Pharmacist House: How Much Is Ideal?

Pharmacist House: How much house can a pharmacist afford?

I currently ~~own~~, have a mortgage on a home and I want to retrospectively go back in time as a new pharmacy graduate and crunch some numbers to see what is a good price point if a pharmacist wanted to buy a house.

I will also discuss if it is a good idea to even buy a house versus renting.

Purchasing a home is one of the biggest purchases in your adult life. It’s crucial to make an informed decision and consider all the financial aspects of owning a home before deciding to make the plunge and sign the dotted line.

The average pharmacist salary in 2019 is $126,210. I’ll be using this salary information to calculate how much house can a pharmacist afford.

Pharmacist House Scenario #1

Gross Monthly Income

I am using Bankrate’s new house calculator for the number crunching.

A few assumptions are needed since this is a hypothetical question. First, the calculator is asking for the gross monthly income. A pharmacist making around $126,000 will have a gross monthly income of $10,517.5.

We’re assuming that you’ve saved up $20,000 for a down payment of your dream house. Next, we’re assuming that you selected a 30-year conventional loan. Your yearly real estate tax will be approximately $2,500 coupled with an estimated $1,900 yearly homeowner insurance.

Interest rates for mortgages are at an awesome level right now. You can get a rate as low as 3.5% but dependent on your credit score and other factors, it can go as high as 4.5%. For this case study, I used the lowest interest rate available at 3.5%.

Monthly Expenses

When purchasing a home, there are a lot of questions to ask yourself. One of which is what is your monthly expenses.

Next, let’s assume you decided to buy a new modestly priced car of $30,000. Your monthly car payment is approximately $530.

If you’re a new pharmacy graduate, then you must factor in your student loan repayment. Let’s assume you owe the average student loan debt of $166,000.

As a newly minted Pharm.D., you will have to start to make monthly payments for your pharmacy student loan. If you elected for the extended repayment plan, which is a 25 years plan, on average, this comes out to around $1,000 per month.

Next up, you’ll likely have a credit card payment to deal with, we’ll say you owe $1,000 per month.

In in all, your total monthly expense is $2,866.67.

Buy Versus Rent

Based on all the numbers above, you have $913.33 left over for your mortgage. Based on all the inputted data, affordable home for you at this point is $223,394.75.

Pharmacist House Scenario #2

However, if we upped the ante a bit, things will get a little bit dicey.

For example, what if you decided to go with the 10-year standard repayment plan instead of the 25 years repayment plan.

I used the student loan calculator to calculate how much money you have to pay monthly if you chose the standard 10 years plan. Turns out, you have to fork out a whopping $1,885 monthly payment.

Secondly, what if you have more expenses each month than you thought and your credit card payment increased from $1,000 to $1,500 dollars instead?

With all the updated numbers, the calculator gave you an available mortgage payment of $-471.67 and the house you could afford is $-85,037.80.

This is not a typo, that’s right those numbers are negative. In this case, you have no option but to rent.

Pharmacist House Scenario #3

For our third scenario, we will go back to the original numbers but change just one thing. You didn’t buy that brand new car you wanted after all and instead decided to keep that old clunker of yours so you could buy your dream house instead.

In this case, your monthly expense is only $2,366.67. This option gives you the most leeway. You have at your disposable an amount of $1,413.33 for your mortgage payment and a house costing up to $334,742.25!

Just because you can doesn’t mean you need to buy a house that expensive. If you’re starting out with a small family, what are you going to do with all that space in that big house?

Ideally, you should live below your means. In this case, a small family home (1,300 square fee) costing around $150,000 is enough.

In this case, you have more money left over to pay extra toward your loan, get a new or used car, start an emergency fund. The possibilities are endless.

You don’t have to take my words for this. You can check out one of my favorite podcasts from Your Financial Pharmacist. I’ll embed it for your listening pleasure.

In this podcast, Jason Long discussed how he was able to retire as a millionaire by making smart choices like buying an affordable house and invest in index funds to achieve financial independence.

This is the exact blueprint that I am planning on implementing as I progress in my personal finance journey.

Private Mortgage Insurance (PMI)

Another important point to make is your down payment. Conventional wisdom and real estate experts recommend you to save at least enough money to put a 20% down payment before purchasing your first home.

If you’re able to do that, you can save yourself money buy avoiding the private mortgage insurance (PMI).

According to Investopedia, PMI is defined as:

Cost – PMI typically costs between 0.5% to 1% of the entire loan amount on an annual basis. You could pay as much as $1,000 a year – or $83.33 per month – on a $100,000 loan, assuming a 1% PMI fee.
Investopedia: 6 Reasons to Avoid Private Mortgage Insurance

Avoiding the PMI can save you hundreds of dollars per month.

Making the case for renting rather than buying

Sometimes it is better to rent than to buy a house. There are numerous reasons for renting rather than buying. Here are the top ten reasons to rent and not buy.

Not ready to settle down in one particular city
Don’t have a use for the extra space
You get to skip on real estate taxes
You can avoid the dreaded homeowner association and its fees
No maintenance costs or repair bills
You don’t have to worry about decreasing property value
Flexibility to downsize or upsize
Lower insurance cost
Lower utility cost
Renting is cheaper than a mortgage payment, dependent on where you live of course

And finally, since you’re not buying a house you don’t have to save for the 20% down payment. Unless you plan on buying in the future, then you have to save. Oh, the competing priorities!

But then again, there’s nothing wrong with wanting to buy a house. The choice is up to you.

Final Thoughts

When we first bought our house, my wife and I just drove around a few subdivisions and pulled the trigger when we save a house that we liked. We ended up buying a property that was in the 190’s range.

We put a $20,000 down payment but it was not enough to cover the PMI, therefore, we’re still paying for that now.

We love our house and all the accommodations it afforded us, We didn’t buy a house that was outside of our reach but we could have planned for it better.

But I wished we had enough money saved to put down enough money to forgo the PMI payments each month.

As of right now, we are planning on paying off our mortgage in the next 5 years or so. but that is a topic for another discussion.

Take Away Points

The take away points of this post is to do your due diligence. You have to figure out exactly what you want and take action toward your goal.

Do you want to pay off your student loan early? Do you want to buy a new house, a new car, and pay off your student loans slowly over time? Answering these tough questions can certainly help guide you to the correct choice to make.

The best advice I can give you is to buy a house that is enough for your needs. Otherwise, if you splurge and overstretch your finances then you may regret it later and this one decision can derail your finances for the foreseeable future and preventing you from your path toward financial freedom.