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Rising rates: doctor loan now vs 20% loan in 1 year?

Home Mortgages and Home Buying Rising rates: doctor loan now vs 20% loan in 1 year?

  • Avatar wcireader 
    Participant
    Status: Physician
    Posts: 110
    Joined: 02/26/2017

    My situation now is slightly more complex than this, but I wanted to reduce it to something simpler.

    Given the expectation that interest rates will rise over the next year, would one be better off:

    (1) Getting a doctor loan now with 0% down (or <20% down anyway, probably 5-10%), OR

    (2) Waiting to save 20% down over approximately 1 year and then getting a traditional 30- or 15-year loan?

    Thank you so much for your thoughts!

    #106095 Reply
    Avatar SPlum 
    Participant
    Status: Physician
    Posts: 60
    Joined: 05/16/2017

    I would not go into a doctor loan, if you can avoid it. We did that in the past and the rates were markedly increased compared to a traditional loan. We were disgusted by the interest we were paying as our debt tolerance decreased and we got out of it in favor for a traditional 15 year 20% down mortgage.

    #106141 Reply
    Avatar Radinomics 
    Participant
    Status: Resident
    Posts: 27
    Joined: 05/26/2017

    Doctor loan now

    You can refinance 20% all the same in a year, this gives you the option of the doctor loan being the better deal

    #106142 Reply
    Liked by Zaphod
    Avatar EM->CCM MD 
    Participant
    Status: Physician
    Posts: 77
    Joined: 07/23/2017

    My wife and I are in the same situation.  We’re getting the doctor loan now for a couple reasons:  1) Expected interest rates 2) Rising housing costs in the area to which we’re moving 3) Very low rate on doctor loan 4) Very overpriced rental market where we’re moving.  Obviously, we can’t predict the future, but if the current trend follows for the next 12 months, we’d be worse off financially.

    The better question for you is whether or not you should be buying a house.  Are you in a stable family situation (i.e. the house you want to buy as a bachelor isn’t the same house you’re husband or wife will want to live in when you get married)?  How stable is your job (probably shouldn’t buy a house immediately right out of training with a few exceptions)?  Are you a graduating med student or graduating attending?  My wife and I are buying a house right out of training, but we’re moving back to the program where I did residency so we know the hospital well, I know my boss, my wife and I know and like the area, we have a network of friends, we’re moving closer to family, etc.  Further, we’re only planning on buying a home between 1.3 and 1.6x our salary.

    If you do decide to proceed with the home loan, shop around the doctor mortgage and buy a conservative house.  I talked to about 4-5 different lenders and found very different rates.  All of them offered me way too much money.  All of them we’re roughly the same mortgage except for the rate otherwise.  Ultimately, we’re going to get a 10/1 ARM at 3.75% which we expect to have paid off in +/-8 years (while still putting ~30% gross towards retirement).  I thought that was a very aggressive rate compared to what I saw otherwise (5-7y ARMs and 15y FRM around the 4.5% range).

     

     

    #106152 Reply
    Avatar Marko-ER 
    Participant
    Status: Resident, Small Business Owner
    Posts: 140
    Joined: 03/09/2016

    I was in similar shoes as you last year. Chose to go with 5-10% down for a 15 year loan, have not regretted it.  Though true to form, doc loan was about 1% APR higher than conventional, rates went up just over 1% in the meantime and we benefited from paying down the principal and mort interest/property tax writedown.   In the larger scheme, the difference is pretty minimal, a few grand at most.  Don’t rush into it, make sure you are happy with the property and with the JOB (#1 priority), before you set down roots.  Doubly true with the limited housing inventory we have — make sure to check out prior sales.  All the points made by the above posters are right on point, too.

    #106195 Reply
    Avatar wcireader 
    Participant
    Status: Physician
    Posts: 110
    Joined: 02/26/2017

    Thank you, all, for sharing your experiences and thoughts.

    If interest rates were not going up, I would rather wait. I will still wait nonetheless some time before I buy.

    I am in my 1st year as an attending but have lived in the same city for >10 years (although not at the same program as where I trained).

    However, my wife had to move away for several years and has also switched directions in her career. She is still looking for appropriate work in the area that she likes.

    However, once she finds work, if she is happy, that is when I would seriously consider the question of doc loan now vs 20% loan in ~1 year (well, 1 year from now).

    Thank you again!

    #106292 Reply
    Avatar SwanSong 
    Participant
    Status: Physician
    Posts: 76
    Joined: 10/22/2016

    Shop around for physician loans.  I did better with US Bank on a physician loan on a 30-year fixed loan with lower closing costs than was the case with conventional banks.

    #106298 Reply
    Liked by Budgetmaestra
    Avatar wcireader 
    Participant
    Status: Physician
    Posts: 110
    Joined: 02/26/2017

    Shop around for physician loans.  I did better with US Bank on a physician loan on a 30-year fixed loan with lower closing costs than was the case with conventional banks.

    Click to expand…

    Thanks! I assume the shopping around is after you’ve already selected and placed a bid on a house, not during the pre-approval process or earlier?

    #106320 Reply
    Avatar totem 
    Participant
    Status: Resident
    Posts: 9
    Joined: 12/28/2017

    I have the same question: shop around after you’ve selected and placed a bid on a house, not during the pre-approval process or earlier? thanks!

    #106637 Reply
    Avatar hightower 
    Participant
    Status: Physician
    Posts: 1485
    Joined: 12/07/2016

    This is do as I say, not as I did advice;)

    I wouldn’t rush into buying a house just to save 1-2% on interest rates.  Buying a house is expensive for lots of reasons outside of the mortgage.  You really want to make sure you do it right with a proper down payment and extra savings for moving expenses, repairs/upgrades, furnishing, etc.  Take your time, make sure it’s the right decision and when it’s time to buy if rates have gone up significantly, buy less house and pay it off faster with a shorter term loan (10 or 15 year loan).  That’s the fiscally smart thing to do in my opinion, but it’s un-American so you’re going to have virtually everyone in your life pushing you to buy a big old doctor house asap, lol:)

    But, above all else, make your wife happy at all costs!! Good luck with your decision

     

    #106651 Reply
    Avatar wcireader 
    Participant
    Status: Physician
    Posts: 110
    Joined: 02/26/2017

    This is do as I say, not as I did advice;)

    I wouldn’t rush into buying a house just to save 1-2% on interest rates.  Buying a house is expensive for lots of reasons outside of the mortgage.  You really want to make sure you do it right with a proper down payment and extra savings for moving expenses, repairs/upgrades, furnishing, etc.  Take your time, make sure it’s the right decision and when it’s time to buy if rates have gone up significantly, buy less house and pay it off faster with a shorter term loan (10 or 15 year loan).  That’s the fiscally smart thing to do in my opinion, but it’s un-American so you’re going to have virtually everyone in your life pushing you to buy a big old doctor house asap, lol:)

    But, above all else, make your wife happy at all costs!! Good luck with your decision

     

    Click to expand…

    Thanks so much for sharing your thoughts and advice.

    #106665 Reply
    dimensionlessindex dimensionlessindex 
    Participant
    Status: Physician
    Posts: 8
    Joined: 04/10/2017
    I would wait for a traditional 15-yr fixed with 20% down, because it is the correct behavioral choice.
    We went through a situation similar to that described by SPlum above. Have been in our house for over three years, purchased in my first year out of residency with a 30-yr fixed physician loan at 4.75%. Refinanced at no-cost two years later into a 15-yr fixed at 3.35% (so effectively a 17-yr loan term). When you are buying, mortgages feel like Monopoly money. But if you look at the amortization schedule, it is incredible how much interest you are paying early in a 30-yr fixed. Feel much better about the progress we are making on the principal with a 15-yr loan.
    The neighborhood is hot and we’ve seen substantial appreciation, but even that has been muted by the interest, which is not as great as the real estate industry leads you to believe: it’s a below-the-line deduction, and the tax reform’s doubling of the standard deduction might change your calculus. Moreover, the fed’s interest rate increases will likely be low & slow. I’d be surprised if a doctor loan now beats a 15-yr fixed rate in a year, but I don’t have a crystal ball. Agree with Marko-ER that you’ll likely pay at least 1% APR higher for the doctor loan. Also agree with hightower that home ownership is expensive for reasons beyond the mortgage. 1% of home value for annual repairs & updates is a good rule-of-thumb (I believe from Frank Gallinelli). My recent research on real estate investing has changed my perspective on real estate consumption substantially.
    Either way, I would shop around banks now. In my experience, local rates were competitive with national rates. Don’t search on LendingTree unless you want a lot of spam and phone calls. It’s nice to work with someone local, and many banks will match or surpass your best offer if you open a checking account, etc. Might as well get direct contact info of local lenders and pre-approved early. Regardless, not a decision to rush.
    #109177 Reply
    Avatar wcireader 
    Participant
    Status: Physician
    Posts: 110
    Joined: 02/26/2017
    I would wait for a traditional 15-yr fixed with 20% down, because it is the correct behavioral choice.
    We went through a situation similar to that described by SPlum above. Have been in our house for over three years, purchased in my first year out of residency with a 30-yr fixed physician loan at 4.75%. Refinanced at no-cost two years later into a 15-yr fixed at 3.35% (so effectively a 17-yr loan term). When you are buying, mortgages feel like Monopoly money. But if you look at the amortization schedule, it is incredible how much interest you are paying early in a 30-yr fixed. Feel much better about the progress we are making on the principal with a 15-yr loan.
    The neighborhood is hot and we’ve seen substantial appreciation, but even that has been muted by the interest, which is not as great as the real estate industry leads you to believe: it’s a below-the-line deduction, and the tax reform’s doubling of the standard deduction might change your calculus. Moreover, the fed’s interest rate increases will likely be low & slow. I’d be surprised if a doctor loan now beats a 15-yr fixed rate in a year, but I don’t have a crystal ball. Agree with Marko-ER that you’ll likely pay at least 1% APR higher for the doctor loan. Also agree with hightower that home ownership is expensive for reasons beyond the mortgage. 1% of home value for annual repairs & updates is a good rule-of-thumb (I believe from Frank Gallinelli). My recent research on real estate investing has changed my perspective on real estate consumption substantially.
    Either way, I would shop around banks now. In my experience, local rates were competitive with national rates. Don’t search on LendingTree unless you want a lot of spam and phone calls. It’s nice to work with someone local, and many banks will match or surpass your best offer if you open a checking account, etc. Might as well get direct contact info of local lenders and pre-approved early. Regardless, not a decision to rush.
    Click to expand…

    Thank you so much for your very helpful reply and for sharing your experience.

    Re “Might as well get direct contact info of local lenders and pre-approved early.”

    I understand shopping around for rates early. However, re a pre-approval, how long is one valid? Would I really be able to get pre-approved now for a home purchase sometime in the next year? Thanks so much!

    #109204 Reply
    Avatar FIREshrink 
    Participant
    Status: Physician
    Posts: 1007
    Joined: 01/11/2017

    Our doctor’s loan had a lower interest rate than anything else we could find.

    #109207 Reply
    Liked by adventure
    Avatar wcireader 
    Participant
    Status: Physician
    Posts: 110
    Joined: 02/26/2017

    So just to follow up re this thread and my initial question – the moral of my story seems to be you NEVER know where rates are going to go. When I started this thread 2/2018, I thought rates would go up for sure. In fact, when I was comparing physician loans on 4/20/18, US Bank (with some of the best rates for physician loans when I compared) was quoting 4.375% @ 0 points with 10% down. In 2018, we decided to wait. We are finally under contract on a home now, and rate is locked in as of this past weekend 3.75% @ 0 points with >20% down. The point being that even if you think rates will go up, you never know – and should wait to purchase until you’re ready (which for many may include having 20%+ down payment saved).

    #211656 Reply

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