By Eileen Derks, SVP, Head of Mortgage at Laurel Road; A 2022 Platinum WCI Medical School Scholarship Sponsor
Since the beginning of 2022, the Federal Reserve has raised interest rates multiple times in an effort to curb inflation. After staying at historic lows throughout 2020 and 2021, interest rates are at the highest levels since 2009 and are anticipated to continue rising into 2023.
However, climbing rates shouldn't necessarily discourage you from buying a home. For physicians who are considering purchasing a home, now may be an excellent time to buy. Even though rates have gone up significantly since 2020, they’re still at historic lows in the context of the past few decades. For example, the average annual interest rate from 1973-1992 stayed over 8%, reaching as high as 16.63% in 1981. Compared to that almost 20-year period, current rates are still quite low.
For physicians looking to buy a home, now may be a great time to act, since rates are expected to keep rising into next year. In this type of environment, the sooner you act, the better, because it can help you secure a lower rate. Let’s explore some aspects of getting a mortgage that physicians should also consider given the current market conditions.
Understanding Fixed vs. ARM Options
The two primary mortgage types are fixed and adjustable rate (ARM). Which one is better for you will depend on your personal financial circumstances and goals.
- 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. The main benefit of this loan type is predictability, which allows borrowers to budget for repayment. Good credit could help you secure a low rate.
- With an adjustable-rate mortgage, after the initial fixed-rate period (initial fixed-rate options are three, five, seven, or 10 years ), 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. Typically, there is a cap and a floor that limit how high the interest rate you’ll pay can rise or fall. 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 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. Factors like if you plan to move in a few years, if you know your income will significantly increase in the future, and if you’re comfortable with refinancing are all important considerations when deciding between fixed vs. adjustable-rate mortgages—in addition to looking at where rates are currently.
Advantages of Rate Locks
When applying for a mortgage, your lender may offer you a rate lock—an opportunity to lock in your interest rate for the time between when you sign a contract to purchase and when you close on the home. A rate lock protects you from market fluctuations and guarantees that a mortgage lender will honor a specific interest rate for a specified period of time. Typically, there is no fee to lock your rate. Shopping and comparing rates along with processing and loan fees is a best practice when looking for a mortgage vs. just an interest rate.
Be mindful to take care of your credit and financial situation during the application process, whether you locked your rate or not. Any changes in these areas or your loan amount can affect your rate. Policies and terms differ by lender, so make sure you read the fine print as you evaluate lenders.
Physician Mortgage Options
As a physician or dentist, special mortgage options are available, and they can help you save money and time. When comparing physician mortgages, it’s important to look carefully at several factors:
- Annual Percentage Rate (APR): This is a standard calculation meant to represent the cost of borrowing and is a combination of both the interest rate and many of the fees associated with the mortgage.
- Terms: Including the length of the loan, the fixed or variable nature of the interest rate, mortgage insurance requirements, and any unique characteristics, like prepayment penalties. Take the time to explore which term is best for your unique situation.
- Loan amount limits: These limits are based on the mortgage itself, so a loan with a $1 million limit and a 10% down payment requirement means you can look at houses with a purchase price of around $1.1 million.
- PMI: Typically, if you have less than 20% for a down payment, you’ll be required to pay private mortgage insurance (PMI). But some physician mortgages will let you skip the PMI (even without the 20% down payment), which increases your affordability and can potentially save you hundreds of dollars each month.
Laurel Road’s Physician Mortgage is a home loan tailored specifically for physicians and dentists featuring up to 100% financing1 or no down payment, for loans of $1 million or less, with no PMI2. Furthermore, these mortgages have fewer restrictions than conventional mortgages, giving recognition to medical professionals’ creditworthiness and earning potential. Laurel Road also offers discounts on lender fees with no processing or application fee—a value of $1,095—and closing cost credits up to $650.3
Career Stage Considerations for Buying a Home
Where you are in your career will likely impact the timing of your home purchase and how much home you can afford. Resident physicians are still working to reach their peak earning potential and are often managing a sizeable medical school debt within their budget. Before making the decision to buy a home, residents might want to consider questions like:
- What is motivating me to consider buying a home right now? Short- and near-term financial goals? Life events, i.e. wedding, children, new job?
- Is there a strong likelihood I will need to relocate to another area within 3-5 years?
- What are my career goals? Will I need to attend more school or training in order to specialize in one field?
- If I don’t buy now, what is the cost of not purchasing a home now?
- What are my budget limitations and how would a monthly mortgage payment fit into a 50/30/20 plan? If you apply this budgeting approach, your monthly mortgage payment is included in Bucket 1 with your “Essential Needs,” which should not take up more than 50% of your budget.
- How urgently do I need a home? For example, if you have a growing family, you may have an immediate need for more space.
After considering questions like the ones above, it may make sense to wait to purchase a home until you’re further along in your career. Nevertheless, these factors shouldn’t preclude residents from considering a home purchase before their residency is completed. In the current unusual market conditions and the likelihood that rates will increase in the next year, it may make sense for residents to purchase sooner rather than later and start earning equity in their homes now.
To understand if purchasing a home is right for you at this point in your career and in these market conditions, talk to an experienced mortgage professional about your goals and budget. They can help guide you and determine the best path for your home purchase. Learn more about physician mortgage options from Laurel Road here.
100% financing and no private mortgage insurance (PMI) is only available to interns, residents, fellows, doctors, dentists, clinical professors, researchers, or managing physicians with a current license and a degree of Doctor of Medicine (MD), Doctor of Osteopathic Medicine (DO), Doctor of Podiatric Medicine (DPM), Doctor of Dental Surgery (DDS), or Doctor of Dental Medicine (DMD). 100% financing is available when purchasing or refinancing with no cash out on a primary residence and loan amount does not exceed $1,000,000. Retired doctors are not eligible. Additional conditions and restrictions may apply.
Only available to interns, residents, fellows, doctors, clinical professors, researchers, or managing physicians with a current license and a degree of Doctor of Medicine (MD), Doctor of Osteopathic Medicine (DO), Doctor of Dental Medicine (DMD), Doctor of Dental Surgery (DDS), or Doctor of Podiatric Medicine (DPM). Retired doctors are not eligible. Additional conditions and restrictions apply.
No Processing/Application fee represents a savings of $1,095. Other loan fees apply. Refer to your Loan Estimate for all other potentially applicable fees. See FAQ for more details. Laurel Road offers up to $650 in lender's credit towards your mortgage closing costs. Credits cannot exceed borrowers’ actual costs to close. For more information, refer to the Rewards Program here.
[Editor's Note: Many thanks to Laurel Road, one of our Platinum Level (contributing $8,000+) Sponsors for the WCI Medical School Scholarship and its longtime relationship with WCI. This is the second of our five scholarship-sponsored posts for 2022. Over the years, Laurel Road has helped thousands of readers refinance their student loans and secure home mortgages with great service and rates. Thank you for supporting those who support this site and especially the scholarship. All proceeds go to the scholarship winners.]