One of the most important aspects of buying a home is timing. Did you buy a $500,000 house in 2006 just before the housing bubble burst into flames and then watch the value plummet to $300,000 by 2008? Bad timing. Did you buy a $500,000 house in 2015 and then watch it triple in value in the span of five years? Great timing. Luckily, if your timing wasn’t stellar, there’s a way to help yourself with lower interest rates, shorter loan lifespans, and possibly lower payments by refinancing your mortgage with a trusted company.
A physician mortgage can be a good vehicle for a young doctor who’s just out of school and doesn’t have many assets or a way to scrape together a down payment of 20%. But if you’re further advanced in your career or deeper into your journey to financial freedom, buying a home with a conventional mortgage and then, later on, potentially refinancing that loan to a better rate with a shorter time frame could be a great move.
On this page, we’ll discuss all you need to know about refinancing a mortgage, the pros and cons of doing so, the differences between a conventional mortgage and a physician mortgage, and how much of a mortgage you can actually afford.
For other types of loans available to doctors, check out our physician mortgage page.
Home Mortgage and Refinance Lenders
Each WCI Recommended Mortgage Lender can be found by clicking on the map or the list found in the “See All Lenders” link below. They are the best in the business vetted by our staff and thousands of white coat investors over the years. Each of these only offers mortgage loans in certain states. These lenders are paid advertisers on the blog and will give you the top-notch service you've come to expect from a company recommended by WCI. If you find the service anything other than excellent, please let us know. Thank you for supporting those who support The White Coat Investor.
Physician vs Conventional
Physician vs Conventional
Physician Mortgage
- Young doctor just out of school
- Not many assets
- No 20% down payment
Conventional Mortgage
- Further advanced in your career
- Closer to financial freedom
- Refinancing loan to a better rate
Mortgage Loan vs. Doctor Mortgage
A conventional mortgage loan is how most homebuyers qualify to buy a house. Normally, the buyer is required to make a down payment that is at least 20% of the home’s asking price so the buyer can avoid having to pay Private Mortgage Insurance (PMI), which protects the lender in case the buyer stops making payments.
Strong credit is required for a lower interest rate, and lenders will lend plenty of credence to the buyers’ current salary to determine whether to extend the loan offer. There’s less emphasis on earning potential and more emphasis on what’s currently in the buyer’s bank account.
Conventional mortgages are more difficult to qualify for than a physician loan, but there’s a reason for that. If you can qualify for a conventional mortgage, especially if you can make a sufficient down payment to avoid paying PMI, you’ll usually get a lower interest rate and fees. That means a lower monthly payment and a lower overall cost for your loan.
A physician mortgage loan is a special type of loan designed for the unique needs of doctors. Doctors traditionally earn a high income or expect to earn a high income in the near future, but they can sometimes find themselves with no cash, little credit, and high debt, especially if they've just graduated from medical school or just finished with residency. Though typical lenders want their borrowers to be gainfully employed, to have strong credit, and to have the ability to make a down payment—effectively the opposite of where many young doctors find themselves—they’ll oftentimes cut doctors a break because they know physicians have plenty of earning potential in the future.
Physician mortgages work similarly to conventional loans with some key differences. For example, you can qualify with a down payment of less than 20% and still avoid paying PMI. Lenders also use slightly different underwriting criteria, focusing more on how much you have to pay on your student loans each month instead of their overall balance and by accepting a signed employment offer as proof of income. This makes it easier for doctors to qualify for loans straight out of medical school or residency.
The primary benefit of a doctor mortgage is that it gives you the opportunity to qualify for a loan to which you normally wouldn't have access.
To get a conventional mortgage, you need strong credit, proven income in the form of pay stubs, low debt, and money for a down payment. But a doctor mortgage lets you skip all of those steps. You can qualify for a loan without needing a down payment, you can qualify while having a large student loan balance, and you can qualify even if you haven’t gotten your first paycheck yet.
Doctor mortgages don’t include PMI, which is good since PMI does nothing for you and is simply an expense. Even better, the interest rate for a physician mortgage typically isn’t much higher than a conventional loan for someone with good credit.
How Much Mortgage Can I Afford?
The first step in buying a home is knowing what you can afford. Banks and other mortgage lenders look at your income, outstanding debt obligations, and credit history as the most important factors when approving your loan application.
Your debt-to-income ratio (DTI) compares your income to your debt obligations. Lenders use this as a guideline to decide if you can afford a home. Using your estimated debt-to-income ratio after the purchase, your banker can help you calculate the maximum home loan for which you would qualify. When added to your down payment savings, that’s roughly what you can afford to spend on a home.
As a doctor with medical school loans, your DTI ratio may not be a simple rubber stamp, even with a high income. Most lenders require a DTI ratio of 36% or less, though some will lend up to 43%.
Lenders also review your credit report for a history of late and missed payments alongside your credit score to determine your creditworthiness. Using the same credit report from your DTI calculation, you can look for any reported late or missed payments. Bankruptcies, court judgments, and charged-off accounts are more severe than a slightly late payment. But a pattern of late payments may prevent you from getting a mortgage at all.
Even if you’re still on track to get a mortgage, don’t rush to buy that home just yet. Many homeowners find themselves in the position of being “house poor,” where expenses added up more than they realized ahead of time and put them into a financial crunch. Rather than buy the most expensive home you can get your hands on, add up your estimated monthly expenses first to ensure you truly can stay on top of your future mortgage payments and other homeowner expenses without going broke in the process.
Expenses like closing costs, property taxes, homeowners insurance, furniture, and HOA fees quickly add up and make it even more expensive to buy a home than you originally thought.
Best Mortgage Term Length For Doctors
In the ongoing debate between whether homebuyers should procure a 15-year mortgage vs. a 30-year mortgage, there are pros and cons on both sides.
With a 30-year mortgage, your interest rate would be higher than it would with a 15-year mortgage, but your payment would most likely be lower because you have twice as much time to pay off the loan. It’s also probably less stressful to have a 30-year mortgage, because it’s perceived as cheaper per month (though you’ll obviously end up paying more interest over the length of a loan than you would with a 15-year mortgage). But you’d also be done quicker with a 15-year loan.
If you are buying an inexpensive house relative to your income and can still easily contribute to your tax-advantaged accounts while having an especially stable job, a 15-year mortgage is probably the right choice, especially if payments on that 15-year note will not be a burdensome percentage of your income. Most everyone else should probably consider a 30-year mortgage (and then potentially think about refinancing that 30-year mortgage later).
Here’s another way to think about it.
Consider the purchase of a $1 million house with 20% down and an $800,000 mortgage. For a 30-year mortgage with a 4.0% interest rate, the monthly principal and interest (P&I) payment would be $3,819. The main reason to consider a 15-year note over a 30-year mortgage is that the interest rate is typically lower. The difference could be 0.25%. For a 15-year mortgage at 3.75%, where the monthly P&I would be $5,817, it means a difference of $1,998 per month. For many people, the advantage of a lower payment outweighs the lower interest rate. But for a doctor who’s a high earner, paying a higher rate could be advantageous to eliminate the debt faster.
What about getting a mortgage that’s longer than 30 years, maybe a 40-year mortgage? Though the monthly payments would be even cheaper than that of a 30-year, that’s something that should be avoided by most.
Should You Use an Adjustable Rate Mortgage?
With a fixed-rate mortgage, the interest rate stays the same over the life of the loan, which means your monthly payment will stay the same. Buyers might like a fixed-rate mortgage for its predictability.
With an adjustable-rate mortgage (ARM), there’s an initial fixed-rate period (initial fixed-rate options are three, five, seven, or 10 years ), but after that, the interest rate changes periodically to reflect current market conditions. If market rates rise, your rate—and therefore your loan payment—will increase. If rates fall, you’ll pay less. This may be a good option for those buyers who do not plan to be in the home beyond the fixed-rate period or for those who prefer a lower rate initially and then can absorb volatility later in the loan.
Some borrowers prefer the stability of a fixed rate, while others don’t mind risking a rate hike given the potential to save money should rates stay low or drop. It’s also possible that the variable rate could stay below the fixed rate for the entirety of the loan—remember, so much of this is about timing.
An ARM can help you to afford more house than you otherwise could with a fixed-rate mortgage. If it is a 5/1 ARM (meaning it is fixed for five years) and you're only going to be there for five years, this could be a no-brainer. Or perhaps you'll be in a dramatically better financial situation five years from now with much more income (like making partner) and fewer liabilities (like student loans.) And still, you could even refinance between now and then, anyway.
Do Doctors Have To Pay Private Mortgage Insurance?
One of the best benefits of a physician loan is that the doctor doesn’t have to pay PMI, no matter how little they put down for a down payment. On a $500,000 loan, not having to pay PMI would save you thousands of dollars.
For a conventional loan, though, it’s likely that a physician would have to pay PMI on a mortgage where they put down less than 20% of the down payment. Aside from having to purchase PMI—remember, PMI benefits nobody but the lender—you’ll also probably have a higher interest rate and higher fees.
How much would you pay in PMI? The average per year cost is somewhere between 0.58%-1.86% of the original loan amount.
Should I Refinance My Mortgage?
There are three primary reasons that people refinance their mortgage: to lower their monthly payment, to lower their interest rate, or to take equity out of their home and use that cash for something else.
Remember, though, refinancing your mortgage is not a free service. You’ll have to pay many of the same fees you did when you got your original mortgage, including application fees, title insurance, appraisal fees, and closing costs. If your original mortgage has a prepayment penalty, you might get stuck with that as well.
The cost of refinancing a home can vary widely depending on the value of your home and how much money you are borrowing with the new loan. According to Freddie Mac, the average refinance involves paying about $5,000 in closing costs.
But if you can afford to potentially pay more money per month toward your house while cutting your mortgage length in half or if you want to pay less money per month on the same timeline as before with a lower interest rate, then, yes, refinancing your mortgage can be a great idea.
Refinancing your home can help you lower your monthly payment, reduce the overall cost of your home, or turn your home equity into cash that you can use. If you’re in a situation where you can accomplish any of these goals, you should definitely think about refinancing.