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I have accepted a new job offer, and will be moving to another state in a few months. I would like help analyzing different mortgage options. I will be profiting very nicely from my current home sale - I currently owe less than 500k remaining on my mortgage, and comparable homes have been selling between 650k-700k (my house was purchased less than 4 years ago, so I was very lucky to be in such a booming real estate market). The new area has a depressed housing market, with homes currently selling for 10k more than they did 5 and 10 years ago, and almost no new construction. I've been in my current city for just under 4 years, and my family is not certain if we will be in the new area for more than 5 years (it's hard to know if you will like an area until you have lived there for a while).

I currently have a 30 year doctor's loan on my house that I will be selling. I am still eligible for a doctor's loan with 0 down. I will have enough to put 20% down on a 450k home (I just sold some stocks and bonds and have about 80k liquidity, and another 65k that my wife can temporarily withdraw from her IRA). I currently have about 220k of medical school federal loans at 4.6%, and I will also be looking to refi those at a lower rate. I will be almost doubling my salary at the new job and can get a comparable home for around 400-450k in the new city, so my plan is to pay down as much debt as possible without increasing overall spending over the next few years.

I have several questions - is it better to do another doctor's mortgage and continue to invest my excess cash available, do a 15-year mortgage or a 30-year mortgage and plan to pay it off in 15 years? Should I look to pay off student loans sooner (even if I refi at a lower rate of 3.5% or so), or the mortgage earlier, particularly if I may not be there more than 5 years and might just break even when I go to sell the house? Is the interest amortized the same as a 15 year if I pay a 30 year mortgage in 15 years? Barring any unforeseen circumstances, I can comfortably make payments at the 15 year rate with plenty of money left over. If I sell the house within 5 years, which option will save me the most money? Should I take the 100k or more that I make on the sale of my current house and put the majority to my student loans first? My thoughts are that the student loans follow me for life, but I can always sell and buy another home. What are your thoughts and which is the best mortgage option?

  • Do you have any other debts? (credit cards, cars)? – D Stanley Feb 13 '17 at 17:56
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    What the heck is a "doctor's mortgage/loan"? – keshlam Feb 14 '17 at 0:57
  • The only other debt is 1 car loan of 15k remaining. I have almost 400k in investments/retirement/cash of varying liquidity. – AEK05 Feb 14 '17 at 3:13
  • For those wondering, a "physicians mortgage" is one which doesn't have PMI but also doesn't have the required (or significantly lower) 20% down. whitecoatinvestor.com/personal-finance/the-doctor-mortgage-loan – Shawn Jan 2 at 22:05
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In your case it's all going to come down to the rates and how long you expect to live in the new house:

  • With a conventional loan you can put as little as 3% down. Then you have the option of PMI or a higher interest rate. If you choose the lower rate with PMI your total monthly payment is higher, but once you hit 20% equity you're in the clear with the lower rate for the rest of the mortgage. In your case, since you aren't sure if you would stay for more than 5 years, I would lean towards the higher rate without PMI, if the rate difference is reasonable (0.5 to 0.75%).
  • You'll want to compare the doctor's loan with the conventional loan side by side. My understanding is that the doctor's loan rate is slightly higher than conventional, but that's assuming you put very little down, and it may still be lower than conventional with a low down payment and no PMI.

As for whether to pay down the student loans or the mortgage first, you'll need to compare the rates, and also adjust for the tax deduction you'll get on the mortgage interest. (You make too much money to deduct any of the student loan interest.) If the student loan and morgage rates are similar, then most likely you're going to be better off paying down the student loans first.

As for 15 vs 30 year, typically the rates are better on the 15 year. If they were somehow the same, then you'd be better off with the 30 yr and making the equivalent payments to the 15 year simply so you have the choice of making a lower payment in the future if you ever want to. But generally, if you plan on always making the 15 year payment amount, then you would be better off going with the 15 year just to secure the lower rate. In your case though, sticking with the 30 year and throwing the difference at the student loan may actually benefit you even more, again due to the tax deduction of mortgage interest.

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It looks like with the sale of your current home you have enough liquidity to obtain credit on the best terms without tapping your wife's IRA.

The biggest factor to consider is the deduction on mortgage interest which reduces the effective interest on your mortgage significantly, particularly as you jump into a higher tax bracket. Along these lines, deferred retirement savings should have a higher priority than paying down the mortgage or your student loans.

Student loans should probably be your biggest priority to pay down. With the mortgage deduction, a 4% rate becomes effectively a 3.4% rate if you are in the 15% bracket, but as low as 2.6% effective rate if you are in the 35% bracket. Both of these are lower than the 3.5% rate that you can get on the student loans after refinancing.

This also assumes you aren't hit with the AMT. This is probably worth the cost of a quick consultation with a tax professional to go over these options and how they affect your taxes.

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So if I understand your plan right, this will be your situation after the house is bought:

  • Mortgage: 360,000
  • Student Loans: 220,000
  • 401(k) Loan: 65,000

Total Debt: 645,000

  • House: 450,000
  • Cash: 100,000

Here's what I would do:

  1. Wait until your house sells before buying a new one. That way you can take the equity from that sale and apply it towards the down payment rather than taking a loan on your retirement account. If something happens and your house doesn't sell for as mush as you think it will, you'll lose out on the gains from the amount you borrow, which will more than offset the interest you are paying yourself. AT WORST, pay off the 401(k) loan the instant your sale closes.

  2. Take as much of the remaining equity as you can and start paying down student loans. There are several reasons why they are a higher priority than a mortgage - some are mathematical, some are not.

Should I look to pay off student loans sooner (even if I refi at a lower rate of 3.5% or so), or the mortgage earlier ... My thoughts are that the student loans follow me for life, but I can always sell and buy another home

So you want this baggage for the rest of your life? How liberating will it be when you get that off your back? How much investing are you missing out on because of student loan payments? What happens if you get lose your license? What if you become disabled? Student loans are not bankruptable, but you can always sell the asset behind a mortgage or car loan. They are worse than credit card debt in that sense. You have no tangible asset behind it and no option for forgiveness (unless you decide to practice in a high-need area, but I don't get the sense that that's your path). The difference in interest is generally only a few payment' worth over 15 years.

Is the interest amortized the same as a 15 year if I pay a 30 year mortgage in 15 years?

Yes, however the temptation to just pay it off over 30 years is still there. How often will you decide that a bigger car payment, or a vacation, or something else is more important? With a 15-year note you lock in a plan and stick to it.

Some other options:

  • Have a smaller house for a few years to get the loans paid off, and start saving for the next house after that's done.
  • Rent until the loans are paid off - especially if you're not 100% certain that you'll stay there and if the housing market is not growing.
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If you don't think you're necessarily going to stay in this area for five years, consider another option: renting.

Five years is often quoted as the minimum length of time for buying (over renting), as the costs of the house purchase and the mortgage are significant - and if you're buying a new house every 5 years you're putting several thousand dollars of fees up front each time. If you don't assume that house prices will increase (as they won't necessarily), then you can consider these costs - say, $5000-$6000 for a $500k house - an extra 1% or so of interest that first year. If you are there 5 years, then you're paying 0.2% extra (more or less); that's reasonable, but if you're there only 2 years, you're adding 0.5% to your rate, which is pretty significant. You won't necessarily come out ahead here (versus renting).

Renting for a year or two gives you enough time to find out if you do like the area, and if you do, you buy then - with more knowledge of the area and a chance to make a purchase at the right time for you. You pay off your loans, or at least a chunk of them, now, save some of the rest, and then rethink in a couple of years. If you then don't qualify for a doctor's mortgage anymore, you just save up the rest of the 20% before making the purchase.

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