Doctor’s vs. Conventional Mortgage

This post is an expansion from a discussion with an attending reader who’s considering doctor’s mortgage.

Since within the last year I have purchased my first home with a doctor’s mortgage, and then refinanced it to a conventional mortgage. I would like to share a few things I learned about them.

Some people like the doctor’s loan because it’s believed to be

“No down payment, No PMI, No paystubs/W2 (just contract)”

but there’s more to the story.

 

  • doctor’s mortgage interest rate is generally 1% higher than conventional loans (this may more than offset the NO PMI sweet deal doctor’s mortgage has.) PMI for most conventional loan falls off automatically when your loan to value ratio (LTV) reaches 80% (this is not hard to accomplish as you put equity away monthly PLUS your house naturally appreciates some if you got a decent deal with the initial purchase.)
  • PMI only exists the first few years and for some less than one year of the life of the mortgage. However, doctor’s loan with a 1 whole point higher interest will be there for the entire life of the loan. So definitely crunch your numbers; not to be fooled with the NO PMI bait of doctor’s loans.

 

  • Almost all major doctor’s mortgage companies still requires at least 5% down and that 5% has to be your OWN Money (ie not a gift, but money that has sat in your bank account for at least 2 months, because under-writing ask for at least 2 months of bank statements. or it has to be money that can be paper-trailed to the source: YOU.)
  • Some small banks will literally take 0% down. But 0% down is pretty detrimental to your financial health as the amortization table looks quite ugly (ie. the proportion of principle to interest per each mortgage payment is very very low when it is 100% financing/ 0% down).
  • Additionally, the more you put down, the lower your interest rate can get. This is true even with doctor’s mortgage. You can ask you lender to provide you with a table of amount of down payment corresponding with the respective interest rate you will get given the rest of your loan application stays the same (ie. same credit score,  same monthly debt liability, same income, same purchase price, etc.)
  • When I was shopping for doctors loan, I got estimates from BBVA, BOA, and Utah Physicians Home Loans. BOA was the first to show me with a greater down payment, they could lower my interest rate.

 

  • If i had to do it all over again, i would have chosen an ARM mortgage rather fixed rate. my friend went for a 3.625%, 0% down, 5/1 ARM doctor’s mortgage while I was stubborn and got a 11% down 4.375% 30 year fixed mortgage. in less than a year, i refi into a ARM @ 3.375% conventional mortgage by paying down my mortgage a few 1000’s (plus my home value went up 16k) to get 80% LTV and avoid the PMI.
  • In 20/20 hindsight, i would have gone straight for ARM at purchase instead of refinancing into ARM. I would have gotten the lowest interest rate possible (ARM frequently is 0.5%-1% cheaper than fixed rate). When I refinance after 7 months of purchasing my home, I did the calculation and learned that I can easily pay off the entire house within 4 months (on my then conservatively estimated attending salary) of the first rate adjustment (even if it adjusts to the maximum life time rate  @8.375%.)
  • Low interest rate is very important at the beginning of your mortgage life, as you have the largest mortgage principle debt early on. This is exactly reverse of how your retirement fund works: at the beginning of your retirement savings, the saving rate matters lots more than return/gain rate, because you have little principle nest egg. But when nearing retirement, the rate of return matters much more than the rate of saving as you are near the maximum nest egg before retirement.

 

 

  • If you crunch the number, and are certain that you can pay off your mortgage shortly if/when the rate adjusts higher, I highly recommend going for ARM. You will get a nice low interest rate for the fixed rate portion of the mortgage, saving you lots in the early years of your mortgage, allowing you to build equity much faster on a often time smaller mortgage payment (free up cash flow).  Then, for most of us, our income at least 4x-6x when we finish training and become attending, which fits nicely into a 5/1 ARM or 7/1 ARM time frame.
  • For instance, when I refinance my doctor’s loan, my mortgage went from 1088/mo to 925/mo, while the smaller payment actually contributes to a faster rate of equity building, ie. my principle payment went from just 300/mo to nearly 350/mo.  So clearly the benefit of lower interest rate in the early years of the mortgage is manifold:
  1. Lower mortgage payment, freeing greater cash flow
  2. Lower interest rate, less money down the drain
  3. Faster equity building with higher proportion of principle payment/mortgage payment
  4. You can put the cash flow towards higher interest debt (student loan), higher return investment (like ROTH)

 

 

 

in short, I think conventional loan is a better deal than doctor’s loan.

the true advantage of doctor’s loan is that under-writing is MUCH LESS stringent than conventional loan, and therefore you can get approved with just a contract/start within 60 days, rather than actual pay stubs. this allows us to buy a house a little sooner than the conventional loan.  but if you ask me, it might be worth the wait… A few months of savings for some down payment and actual paystubs can save you quite a bit of interest over the life of the loan.

 

  • did you take a doctor’s loan? was it worth it?
  • did you have a conventional loan? how did it work out for you?
  • did you get a ARM or fixed rate mortgage? how did it work up for you?

 

Comment below!

Refinance your student loans with DRB now and save interest throughout residency.

As some of my readers are justly nervous about paying off or down their student loan with credit card offers, there is finally a safe and sound alternative to letting the monstrous interest rate of 5-9% compound throughout pre-attending years.

I just learned that DRB has rolled out a new program to allow residents and fellows to refinance their student loans to a lower interest rate. This program is quite amazing. In fact, if this program were available last year, I would have refinanced my 6.8% student loan with DRB in a heart beat. I did apply for refi with DRB back then but could not qualify because they only had programs geared towards attending physicians with income 5x of my internship income.

Here’a  flyer for the DRB refi program.

DRB Resident Fellow Student Loan Refinance Program

For more details and case studies, check out this short and sweet power point presentation.

DRB Cases and Details

If you apply to refinance your student loan via this link, you will get a $300 bonus (yes you get $300 bonus; I asked DRB to increase it!) when your loan closes. I will also get a referral fee. As refinancing your student loan saves you 10’s of 1000’s of dollars in interest, you will also support DWM.

You can also read about what white coat investor has to say about refinancing your student loan in residency. 

Bottom line is, if you are at all concerned about whether you’d be able to get a 503 EMPLOYEE (not just contractor) job in order to qualify for PSLF, refinance your 7% student loans to 2%, the sooner you do so, the more you save.

  • Do you want to pay your loan off rapidly or wait for PSLF? why and why not?
  • Have you look into the 503 employee jobs available in your field? What are the chances you can get such a job right out of residency?
  • Do you know 40% of our peers are counting on PSLF? Do you think there are 40% 503 employee job across the board in medicine?
  • Do you see any down side to lowering your interest rate now OTHER THAN, not being able to go for PSLF?

Comment below!

Rainy Day Fund

Every financially responsible adult I know has a rainy day fund.

I have a non-conventional emergency fund, totaling 220k, of which:

  1. 50k is 0% interest for next 3-12 months.
  2. 50k charges 2% transaction fee for 0% interest for 12-18 months; effectively 1.33-2% interest rate.
  3. The remaining 120k are 0% interest for 45-60 days (ie. grace period).
  4. I can open additional new credit cards, at any time, with 0% interest for 12-21 months (citibank has the longest introductory 0% rate) if there are additional incentives.

Because of my credit limit and credit score (allowing me to qualify for additional credit with great terms at any time), I am reluctant to put any actual money into a rainy day fund.

Why would I put cash away in liquid accounts making 0.1% interest when I can put it into a ROTH account @ the cheapest tax available to me in my life going forward & can get 8-10% return in the long run?

The whole concept of emergency fund is that you may need the money unexpectedly. But once you use the emergency fund, you know exactly what to expect. My point is people guess/estimate and save 6 months of expenditure for rainy day fund, and they lose out on interest/return if rainy day never hits or hits much later than now… they lose also if rainy day hits, whether they saved up in advance or they pay of their credit cards 12 months later

 

So I like my rainy day fund to be THERE but not costing me anything in the form of missing higher interests/ returns. I can use my rainy day fund interest free for greater than 1 year, make a little cash back bonus, and easily afford the monthly payment, and just pay off the balance before the promotion ends.

For example, I charged my brand new roof and AC on a new credit card when we first moved in last year. 15k @ 0% interest rate for 15 months, monthly payment of ~$150.

More importantly, I knew how much I needed to save to pay this off when the promotional 0% interest ends. With 2.5 months left, I have pretty much saved enough to pay off the card entirely, and for any amount I do not pay off, I have multiple balance transfer checks I can write to pay it off, and get to ride low interest rate 1.33-2% for another 1+ year. Using my credit card as my rainy day fund allowed me to

  1. funnel limited cash towards ROTH and back then student loans (providing me with much higher return 6-12% than a liquid account could offer)
  2. i borrowed my rainy day fund @ 0% for 15 months, and a smaller portion of it possibly @ max 2% interest (near inflation rate) for the next 1+ year
  3. i knew exactly how much i needed to save to pay off my “used” rainy day fund, giving me tremendous flexibility/hindsight in managing my cash flow

 

Traditionally, people make educated, or not, guesses and save for emergencies. When emergencies arise, they have the cash sitting to pay for them.

I like to put my money, as much as I’m comfortable with, where I can generate the MOST return/gain/avoid loss at every given moment. I rest well at night, knowing that I have a pretty enormous emergency fund available, that buys me plenty of time to save and pay it off when the rate gets ugly.

In summary, my rainy fund works as such:

Emergency hits-> Charge onto credit cards OR if cash is needed, use balance transfer checks -> devise pay off plan so that the credit card is paid off by end of promotional rate   -> extra cash flow beyond paying off non 0% debt go towards higher return investment instead of sitting in “emergency fund”

This takes the guessing out of building an emergency fund, and allows me to funnel all my resources towards higher return.

 

I’d imagine at the rate I’m able to channel my limited income as a pgy1 towards paying off my student loan, now maxing out 23.5k of annual roth space, I would one day have a liquid saving account/money market account for rainy day fund.

Using my credit limit that gives me 12-18 months to pay back interest-free money is likely only useful to me for the next 5 years while I’m still in training.

 

 

  • What is your emergency fund?
  • How much do you save per month in your rainy day fund?
  • Are you comfortable with using credit cards for emergencies? why and why not?

 

Comment below!

 

Medscape report II

Paying off Student Loans by Age Group

“It is not surprising that the percentage of school debt falls steadily with age. According to the AAMC, medical school debt has increased by 6.3% since 1992 compared with a 2.5% increase in the Consumer Price Index.[5] The AAMC also has reported that the median 4-year cost to attend medical school for the class of 2013 was $278,455 at private schools and $207,868 at public ones.[6] Given these high tuitions, resident debt has risen much more rapidly than inflation or resident compensation. According to the Medscape survey, 20% of physicians 50 and older are still carrying this liability. Even more physicians may owe money on college in mid-life as the current younger group of physicians age, and their higher debt continues into later life.”

In my age group 28-34, 67% of us young docs are still carrying/paying off student loans. Given the traditional medical students usually finish residency training around age 30.

 

Fortunately, for a multitude of reasons,

I have paid off my student loans completely at age 30.

I just graduated from medical school in 2014 and am only an intern now.

My goal is to help the other 67% who are still carrying (likely massive 200k-500k) student loans to get rid of this monetary noose around their necks ASAP. Paying interest at 6.8% is a pretty bad guaranteed loss… Most residents don’t have the income/debt ratio to qualify for refinancing their student loans to a lower rate. [I wrote this few months ago, but now residents and fellows CAN actually refinance their 7% student loans with DRB to as low as 1.9% loan. More details on refinancing your student loan with DRB here.]

If you do the math, you’d see that the student loan burdens are massive because of the HIGH interest rate combined with LONG TIME the principle is compounding. Students who graduate with 400k debt, only borrowed 330k in the first place. 50-75k of the total debt at graduation are simply interests+ origination fee accrued during school.

 

4 measures one can take to minimize student debt are:

1) Minimize and delay taking out student loan (be frugal, creative, and live within/below your means). Cost of attendance are generous estimate of how much you need for school each year, your budget should be well below the COA. Borrow well below your budget because when you run out, it’s easy to get more (from my experience, shooting an email to the financial aid office saying “I need 10k.” will get me the money within 3-4 weeks.)

2) DELAY and AVOID debts with high interest rates (take on a debt with lower interest rate such as credit card balance transfers w annual interest rate 2-3%, utilize home equity loans, or better still use 0% APR promotional rate for 18 months on your living expenses/tuition. Then either pay it off when the 0% APR is up with readily available student loan or simply balance transfer another card for another 1-1.5 year @ 2-3% interest/balance transfer fees.)

3) Prioritize your debts; pay the debt with the highest interest rates first. 

4) Refinance your student loans to a lower interest rate. As a DFD reader, you can get a $300 bonus when your student loan refinancing closes with DRB. Use this link.

 

 

*You can see the full Medscape report here.

Safer route than mine… Still guaranteed saving

As some of my readers are justly nervous about paying off or down their student loan with credit card offers, there is finally a safe and sound alternative to letting the monstrous interest rate of 5-9% compound throughout pre-attending years.

I just learned that DRB has rolled out a new program to allow residents and fellows to refinance their student loans to a lower interest rate. This program is quite amazing. In fact, if this program were available last year, I would have refinanced my 6.8% student loan with DRB in a heart beat. I did apply for refi with DRB back then but could not qualify because they only had programs geared towards attending physicians with income 5x of my internship income.

Here’a  flyer for the DRB refi program.

DRB Resident Fellow Student Loan Refinance Program

 

For more details and case studies, check out this short and sweet power point presentation.

DRB Cases and Details

 

If you apply to refinance your student loan via this link, you will get a $300 bonus (yes you get $300 bonus; I asked DRB to increase it!) when your loan closes. I will also get a referral fee. As refinancing your student loan saves you 10’s of 1000’s of dollars in interest, you will also support DFD.

 

You can also read about what white coat investor has to say about refinancing your student loan in residency. 

 

Bottom line is, if you are at all concerned about whether you’d be able to get a 503 EMPLOYEE (not just contractor) job in order to qualify for PSLF, refinance your 7% student loans to 2%, the sooner you do so, the more you save.

 

 

  • Do you want to pay your loan off rapidly or wait for PSLF? why and why not?
  • Have you look into the 503 employee jobs available in your field? What are the chances you can get such a job right out of residency?
  • Do you know 40% of our peers are counting on PSLF? Do you think there are 40% 503 employee job across the board in medicine?
  • Do you see any down side to lowering your interest rate now OTHER THAN, not being able to go for PSLF?

Comment below!