially impactful decisions you will make. Here are some bullet points to keep in mind:
- A personal residence is not an investment. It’s a lifestyle expense.
- Know how much the stealth expenses of property tax and local income tax add to the purchase price when comparing different areas.
- Make sure your home budget allows for the other things you love in your overall budget.
- Be prepared for stuff to break.
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