The Complete Guide To Physician Mortgage Loans

The Complete Guide To Physician Mortgage Loans

On the surface, physician mortgage loans look great. No money down. No jumbo limits. No private mortgage insurance (PMI). Finally, it seems like a product exists to reward you for your time training to be a physician. After all, it’s been tough. For the past few years, you’ve watched many of your friends become homeowners.

While they were posting their latest photo of a fun, DIY home renovation, you were stuck in the library studying pathology. While they hosted a summer barbeque in their own backyard, you were sitting through an 8 hour board exam (and timing your breaks perfectly so you could scarf down a protein bar.)

But, let’s be real. Lenders are in business to make money, and they can’t just give you a free ride. So, how do physician mortgage loans stack up against everything else that’s available? Are they really as good as they sound? Let’s find out.

At this point in the home buying process, you’ve already made a solid decision about how much to spend on your home and you have your financial ducks in a row. So, the next step is to decide how to finance your home and whether a physician mortgage loan is the best option for you.

To help you make an informed decision, we’ll cover:

  • How Physician Mortgage Loans Work
  • Alternatives and How They Compare
  • Deciding On The Best Mortgage For Your Situation

Physician Mortgage Loans

First, let’s talk about why physician mortgage loans even exist. The reason is that physicians are extremely profitable customers for lenders. They take out big loans early in their careers and almost always pay them off. Lenders use physician mortgage loans to lock in early-career physicians by lending them more money with fewer stipulations than their competitors. They make it even more appealing by marketing it as a “special program” just for physicians.

Keep in mind, though, that their ultimate goal is to get you in the door and sell you other products as your needs change. A medical student transitioning into residency with zero earnings history, no cash and a boatload of student loans would normally never qualify for a mortgage if it wasn’t for physician mortgage loans. However, there’s no such thing as a free lunch. These loans are appealing at first, but often end up being more expensive than the alternatives. That’s why it’s so important to compare physician mortgage loans to other types of mortgage loans before making your decision.

What’s So Special?

So how is the physician mortgage loan different than a typical mortgage? Here are some of its common features:

  • Zero (or very low) down payment required
  • No private mortgage insurance “PMI”
  • No rate increases on jumbo loans (typically, loans larger than $417K)
  • Lending based on a physician’s signed employment contract
  • Less critical of student loan debt

Who Counts as a Qualified Borrower?

A “qualified borrower” is normally a medical resident, fellow or attending physician with a signed contract for employment. Some lenders also include dentists, veterinarians, and other doctors.

Who Offers Physician Mortgage Loans?

There’s a growing list of lenders offering physician mortgage loans, including:

Also, please note that we do not have a financial relationship with any of these lenders. If you’re a lender and would like to be added to our list, please let us know.

Mortgages Expenses:

So, now that I’ve explained why physician mortgages are different and why they appeal to many young physicians, it’s time to take a look at mortgage expenses. Many people focus on the monthly payments when considering buying a home, but there are several costs that make up your total mortgage expenses:

  • Interest – The cost of interest is based on the interest rate, loan balance and loan repayment term
  • Closing costs – A one-time, out-of-pocket expense paid at closing, wrapped into the loan balance or wrapped into the loan in the form of a higher interest rate
  • PMI – The monthly fee typically paid until reaching 20% equity

Closing costs and interest rates are kind of like a teeter totter: reducing closing costs on a mortgage increases the interest rate. Or if you want the lowest rate possible, you’ll have higher closing costs. You can see how this works in this breakdown from the Mortgage Professor website.

Pic 1

As for PMI, you either have it or you don’t. It’s typically going to cost between 0.3% to 1.5% of the original loan amount per year. A surefire way to avoid PMI is to put 20% down. Some loans, however, like the physician mortgage loan, do allow you to avoid PMI even though you don’t have 20% equity.

Another way to avoid PMI is to get two mortgages – one that finances 80% of the deal and the second that covers the remaining debt (up to 20%). But keep in mind that all of these PMI avoidance tactics come with additional costs.

Rates and Costs – An Example

Let’s assume you’re a physician considering a $500,000 home. You have fantastic credit but no cash for a down payment. What are your options for mortgages with no PMI? Here are the most popular:

  • Physician Mortgage Loans: 30 yr fixed rate – 4%
  • Physician Mortgage Loans: 7/1 ARM – 3.25%
  • Conventional 80/20:
    – First mortgage (80%) – 30 yr fixed – 3.5%
    – Second mortgage (20%) – Interest only HELOC (prime + .5% or 4% today)
  • VA Mortgage (must be military): 30 yr fixed rate – 3.25%

Which Option Should You Choose?

If you’re in the military, the VA Mortgage is usually a home run, especially if you’re considered disabled.

Physician mortgage loans have the highest interest rate but it’s locked in. The ARM has a better rate than the 30-year physician mortgage, but the rate becomes variable after seven years.

The conventional 80/20 offers the best rate on the primary mortgage, but the second one has a variable rate.

Assuming you’re not in the military and can’t get a VA Mortgage, you should base this decision on how long you’ll own the home and how much you plan to pay on the mortgage. Let’s go over the best options based on these factors:

  • 0-7 years – If you don’t foresee yourself living in the home for at least seven years, the Physician Mortgage Loan 7/1 ARM is your best option. But, really, if you plan on living in it for fewer than five years, you should be renting.
  • 7+ Years (and average income and savings) – In this case, the Physician Mortgage Loan with 30-year fixed rate is the better choice. But this should be revisited when you have 20% equity, you drop below the jumbo limits or if rates drop in general. Once you fit the profile, you can often refinance into a new, non-physician loan that’s much more competitive.
  • 7+ Years (and ability to pay the HELOC off very quickly) – The Conventional 80/20 typically provides the best deal if you can get the home equity line of credit knocked out within a year or two.

To simplify the math, we didn’t include closing costs. We always suggest asking lenders to provide an estimate with as close to zero closing costs as possible – at least for starters. That way, compare apples to apples. It’s much easier to compare mortgages structured similarly from a cost standpoint.

Should You Put Cash Down?

What if you have some cash to put down or are considering waiting until you have the cash? In that case, you’ll be comparing the physician mortgage with the conventional 20% down mortgage. Once again, we’ll assume both are structured to wrap closing costs into the loan to make the math simpler. To give you a clear comparison, let’s structure the 20% down conventional loan to have the exact same payments as the physician mortgage loan. The only difference is the down payment and the interest rate.

Option #1 – $100K down payment conventional loan

  • $400,000 balance
  • 18.1183 year fixed rate at 3%
  • $2,387.08 per month principal and interest

Option #2 – $0 down payment physician mortgage loan

  • $500,000 balance
  • 30 yr fixed rate at 4%
  • $2,387.08 per month principal and interest

Looking at those numbers, you’re probably thinking you’d take the $0 down option. Maybe you don’t have that much cash available or maybe you think there are smarter ways to use that $100,000. You could use it to pay off loans or start investing. And 4% is still a really good rate. But how does it really compare to the 20% down option?

Pic 2

Pic 3

The total lifetime interest costs:

  • Option 1 – $118,998
  • Option 2 – $359,348

As you can see on the charts above, putting $100,000 down will end up saving you over $240k in interest. Plus (and this is a huge plus), you’ll get your mortgage paid off almost 12 years sooner.

Additionally, don’t forget that having equity in your home will provide greater security and flexibility, especially if something unexpected happens. With the 100% financed physician mortgage loan, you should expect to start out underwater. If something doesn’t work out and you’re forced to sell quickly, you should be prepared to write a potentially large check for up to 10% of the purchase price just to get out of the home.

On the flip side, if you do come up with the $100,000, you could finance 100% using the physician mortgage loan and invest the cash. If you run those numbers, the end result will look much better. But not only does this require an aggressive investment, it also requires greater leverage on your home, which further adds to the risk. It will also require many years of disciplined investing and assumes you never spend any of it. That’s not impossible, of course, but it’s much easier said than done.

At the end of the day, getting the conventional mortgage and paying it off more quickly is a much better deal. If you don’t have the cash for a down payment, however, the physician mortgage loan is a solid alternative worth considering. Still, it’s not always automatically best solution.

What if You Already Have a Physician Mortgage?

If you already have a physician mortgage loan but you’re not paying attention to it, there’s a good chance you’re throwing away good money. You should review your options for refinance if any of the following occur:

  • Interest rates drop
  • You reach 20% equity
  • You get below the jumbo limits
  • Your plans change

In the past few years there’s a good chance all four of these things have happened for many of you.

Here’s a scenario that illustrates one of the most common money saving opportunities for physician mortgage loan borrowers:

Dr. Smith bought her home using a 100% financed physician mortgage loan at 4.75% in July of 2013. The original loan amount was $500,000 with monthly principal and interest payments of $2,608.24. The lifetime interest for that loan would have been $438,965.21. Fast forward three years to today and Dr. Smith’s property has appreciated to around $600,000 in value and she owes $475,712 on her original mortgage.

When she bought the home, she had no cash to put down and very few options. The physician mortgage loan was probably her best bet. But now that she has over 20% equity and a healthy earnings history, all sorts of options have opened up. Odds are she’d be able to qualify for the best deal around.

If she had the initiative to refinance and wanted to keep the payment similar to the one she was already used to, she’d be looking at a new 20-year fixed mortgage at 3%. The monthly principal and interest payment on the $475,712 new mortgage would come up to $2,638.29. More importantly, she’d be shaving seven years off her repayment term with only a $30/mo increase in payment. Now that’s a home run!

She could also consider refinancing into a new physician mortgage loan. That would have been better, but nowhere near as appealing as the conventional mortgage. She’s now in the sweet spot for traditional mortgages and she should take advantage of it.

Pic 4

When you’re considering a refinance, be sure to check out a few different lenders.

And remember, while refinancing into a new physician loan may be a good deal, it’s not always the best one. Doing your homework before refinancing your physician mortgage loan will pay off. Ideally, you also have someone, like a financial planner, who can help you analyze your options objectively.

When Should You Avoid Physician Mortgage Loans?

Perhaps by now, you’re more excited than ever about buying a house, especially now that you know an option exists where you can get a home with $0 down and no PMI. However, in order to cover all my bases, I did want to point out that you should probably stay away from physician mortgage loans if any or all of these conditions apply:

  • The ease of getting a physician mortgage loan is tempting you to consider buying too much house
  • You have (or will have) at least 20% to put down on the home. In this situation, a conventional mortgage is best.
  • You’re in the military. In this situation, look at a VA loan instead
  • You expect a large influx of cash shortly after buying and are using the physician mortgage to get the deal done now
  • You aren’t comfortable with the prospect of starting out 5-10% underwater on your home (in other words, you don’t want to write a big check to get out of it if your circumstances change)

Alternatives to Consider Before Signing

In my opinion, it’s best to wait until you have at least 20% to put down on the home. That way, you’ll to get the best deal possible. Plus, you don’t have to take on any of the risks that come with financing anything 100%.

If you like that idea, go ahead and rent for now and start stashing away some cash in preparation for buying your first home. If you already own a home and plan to upgrade, the best way to save for your future down payment is by paying your current mortgage off more quickly. You might even consider refinancing your current mortgage into a shorter term to get used to monthly payments. You can also structure the new loan so that it allows you to build equity to the amount necessary to have 20% by the time you plan to upgrade.

There are several other types of loans we didn’t cover that could come into play. Here are some of them:

1) The Conventional Loan with PMI typically requires at least 10% down. If you have 10% to put down, this may be a better option than the physician mortgage loan, if you plan to own the home long enough for the PMI to stop.

2) The FHA Loan typically requires 3% down and has very competitive rates, but it also comes with a monthly permanent fee similar to a PMI. The monthly FHA fee makes it way less appealing for most borrowers.

3) The Jumbo Loan with PMI typically requires at least 10% down. This type of loan would be worth comparing to larger physician mortgage loans. Often, it comes down to how long you plan to own the home. The Jumbo might have a lower rate but it also comes with PMI.

Other Mortgage Resources

There are many online resources to help you learn more about mortgages. Some examples include:

  • The Mortgage Professor: A site with several mortgage calculators and spreadsheets to help analyze mortgage options.

Also, if you’re feeling overwhelmed by all of these options or have any questions about anything mentioned in the post above, please reach out to us. We help clients navigate these types of decisions all the time. We’re happy to set up a free consultation to find out whether we’re a good fit.

Don’t miss out!

Join our growing network of other smart people who get financial tools and tips delivered right to their inbox.

Feeling like you don’t have control over your money?

Let's fix it! Download this guide now and take control in less than 15 minutes.

What's Next

Have questions or care to share your experience? Ask/share in the comments!

Are you interested in having a conversation? We’d love to connect! Click here to request a free consultation. We look forward to hearing from you.

Looking to create your own financial plan? Click here to download our free guide to getting started.



© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

The Pros And Cons Of The 15 Year Mortgage For Physicians

The Pros And Cons Of The 15 Year Mortgage For Physicians

Q: What are the pros and cons of the 15 year mortgage for physicians or other high income professionals?

Many physicians and their advisors fail to give the 15 year mortgage a fair shake. Here are the pros and cons…


The Pros

 

Forced wealth building

Your odds of having more wealth 15 years from now are considerably higher if you opt for the 15 year mortgage over the 30 year mortgage. The disciplined analytic would immediately object and claim you’ll actually be wealthier going with the 30 year and investing the difference. The numbers will typically agree but the numbers miss one massive factor. It’s exponentially harder to make your required mortgage payment AND invest an equal amount systematically over 360 months than it is to make your required mortgage payment for 180 months.

Even the most disciplined people miss a month here and there every couple years. The numbers don’t look so pretty when you opt for the 30 year and spend the difference, even if it’s only a fraction of the difference. There are other important and more complex errors we regularly see people making in this analysis which you can read more on in this Nerds Eye View article.

Less interest paid

The 15 year mortgage will save considerable interest over to the 30 year. This is a sure bet. Most people would be excited to get a guaranteed 4% on their investment. Yet they stretch their mortgage out as long as humanly possible. Why not pay more toward the mortgage and consider those payments to be your conservative investment allocation. If your considering physician mortgage loans, you should check this guide out first before going down that path.

Faster path to true ownership

It’s not always about the numbers. Although hard to quantify, there is a major qualitative benefit associated with true home ownership that should not be overlooked. Ask anyone you know that owns their home outright how they feel about it. True home ownership comes with additional security and financial peace.

Greater future cash flow flexibility

The 15 year mortgage will be paid off sooner than longer term mortgages. Once it’s paid off, monthly required expenses instantly decrease. Not having a mortgage provides much greater cash flow flexibility which can be especially appealing when you’re retired and living off your assets.

The Cons

Weak creditor protection in many states

In some states, the equity in your home is not protected fully from creditors. The 15 year mortgage will cause you to build equity in your home faster than the 30 year mortgage. Therefore if you’re in a state with weak creditor protection on homes, you should take that into consideration when comparing the 30 and the 15 year mortgage. If this is of concern, you should see legal counsel on the matter.

Less interest deduction

The 15 year mortgage will require less interest than the 30 year mortgage. Most physicians are able to deduct some or all of their mortgage interest on their taxes. Therefore, the 15 year mortgage will result in more income tax paid compared to the 30 year. The specific differences will depend totally on your circumstances. However in every case, the tax savings will never totally offset the interest. And at the end of the day, after you net out the tax differences, the 15 year still results in less total interest.

Less to invest

Monthly principal and interest payments will be higher with the 15 year compared to the 30 year mortgage. As a result, you’ll have less to invest (or spend). This will reduce your ability to build wealth in the alternative investment. However, it will also increase the pace at which you build home equity. And this gets back to our first point. Investing systematically requires much more discipline than paying a required mortgage payment.

Less cash flow flexibility today

This alone can be a deal breaker. If you opt for the 15 year mortgage, will you be forced to reduce savings? Is the required payment of the 15 year mortgage going to restrict your ability to make ends meet? If so, stay away from the 15 year mortgage. And consider this a sign you’re spending too much on the home no matter which mortgage you take on. When considering buying a home, you should be able to live your ideal life AND afford the 15 year mortgage OR the 30 year mortgage. The choice between the two should really come down to other pros and cons. Avoid going with the 30 year simply because it’s the only option you can afford.

At the end of the day, it really depends on your goals and circumstances.

Don’t miss out!

Join our growing network of other smart people who get financial tools and tips delivered right to their inbox.

Feeling like you don’t have control over your money?

Let's fix it! Download this guide now and take control in less than 15 minutes.

What's Next

Have questions or care to share your experience? Ask/share in the comments!

Are you interested in having a conversation? We’d love to connect! Click here to request a free consultation. We look forward to hearing from you.

Looking to create your own financial plan? Click here to download our free guide to getting started.



© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

10 Ways We Have Saved Our Clients Money

10 Ways We Have Saved Our Clients Money

“I can’t afford to pay for one.”
“My net worth isn’t high enough.”
“I don’t have any extra money to save.”
“I’ll do it next year.”

We hear all kinds of reasons NOT to engage in financial planning – some are legitimate, but many are just misinformed views about what financial planning really entails. Here, our ultimate objective is to put you in the best overall financial position to achieve your goals. We review all aspects of your financial life, from basic budgets and insurance, to more complicated investment and estate planning analysis. Our review of all of these areas frequently allows us to find money-saving opportunities for our clients along the way. Here are some examples of the more common ways we’ve been able to accomplish this:

1) Tax Planning & Review

To say that taxes are complicated would be an understatement. Fortunately, we see tax returns every day. We are familiar with what we should and should not see on a tax return, and spotting those errors and omissions have literally saved our clients thousands:

  • Did you miss a deduction?
  • Did you know there’s a credit for that?
  • Are you withholding too much from your paycheck instead of putting that extra cash to work for you throughout the year?
  • Would you be better off making pre-tax or roth contributions?
  • Are you tax-loss harvesting in your taxable accounts?
  • Should you file jointly or separately? (especially when considering your student loan repayment plan)

These are all things that can have a large & direct impact on your bottom line. Are you sure that you haven’t missed something? A second or third set of eyes can help make sure you don’t!

2) Insurance Analysis

Very rarely do we find that people have the right amount or type of insurance… whether it be life insurance, homeowners insurance, auto insurance, etc., it’s often in need of improvement. To be clear, we do not sell these products, but we do run an analysis on what amounts of coverage you should have and what kinds of coverage you should have.

For example, it’s very common for people to get their home & auto insurance early on and never revisit it. And you’d probably be very surprised to learn how many people are over-paying for their insurance (some significantly – $1k/yr+). We have helped clients cut back on monthly premiums just by assisting them in comparing coverage with different companies.

We also see many clients paying for insurance they DON’T need. Some are over-insured, some are paying for permanent life insurance they don’t need, some are paying for extra benefits & riders on their policies that they’ll never use, and many can save hundreds a year by paying premiums at a different frequency (semi-annually or annually vs. monthly) and just don’t realize it.

3) Employee Benefits Review

Similarly, we see a lot of people paying for benefits they don’t need, and some who are not utilizing benefits that could help them. $10/paycheck for that unneeded insurance may not sound like much now, but when you pay it for 10 years.. there’s ~$2,500 you’ll never see again.

Are you using your HSA? Most people aren’t. Do you understand the benefits of an HSA? You might be interested to know that you are potentially better off saving here than you are your IRA from a tax-standpoint. Further, did you know that many companies make HSA contributions on your behalf? We’ve seen company contributions up to $2,400/yr! That’s a lot of free money & you could be missing out! Not to mention the potential savings in health insurance premiums.

And then there’s the retirement plan – are you using this in the most efficient manner possible? Are you using the right plan? Does it make more financial sense to use your 401k, 403b, or 457? Are you getting your full employer match? Does your plan have a “true-up” option? If not, you could be missing out on part of your employer match and not even realize it.

4) Student Loan Analysis

This is a biggie – I’m talking 5-figures in potential savings big. Student loans are a bear of a topic and it’s very difficult to find a planner who truly understands the ins and outs. Fortunately, we make it a point to keep up with the changes & stay informed because it drastically affects such a large percentage of our client base. If you can’t answer these questions, you may stand to benefit from a discussion:

Especially for someone with a high student loan balance, getting help with this is CRITICAL and can have a MAJOR impact on your future.

5) Investment Expense Reduction

Most people don’t understand what they’re paying for with their investments, or the enormous effect these fees can have over the long-run. Check out the image below. This scenario assumes you have a 401k with $100k in it today. You max it out at $18k each year, and your average return before fees is 8%. Over 30 years, the difference between a portfolio with an expense ratio of .25% and .75% is over $300k! And then if you compare .25% and 1.25%, that jumps to over half a million dollars.

Capture

That is SERIOUS money, and most portfolios we review are closer to the 1.25% end than they are the .25%. Do you know how to determine what you’re paying? Are you literally missing out on hundreds of thousands of dollars without even realizing it?

6) Debt Refinance

Especially in today’s market, refinance opportunities are everywhere… auto loans, home mortgages, etc. Do you know if your rates are competitive? If not, do you know which lenders to go to? How do you keep those closing costs down? Recently, we helped a client refinance from a 30-year mortgage to a 20-year mortgage while keeping the monthly payments approximately the same. Not only did this save thousands of dollars in interest a year, they’re now going to pay off their home several years earlier than anticipated.

And then there are other questions to consider.. Should you get rid of your ARM? Are you paying PMI? What it would take to get out of PMI? What about physician mortgage loans?

7) Estate Planning Analysis

Some of the biggest potential issues we find are with beneficiary designations. Sure, you may have the right amount of life insurance coverage in place, but is it set to go to the correct person? Most of the time it is.. But sometimes that $2M death benefit is still set to go to your ex-spouse. Or your parents. We’ve seen this on a handful of occasions, and this small error could mean potential ruin for your loved ones. Make sure your hard earned money is going to fall into the right hands.

8) Salary Negotiation & Contract Review

We do a lot of pay stub and tax return analysis as a part of our services, so we likely have a pretty good idea of what people in your field can expect to be paid. We’ve encountered a few clients that were underpaid compared to what we typically observed in their field, and encouraged them to present their findings to their employers and discuss/negotiate opportunities. So far, outcomes have been positive!

Or for those going into a new job, do you know what to expect from your salary and benefits package? We are aware what the market dictates… especially for physicians. Are you getting a good (or at least fair) deal? Should you be negotiating for more? Are you missing out on anything?

9) Big Financial Decisions

Are you considering making a major purchase? Buying a new car or a new house? Have you sat down and thought about what you SHOULD afford, versus what the lenders tell you that you CAN afford? Because there is a major difference. Have you considered your financing options and how they can affect your interest rate and out of pocket costs?

Or if you have a rental property, have you taken the time to sit down and analyze its profitability? It’s not as simple adding up as the rent you collect. Have you calculated the return you actually realize after taxes, maintenance, etc? Many rental properties we analyze are not nearly as profitable as an alternative investment. Make sure you’re not missing out on earning more money somewhere else.

10) Time Savings

And for your most important asset – your time… it’s nearly impossible to put a dollar amount on this one. What is an extra hour of family time, relaxation time, time with friends, etc. worth to you? How do you quantify that? You really can’t, because time is invaluable. We allow clients to outsource tasks to professionals, which, in turn, allows them to spend more time with the people they love, doing what they love.

After running through those points, it becomes more clear that financial planning can be for everyone. It’s not just about investments, and it’s not just for the 1%. If you don’t work with an advisor yet, are you doing everything above for yourself? If not, you could be missing out on both time & money saving opportunities. Or if you do work with an advisor, is he/she doing everything above for you? If not, it might be time to consider a change – make sure you work with an advisor you trust, and who will work in your best interest 100% of the time.

Don’t miss out!

Join our growing network of other smart people who get financial tools and tips delivered right to their inbox.

Feeling like you don’t have control over your money?

Let's fix it! Download this guide now and take control in less than 15 minutes.

What's Next

Have questions or care to share your experience? Ask/share in the comments!

Are you interested in having a conversation? We’d love to connect! Click here to request a free consultation. We look forward to hearing from you.

Looking to create your own financial plan? Click here to download our free guide to getting started.



© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

How Much Should Physicians Spend on Their Home?

How Much Should Physicians Spend on Their Home?

So you’re pre-qualified for the million dollar home, but should you buy it?

House Poor

According to Investopedia, “house poor” is a situation that describes a person who spends a large portion of his or her total income on homeownership, including mortgage payments, property taxes, maintenance and utilities.

If you’re house poor, you don’t have the money to do other important things such as saving, giving, or traveling. Basically, your home expenses eat up the majority of your disposable income.

Lending Standards

Today, mortgage lenders are happy to lend money as long as your Debt to Income “DTI” ratio stays below about 40%. Your DTI ratio is equal to your total required debt payments (principal and interest only) divided by your gross (pre-tax) income.

Here’s an example:

Image 1

  • Total Debt Payments = $30,000
  • Total Gross Income = $120,000
  • DTI Ratio = ($30,000 / $120,000) = 25%

Problems With Using DTI

With DTI, the only considerations are income and debt payments. That should tell you something right there… it fails to consider any other home costs such as maintenance, insurance, taxes and improvements. DTI also leaves out savings, giving, taxes, travel, and other spending.

How Physicians Become House Poor

Let’s use the same example and assume this person is wanting to upgrade to a nicer home. Mortgage lenders, especially those offering physician mortgage loans, will likely approve a mortgage with annual principal and interest total payments up to $30,000.

Image 2

  • Total Debt Payments = $48,000
  • Total Gross Income = $120,000
  • DTI Ratio = ($48,000 / $120,000) = 40%

If you’re financing 100% and using a 30-year fixed mortgage at a 4% interest rate, that’ll get you into a mortgage just under $530,000. That’s a really nice home for an annual income of $120,000. It’s also the ultimate definition of house poor.

Now, let’s consider everything else that comes with owning a $530,000 home. The house alone with have the following annual expenses:

Image 3

I’m sure you’re probably thinking that maintenance is too high, but it’s pretty realistic. Experts suggest setting aside 2 – 4% of the value of the home just to keep it in good working order. And this is before any upgrades!

Keep in mind we didn’t include any extras: home improvements, security systems, lawn care, landscaping, or HOA fees. This is bare bones – get you in the house and keep it in the condition you bought it. Nothing more.

So let’s see where the $120,000 annual income stands:

Image 4

This leaves you a whopping $2,000 per year for giving, saving, and any spending above basic necessities! Zero wiggle room or margin for error. This screams house poor. And this is how lenders determine the maximum amount that they’ll loan. It’s basically the most you could possibly handle and still be able to put food on the table (and that’s it). If they were to lend more than this (which they did back in the early 2000’s) it’s almost a guaranteed bankruptcy or foreclosure.

The Not So Obvious House Poor Example

There are different levels of house poor. Let’s say a young physician is starting in practice and wants that million dollar home. Let’s see how these numbers shake out.

Image 5

With a DTI of around 35%, you’ll qualify from the lender’s perspective with lots of room to spare. You’ll be left with ~10% of income to furnish the home and bump up your lifestyle a touch above the level you were living in residency. It’s unlikely there will be any leftover to save, though, so you’d better be prepared to work forever. Your kids won’t get any student aid for college because you make too much money. And you aren’t in a good position to have any leftover money to help them. So they better be prepared to take out large student loans. But… you’ll have a pretty sweet house.

So what about $350,000 income? Is that gonna do the job? If we assume taxes increase to 30% and everything else is the same, you’re left with $82,712 per year (DTI ~ 25%). That would probably be enough to save for a very average retirement, assuming you were still relatively young. And the rest would allow for a very modest lifestyle increase. It would be very challenging to save for college costs and build up emergency reserves. But it would be possible with discipline.

Essentially, if your home expenses create a situation where you’re not able to live your ideal lifestyle, it’s a form of being house poor.

The Wrong Way To Determine Home Price

Most people ask the question, how much house can I afford at my income? This is the approach the lending and real estate industry use. This “debt first” approach is the wrong approach.

Some people use rules of thumb to determine the appropriate amount to spend on a home. This only works if you fit into the exact profile or situation the rule is based on.

The Right Way To Determine Home Price

First, don’t take this lightly. It’s not exactly easy to un-do a home purchase. And by all means, don’t rush! Take a minute to logically think through your best course of action first BEFORE you start checking out houses.

Determine Your Budget

Your budget should be based upon your goals and financial circumstances. FIRST – figure out what taxes will be, what you’d like to give, and what you should be saving to hit short and long term goals! What’s leftover is what you have to work with. Odds are you already have some financial obligations such as a family to support, student loans or other debts to pay off.

Subtract out your existing lifestyle and debt obligations from what’s leftover. This leaves the disposable income you should consider when making the home decision. And don’t forget to consider anticipated lifestyle increases and margin for error! Those should be included in the disposable income figure.

Set a goal for how quickly you’d like to payoff your home. If you’re thinking 20 years, you should look at 20 year mortgages. Don’t fall for the mind trick of convincing yourself you’ll go with the 30 yr and overpay regularly. Really? Show me someone that’s actually done that.

Don’t forget to add in all the other home expenses besides the debt payment when looking at total home costs. Using the $250,000 income example, here is how this might shake out…

Income = $250,000

  • Minus Taxes (20%) – $50,000
  • Minus Giving (10%) – $25,000
  • Minus Saving (20%) – $50,000
  • Minus Necessities (~150% poverty) – $30,000
  • Minus Existing Debt – $30,000
  • Minus Desired Lifestyle Increase (outside home) – $20,000
  • Remainder (for home budget) = $45,000

Let’s assume the goal is to pay off the mortgage in 15 years or less. Based on this goal and the remaining cash flow, the home mortgage absolute maximum should be $350,000 (assuming 100% is financed at 4% 15 yr fixed). This is how that would look:

  • Principal and Interest – $31,068
  • Other Home Costs (4%) – $14,000
  • Total Home Costs – $45,068

If the size of the mortgage goes above $350,000, it’s going to start eating into your other financial goals. Something will have to give.

So once you have a very specific budget, then it’s time start talking to lenders and realtors and begin looking at homes within your price range. Don’t even bother looking at homes outside of your range. Make it clear to your lender and realtor that your range is set in stone.

Keeping Priorities In Order

The home purchase experience is extremely emotional. It’s hard enough to be logical and keep priorities in order when emotions run high. If those priorities aren’t set solidly in stone BEFORE starting the process, you’re setting yourself up to make a poor decision.

Don’t miss out!

Join our growing network of other smart people who get financial tools and tips delivered right to their inbox.

Feeling like you don’t have control over your money?

Let's fix it! Download this guide now and take control in less than 15 minutes.

What's Next

Have questions or care to share your experience? Ask/share in the comments!

Are you interested in having a conversation? We’d love to connect! Click here to request a free consultation. We look forward to hearing from you.

Looking to create your own financial plan? Click here to download our free guide to getting started.



© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Simple Steps To Determine if You Should Refinance Your Mortgage

Simple Steps To Determine if You Should Refinance Your Mortgage

So, Brexit was big news! Everyone thought it would crush investments. And it did for a couple days. But as you can see below, investments fully recovered a few weeks later. So much for the stock market crash.

Capture

Source: Morningstar Chart Vanguard Total Stock Market Index ETF

But you probably missed the other big Brexit news (big in my book)… Mortgage rates dropped again, and they haven’t recovered yet. If you have a mortgage, pay attention. Now is a great time to consider refinance. Thank you, Brexit!

So let’s talk mortgage refinance. I’ll cover the following:

  • When To Avoid Refinance
  • Finding Refinance Quotes
  • All-in Loan Costs
  • Running The Numbers
  • Comparing Options
  • Good Debt vs. Bad Debt

When To Avoid Refinance

Some of you may already be good to go. If you’re not sure, here’s how to verify. Look up current refinance rates online. Zillow provides updated rates on various types of mortgages here.

Determine your scheduled pay off date. For example, if you took out a 30-year mortgage one year ago and make the minimum payments, it’s simple – you have 29 years left. Or, if you overpay your mortgage, run an amortization calculator to determine how long your payoff will take.

Then, compare your interest rate to the current rates being offered for similar types of mortgages (15 year/15 year, 30 year/30 year, etc). If your current rate is equal to or lower than marketed rates, refinance is likely not for you. Typically, advertised rates are the best possible outcome.

There are some exceptions to this rule. For example, if your rate is competitive but you pay PMI (mortgage insurance) AND you have 20% or more equity, you may still benefit from refinance. Or maybe you have a 30 year mortgage but have zero intention of staying in the home for more than a couple years, the 5-year ARM rates could be a much better comparison when considering refinance.

Finding Refinance Quotes

If your rate check shows that there’s potential for improvement, the next step is looking at actual proposals.

Tip: If you don’t know your credit score, run it yourself before starting this process. Lenders want to know your score so their quotes are accurate. If you initiate the process without knowing your score, they’ll encourage you to let them run it. However, if you allow 3 lenders to run your credit, it’ll pull your credit score down a bit. Instead, check your credit yourself (which doesn’t ding your credit) and share your score with the proposed lenders. This should be enough info for them to run a good quote. Eventually they’ll have to run your credit, however, it’s best if you can delay this until you’ve confidently locked into the best refinance option. Here are a few free resources to check your credit: Quizzle, Credit Karma & Annual Credit Report.

You’ll want to identify 2-3 quality lenders that are likely to provide competitive mortgage offers. If you work with a financial planner, they should be able to help facilitate this process. Reach out to each lender and request a proposal for refinance. The proposal should include information on estimated closing costs, interest rate, monthly payment and other details.

When reaching out to lenders, expect pressure to get the process started with them. After all, their job is to close these deals. It’s better to avoid this early on. Definitely don’t sign anything, let them run your credit or spend too much time with any one lender until you’ve decided on the best option. It’s not worth wasting everyone’s time. Instead, shoot ‘em straight. Tell them up front that you’re talking with multiple lenders and aren’t sure which one you’ll choose. Most people will respect this and not want to waste time either.

Now, we all have several buddies selling mortgages – I’m sure a few names have already come to mind. You might be thinking – “why not throw them a bone… it’s a win-win right?” Well, maybe. But it could also cost you thousands if you end up going with the wrong lender. If you’re set on working with a buddy, though, I suggest at least trying this strategy. Go to several referred lenders first and get their offers. Bring the offers to your buddy. Then it’s just a matter of comparing options – it makes it an objective decision. If they can provide a better deal, great! If not, it shouldn’t be a big deal.

The goal should be to have at least three solid mortgage refinance proposals to compare. If you’re a physician, you should include physician mortgage loans as an option. This will increase the chances of you getting a solid deal. We review these all the time for clients. The spread in offers is normally thousands to tens of thousands of dollars. Trust me, it’s absolutely worth comparing multiple lenders!

All-in Loan Costs

There are several important types of pure costs you’ll pay with mortgages. Here are the loan costs we’ll cover:

  • Interest Expense
  • Private Mortgage Insurance (PMI)
  • Closing Costs

Interest expense is the cost you pay to borrow money from a lender. If you’re looking to get an estimate of expected interest on your mortgage, take the amount owed and multiply it by the interest rate. Then divide that number by twelve to find how much of your current monthly payment is interest. For example, if you owe $250,000 and your interest rate is 4% here is how that would look:

Capture2

If a portion of your monthly payment is going toward paying down the debt (principal), this interest number will go down each month because your total amount owed will be less. An amortization schedule shows future principal and interest payments to give you an idea of how this will all shake out. You can see an example below showing the first year.

Capture3

You’re welcome to use our amortization spreadsheet for your calculations. You can find a link to it for free here.

PMI is the annoying monthly fee commonly required when you don’t have at least 20% equity in your home. If PMI is in play with your potential refinance, it must also be considered as a pure cost. The terms and conditions will vary with different lenders, so make sure to ask specifically what’s required to drop PMI. This will help you project costs going forward.

Closing costs consist of four types of costs:
1) Loan Costs
2) Prepaid Interest
3) Initial Escrow
4) Lender Credits/Debits

Loan costs are the pure transactional costs required to close the deal. They consist of things like appraisal fees, credit checks, and application fees.

Prepaid interest covers the interest expense due on the debt from the time you close to the time you make your first payment. You know how they always say by refinancing, you get to skip a payment or two? Well, that’s only halfway true. You get to skip the principal payment but not the interest – sneaky right?

Initial escrow is the amount you must pay to beef up your new escrow account. Escrow accounts pay your insurance premiums and property taxes each year. This should not be considered in the refinance decision. It’s a cost that should be the same whether you refinance or not.

Lender credits and debits give you the option to either buy lower rates (lender debits) or get credit for higher rates (lender credits). Here’s an example – we’ll use the same $250,000 refinance scenario (no PMI) to show you how lender credits/debits vary. Lender XYZ is offering you three options as follows:

1) 3.25% Interest Rate, $1,500 Lender Credit
2) 3.125% Interest Rate, $0 Lender Credit
3) 3% Interest Rate, $1,500 Lender Fee (Debit)

Running The Numbers

Before I get into the numbers I wanted to clarify something: it’s not all about lowering your monthly payment! This is particularly true if you’re extending the time it’ll take to pay off the loan. The mortgage industry loves to sell the whole “payment reduction” idea. Check out Realtor.com’s refinance calculator. If you took out a 30-year mortgage for $300k in Jan 2008 at 4.5% (and you owe $251,024 as of this writing), and you’re considering refinancing into a new 30-year mortgage at 3.5% with $3,000 closing costs, you might think that’s going to be a home run. Run the realtor.com calculator and their bolded result shows monthly savings of $393. That’s pretty sweet, right?

Not so fast. If you look closer, you’ll also see lifetime savings shows -$16,560. Basically, the refinance loan with a 1% lower rate will actually end up costing you over $16K more than the old loan its lifetime. The problem is that you’re adding 8+ years to your term. That’s 8 more years of paying interest. Here’s a quick fix: at worst, keep your new monthly payment equal to your old payment so you’re not losing any ground.

So start by running the numbers on your current loan. Figure out how much interest will be paid in the short and long term assuming you leave it as-is. You can normally pull up your custom amortization schedule using your lender’s online access (note that this doesn’t take into consideration any additional payments toward principal made in the future). You can also use our amortization schedule worksheet.

Tip: Hang onto your mortgage amortization schedule if you don’t end up refinancing. If you do refinance, hang onto the new amortization schedule. It can come in handy if you consider refinancing again. Also it makes tracking your net worth much easier which we discussed in this earlier post.

Let’s stick with the $250K mortgage example at 4%. The loan has exactly 27 years remaining. If you run the amortization schedule (see below visual), you’ll find the following:

  • Next month’s interest – $833.33
  • Next 1 year cumulative interest – $9,904.41
  • Next 3 years cumulative interest – $29,062.61
  • Over 27 years, it’ll be $159,218.63 (ouch!)

If PMI is in play, add it to the interest expenses for as long as you’re required to pay it. The combined interest and PMI will be your total loan costs.

Next you’ll want to dig into the refinance quotes. There are three components to consider:

1) Transaction Costs – Total closing costs minus prepaid interest and initial escrow
2) Time Costs – Total time you’ll spend multiplied by the value of your time per hour (if you don’t know the value of your time per hour, use your salary divided by 2000)
3) Ongoing Costs – Total interest (from amortization), PMI and prepaid interest

Tip: Don’t limit yourself to choosing between the 30 year or 15 year mortgage. Most lenders allow you to request custom repayment periods (like 24 years) so that you can keep your principal and interest payments similar to before and gain ground on your mortgage. Ongoing costs depend upon how you structure the new loan. If you keep payments the same, it also provides a solid apples to apples comparison to consider.

Take each refinance offer and add up the total costs. Let’s say you’re refinancing the $250,000 mortgage and your principal and interest payment WAS $1,263.02 per month (at 4%). You talk with three different lenders and come up with the following options:

1
Capture4
2

Comparing Options

When you’re comparing refinance offers to your current mortgage, you’ll want to look at the total loan costs for each option. Compare each loan’s costs and determine how you’ll fare over various periods of time. If transaction costs are involved, you’ll want to figure how long it will take to recover those costs and be better off (breakeven analysis).

When you compare the three options above to the existing mortgage, it becomes obvious you’ll actually be better off refinancing in all three scenarios. But then which option is the best? Some might say Option 2 because it has the lowest interest rate. Or maybe Option 3 because there aren’t any closing costs. But the best answer really depends on your time horizon.

If you’re expecting to live in the home for less than 91 months, Option 3 provides the lowest costs. But then in the 91st month, Option 1 takes the lead. Although Option 2 would eventually be a better deal than the current mortgage (after 51 months), it would never be the best deal. You can see this comparison illustrated in the chart below.

Capture5

Good Debt vs. Bad Debt

Many people believe mortgages fall under a category called “good debt.” The idea behind “good debt” is to always make the minimum payments because the interest rates are so low. Why make extra payments when you have other options that provide a better long-term bang for your buck or return on investment? If you look at long-term investment returns and compare them to your interest rate (net of taxes) on the mortgage, you’ll end up with more wealth investing. The math behind this is pretty straight-forward and something I agree with. However, there is always more to the story.

The first issue with this analysis is that it assumes when you opt for lower mortgage payments you ALWAYS invest the difference. In reality, most people don’t do that. At least not every single month. They end up spending some of it.

The second issue is that we’re comparing apples and oranges. Paying down your mortgage faster provides guaranteed ROI (in the form of interest avoidance) whereas investing is not at all guaranteed. You must take risks to provide better results. Also along those same lines, research says that your Average Joe investors consistently underperform the market by a large margin. People often fail to take this into consideration.

And finally, there are psychological benefits to owning your home free and clear that people don’t think about. Ask people who have paid off their mortgage how they feel about it. I’ve never heard one of these people talk about getting back into a mortgage so they can invest.
historical-mortgage-rates

Over the past 20 years you can see all of this playing out. People started out 20 years ago with their 30-year mortgage. As rates dropped (see above historical visual of mortgage rates), people refinanced into new 30-year mortgages so they could lower their payments and get a better bang for their buck with other types of investments. But, in reality, they don’t invest and end up just spending the free cash flow.

After a few years, rates drop and they refinance again and pay all the new transaction costs again. They must have forgotten what happened the last time because somebody talks them into the exact same plan. They set up the 30-year with plans to invest the difference. And, like before, they end up spending the extra cash flow. Fast forward to today and they’re still in the early years of a 30 year mortgage. They’ve refinanced 5-7 times over the years. Who knows how much they’ve paid in transaction costs over the years. They haven’t made any forward progress on the debt, and they haven’t generated any additional wealth on the side as a result of having lower monthly payments.

Building wealth is hard enough as it is. Make it easier on yourself and quit overthinking these decisions. Set up your mortgage with the required payments that put you on track to pay it off as quickly as you’d like. When you refinance, don’t extend your payoff date. At worst, keep payments the same and shorten your term! Paying off your mortgage is a good thing. Ask someone you know that actually owns their home outright, and you’ll see what I mean.

Have questions or care to share your experience? Ask/share in the comments!

Don’t miss out!

Join our growing network of other smart people who get financial tools and tips delivered right to their inbox.

Feeling like you don’t have control over your money?

Let's fix it! Download this guide now and take control in less than 15 minutes.

What's Next

Have questions or care to share your experience? Ask/share in the comments!

Are you interested in having a conversation? We’d love to connect! Click here to request a free consultation. We look forward to hearing from you.

Looking to create your own financial plan? Click here to download our free guide to getting started.



© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Mortgage Breakdown: Fixed Rate vs ARM

Mortgage Breakdown: Fixed Rate vs ARM

This is a guest post from Miranda Marquit, a financial journalist. She writes for a number of publications about subjects related to money. You can read more of her writing at PlantingMoneySeeds.com.

For many young professionals with families, one of the biggest financial milestones in life is buying a home. There is a feeling of accomplishment that comes with a successful home purchase, as well as a feeling of freedom and security.

However, since a home purchase is likely one of the largest purchases you will make, it’s important to understand your options and choose what works best for you. One of the decisions you will need to make is whether to get a fixed rate mortgage or an adjustable rate mortgage (ARM).

Fixed Rate Mortgage

The biggest advantage to a fixed rate mortgage is that you lock in an interest rate for the duration of your loan. Right now, with the Federal Reserve set to continue increasing interest rates, and with Treasury yields expected to start rising, mortgage rates are also expected to increase. If you have a fixed rate mortgage, you don’t have to worry about seeing an increase in your interest rate – or your payment.

A downside to a fixed rate mortgage is that you don’t have the ability to take advantage of falling interest rates. If rates fall, you need to refinance your mortgage in order to lower your interest rate and payment.

Buying a Home with an ARM

In most cases, the initial interest rate you see with an ARM is lower than what you would get with a fixed rate mortgage. This is because there is always the chance that mortgage rates will go up and the lender will be able to charge you more for the loan.

If rates head lower, there is a chance that you will get a break in the form of a lower mortgage payment. As rates rise, though, you will see a higher monthly mortgage payment. Most lenders offer terms that limit the number of payment increases you can see in a specific period of time, as well as an overall cap on your rate. However, that doesn’t change the fact that you can still see increases in your payments.

What About Hybrid ARMs?

Many professionals who expect to make more money a few years after the initial home purchase like to use hybrid ARMs. These ARMs guarantee a set interest rate for 5, 7, or 10 years. Just before the ARM is expected to become variable, the home buyer can refinance to a fixed rate for the remainder of the term. If you like the idea of a lower rate to start, and you are confident that your financial situation will improve before the rate re-sets, this can be a viable solution.

Still, it’s important to understand the risks associated with choosing a hybrid ARM. The biggest risk is that home values could drop and when you are ready to refinance your home, you might not be able to. This was one of the issues associated with the recent mortgage market crash. Many homebuyers had taken advantage of low-rate hybrid ARMs, but were unprepared for higher rates later. They couldn’t refinance to fixed rate loans because home values had dropped and they didn’t have enough equity.

Before you decide to buy, think about which financing arrangement is likely to work best for you. Honestly evaluate whether or not you can handle an increase in your mortgage pavement as interest rates go up. The last few years have been great for ARMs, due to the low-rate environment. Now that the economy is picking up and interest rates are rising, many professionals might find it more advantageous to lock in a fixed interest rate.

Mortgages For Physicians

Many lenders have special programs for physicians and other type doctors. These physician mortgage loans offer special terms and are sometimes structured as an ARM or a fixed rate. It’s important to understand which is which when considering these type special loan programs. Also, you should ask if there are any prepayment penalties, especially on the shorter term ARM products.

Don’t miss out!

Join our growing network of other smart people who get financial tools and tips delivered right to their inbox.

Feeling like you don’t have control over your money?

Let's fix it! Download this guide now and take control in less than 15 minutes.

What's Next

Have questions or care to share your experience? Ask/share in the comments!

Are you interested in having a conversation? We’d love to connect! Click here to request a free consultation. We look forward to hearing from you.

Looking to create your own financial plan? Click here to download our free guide to getting started.



© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.