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We recently refinanced our physician home loan down to 3% on a 15-1 Adjustable Rate Mortgage. Our prior monthly payment of $2750 is now down to a low monthly payment of only $2300 on our $450,000 home. Crazy, huh? You can do it, too.
How? Interest rates for mortgages have hit multiple all-time lows in the last two months (see graph below from Freddie Mac as of 5/3/2020). This is fueled in part by an economy that limits the ability for many to buy a home where borrowing needs to be encouraged.
In this post, we are going to discuss all things physician mortgage refinancing so that you can be armed with the information you need to determine if now is a good time to buy a home using a physician mortgage or refinance your current mortgage to a better interest rate.
Note: The physician mortgage refinance took two months due to volume, and it was a bit more involved than our prior experiences. Due to the current environment lenders are tightening up requirements for home buyers. In fact, when we recently refinanced our physician mortgage, we were asked to provide pay stubs four separate times just to ensure we hadn’t lost our job during the current recession.
What is Special About a Physician Mortgage?
There are a few different ways to limit your monthly payments when it comes to a physician’s mortgage. One is to save 20% down and get a traditional mortgage like everyone else. This will allow for lower interest rates and the ability to avoid Private Mortgage Insurance (PMI).
PMI is not an insignificant cost. It usually ranges from 0.5 to 1% of the home cost annually. So, for a $500,000 this can be as much as $5,000 per year, which would increase your monthly mortgage payment by $500. This is something you should avoid when possible.
The other way to avoid PMI is by utilizing a physician mortgage loan. Due to the fact that doctors rarely default on their home loans, have good job security, and a high paying job – banks will provide a special mortgage for doctors that often allows you to put as little as zero to 5% down on a home and still avoid paying PMI.
Honestly, it is a pretty sweet deal.
When Should I Consider Refinancing My Physician Mortgage?
We put zero down on our physician home loan, avoiding PMI, and still received a reasonable interest rate 18 months ago at 4.75% interest on our 15-1 ARM. Then, we closed recently on a physician mortgage refinance with the same bank down to a 3% interest rate on a new 15-1 ARM.
This lowered our monthly payment to a paltry $2300 per month on our $450,000 home, which seems too good to be true… but this is the reality of our current interest rate environment.
You may be asking how you can determine when it is the right time for you to refinance your physician mortgage, too. Well, I’ll introduce you to the 1/3/5 Rule. In other words, 1% and 3 to 5 years.
First, you want to be able to obtain an interest rate that is at least 1% lower than your current rate. The reason for this is that refinancing your home costs money. There is no reason to refinance your home and pay thousands of dollars just to get an interest rate that is only 0.2% better than your current rate. That is unless you are going from one loan that has PMI to a physician mortgage that doesn’t.
The second guideline it that you should plan to stay in your home for another 3 to 5 years. The reason is the same. It will cost you thousands of dollars to refinance. Just like any time you buy a house, you need to plan to stay for long enough to have at least 10% equity in your home.
The reason for the 10% equity is that it costs roughly 8% to sell a home. So, if your home costs $500,000 you will need approximately $40,000 to sell that house. If you refinance your home and then have zero equity in the home, you better have another source of money to sell your home. Otherwise, planning to stay for another 3 to 5 years should allow you to break even.
Where Should I Refinance My Physician Mortgage?
It turns out that this is a more difficult question to answer. It depends on a few different things:
First, what state are you in? Not every lender is able to help customers in every state. For this reason, you must find someone that can help you where you are located.
Second, it depends on what sort of terms you are looking for on your physician mortgage. Are you looking for a variable, fixed, or ARM (discussed more below)? For example, the 15-1 ARM that I got is not offered by many lenders.
Third, do you have money to bring to the table? Some physician lenders will require you to bring at least 5% of the home value. So, for a $500,000 that’s $25,000. While other physician mortgage lenders will allow you to put zero down. If you don’t have the money to put down, make sure your emergency fund can at least cover your ability to sell a house (8% of the home cost) so that you don’t get trapped should you need to change jobs.
Ultimately, your goal is to get the best interest rate at the term lengths you want! So, contact MULTIPLE lenders and go back-and-forth between them until you get the best offer. Just like leveraging a physician contract – which should ALWAYS be reviewed by a physician contract review expert – use your leverage to get the best deal!
You can find some sites that list specific physician mortgage lenders by state.
Fixed, Variable, or Adjustable Rate Mortgage?
This is a tougher question to answer. It really depends on what you have decided about your long-term life and financial goals.
A fixed-rate is what it sounds like – it is a rate that doesn’t change. No matter what happens to interest rates going forward. Just like when you refinance your student loans for a sweet cashback deal, you are paying more for a fixed rate because the bank is assuming the risk that interest rates won’t increase.
Variable-rate mortgages change as interest rates change. This is based on LIBOR (London Inter-Bank Offer Rate). This can offer a lower interest rate because you are assuming some risk that the variable rate may go up. However, in the mortgage industry a loan that is variable from the beginning is not common (or recommended).
The third option is a hybrid between the two options mentioned above called an Adjustable Rate Mortgage. This has a fixed rate for a certain period of time and then becomes adjustable (or variable). For example, a 5-1 ARM is fixed for 5 years and then becomes variable thereafter based on the LIBOR. It usually comes with a minimum and maximum interest rates.
For my family, being debt-free is very important to us. We never planned on having a mortgage for longer than 7-10 years after we purchased our current home. We were always planning on paying more towards our mortgage as we could. However, given my disability insurance situation (i.e. I cannot get it), I didn’t want to lock into a very high 15-year fixed monthly payment.
For this reason, we got a 15-1 ARM which offered a lower interest rate than a 30 year fixed loan (but higher than a 15 year fixed by 0.25% points). This provided a low monthly payment that we could pay in all but the worst circumstances, but also provided a very low-interest rate with the opportunity to pay our physician mortgage off early.
What Should I Do With Any Equity?
When you refinance your house, it will cost you money. For us, it ended up being about $4,000 to $6,000 to refinance our home. Despite that, we had enough equity in our home (the value of the home – what you owe) to cover the costs.
When you refinance, the bank has an obvious conflict of interest to let you take out any equity in your home that you have so that they can refinance you up to the full value of the home. In this way, they will be applying interest you are required to pay back to them on a larger number.
This is why banks make sure you know you can refinance, if interested. They make money on the process and – if you take money from the equity in your home – they get to charge you interest for longer.
For this reason, we brought cash to close to pay for some of the processes and left any remaining equity in the home. Remember, our goal is to be debt-free. Not just to have a lower monthly payment on our physician mortgage.
When refinancing, I encourage you to keep your financial goals clear! If your long-term goal is to be debt-free, then don’t take out any equity you don’t need to use to pay for the physician home loan refinance!
Should I Change My Monthly Payment?
People refinance for three reasons. Two of them are good. One of them not so much.
The first two reasons are for a lower monthly payment (increases monthly cash flow) and a lower interest rate (less overall interest rate paid on the home). Both of these are good things. The third – not so good – reason people refinance is to take out equity on the home. We discussed this above.
If your monthly payment will be lower, this does beg the question, “What should I do with the lower monthly payment and extra cash flow?” Of course, this depends on what your cash flow plan is for your money. For my wife and I, we kept our monthly payment where it was prior to the refinance so that we are now putting an extra $400 per month towards our principle on the home each month.
However, if you aren’t accomplishing your annual savings goal – or have other higher interest debt – this may not be ideal for your situation.
Not sure what to do with your cash flow? Then, it is time for you to take the Medical Degree to Financailly Free course. The next course is available for purchase from May 26th to June 10th! If you click here, you can join the waitlist for the course right now!
If you are considering refinancing your physician mortgage, remember the goal should remaining becoming debt-free. Yes, the refinance will lower your monthly payment. Yes, it will save you overall interest paid on the loan.
Yet, don’t forget your overall purpose when deciding where and how to refinance. Have a plan for your cash flow. And, keep your goals in mind as you decide your term conditions.
Have you recently purchased or refinanced your physician home loan? What was your experience? Leave a comment below.
Thank you for an informative blog as some of us are in the same boat as you. Would you mind sharing what bank was your initial mortgage was with and who did you switch to.
First national bank of Pennsylvania for both