Buying a house- use physician loan or the normal 20% down?

[spiffycats]

Hello all ,we are looking at purchasing out first home now and a few things popped up, one is should we do the physician loan? The rationale behind this is that eventho we have 20% to put down, saving that money in other investments right now may make more sense as there is a housing bubble that may explode, and if does explode it would make sense to use that money to buy income property? OR is there never any good reason to do the physician loan if you have the 20% down? Thanks in advance!

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[Ray D. Ayshun]

Hello all ,we are looking at purchasing out first home now and a few things popped up, one is should we do the physician loan? The rationale behind this is that eventho we have 20% to put down, saving that money in other investments right now may make more sense as there is a housing bubble that may explode, and if does explode it would make sense to use that money to buy income property? OR is there never any good reason to do the physician loan if you have the 20% down? Thanks in advance!

We didnt have the 50k to make a 20% down payment, so it was simple in our case. Had we had it though, i think we still wouldve taken the physician loan. The biggest advantage i saw to the down payment was lack of pmi, which is the entire reason to get the physician loan. Your career is worth the equity for them. Sure, you technically have a slightly lower interest rate with a standard loan vs physician loan, on the order of 0.25%, but its not worth locking up the cash to me. On the other hand, if youre doing this as an investment during residency cause it sounds smart, id advise against it. Physician loans help banks get physician clients at the beginning of their careers. They help resident physicians get homes who need homes, but with market and maintenence risks, and dont neglect the fact that the majority of your mortgage payment is not going to the principal at first.

 

[spiffycats]

We didnt have the 50k to make a 20% down payment, so it was simple in our case. Had we had it though, i think we still wouldve taken the physician loan. The biggest advantage i saw to the down payment was lack of pmi, which is the entire reason to get the physician loan. Your career is worth the equity for them. Sure, you technically have a slightly lower interest rate with a standard loan vs physician loan, on the order of 0.25%, but its not worth locking up the cash to me. On the other hand, if youre doing this as an investment during residency cause it sounds smart, id advise against it. Physician loans help banks get physician clients at the beginning of their careers. They help resident physicians get homes who need homes, but with market and maintenence risks, and dont neglect the fact that the majority of your mortgage payment is not going to the principal at first.

Fortunately i am now done with residency, what I am seeing is the physician loan is about 0.5% higher interest than the standard 20 % down . Do you think this makes sense to do?

 

[FutureInternist]

Are all of your retirement & education accounts funded?
Interest rate on school loans?

I put 5% down & used the extra $ to pay down my loans since that rate was >2 points higher than house loan. Whatever was left over went into Roth IRA for myself & wife & then into a 529 for kiddo.

Also keep in mind that there will be certain expenses that come with the house..HOA fees, landscaping, ?new/more furniture etc so you need to set aside some money for that as well.

 

[colbgw02]

Broadly speaking, it's probably more prudent to put the 20% down, but the devil really is in the details.

How risk adverse are you? How, specifically, would you invest the down payment if you go with the physician loan option? How will you handle losing money if you invest your down payment only to see it lose money? How much will you kick yourself if the stock market goes up 10-15% per annum for the next 3 years?

What is the interest rate you're being quoted? How likely is it to change before you lock it in? How does that number compare to historicaly lows? To inflation?

How old are you? And for how long do you plan on working? Have you invested a lot already for your age? Or do you need to play "catch-up" to reach your goals?

How much do you love this house? Is it your "forever" home? A starter? How long do you plan on living there? Does is need work for which a home-equity line of credit would be useful?

 

[NITRAS]

The physician loans will have a higher interest rates than market rates. PMI can (usually) be dropped without refinancing once you reach a 20% equity position.

I think it is healthy to never think of a home as a "forever home". Your needs and wants will change. If you build a house, you'll want some changes as soon as its finished. You probably won't live in that house for more than 5 years, especially if you are at the beginning of your career.

 

[link2swim06]

The physician loans will have a higher interest rates than market rates. PMI can (usually) be dropped without refinancing once you reach a 20% equity position.

I think it is healthy to never think of a home as a "forever home". Your needs and wants will change. If you build a house, you'll want some changes as soon as its finished. You probably won't live in that house for more than 5 years, especially if you are at the beginning of your career.

Thats not always true. I just got a loan that had the exact same interest rate.

With that being said, your second point is very true. I got a 10 ARM, I doubt I'll be in it much longer than 10 years.

 

[spiffycats]

Thats not always true. I just got a loan that had the exact same interest rate.

With that being said, your second point is very true. I got a 10 ARM, I doubt I'll be in it much longer than 10 years.

may you share which loan servicer you went with that offered the same rate?

 

[spiffycats]

Broadly speaking, it's probably more prudent to put the 20% down, but the devil really is in the details.

How risk adverse are you? How, specifically, would you invest the down payment if you go with the physician loan option? How will you handle losing money if you invest your down payment only to see it lose money? How much will you kick yourself if the stock market goes up 10-15% per annum for the next 3 years?

What is the interest rate you're being quoted? How likely is it to change before you lock it in? How does that number compare to historicaly lows? To inflation?

How old are you? And for how long do you plan on working? Have you invested a lot already for your age? Or do you need to play "catch-up" to reach your goals?

How much do you love this house? Is it your "forever" home? A starter? How long do you plan on living there? Does is need work for which a home-equity line of credit would be useful?

Fantastic questions and really gets me thinking, so where we are based the housing market is insanely right now, meaning a bubble, thus the goal of keeping the down payment in the bank would be so that as soon as the real estate bubble here bursts we can buy income property with that money...additionally stock market investing is not a bad idea
in terms of the conventional loan out here with 20% down , the interest rate is 4.5% today...the best interest rate with the physician loan i have been offered is 5%, so a difference of 0.5%, how significant is this? is this worth keeping the 200k in the bank for?
this will not be a forever home i am sure, we are 30 and would ideally move after 5 years and then either sell or rent it out , hoping to work for 30 + more years

 

[Ray D. Ayshun]

Fantastic questions and really gets me thinking, so where we are based the housing market is insanely right now, meaning a bubble, thus the goal of keeping the down payment in the bank would be so that as soon as the real estate bubble here bursts we can buy income property with that money...additionally stock market investing is not a bad idea
in terms of the conventional loan out here with 20% down , the interest rate is 4.5% today...the best interest rate with the physician loan i have been offered is 5%, so a difference of 0.5%, how significant is this? is this worth keeping the 200k in the bank for?
this will not be a forever home i am sure, we are 30 and would ideally move after 5 years and then either sell or rent it out , hoping to work for 30 + more years

If you're thinking your market is about to correct itself why buy a million dollar house for 5 years? Maybe there's a market for 5k monthly rental properties, but seems risky to bank on that.

 

[VA Hopeful Dr]

Fantastic questions and really gets me thinking, so where we are based the housing market is insanely right now, meaning a bubble, thus the goal of keeping the down payment in the bank would be so that as soon as the real estate bubble here bursts we can buy income property with that money...additionally stock market investing is not a bad idea
in terms of the conventional loan out here with 20% down , the interest rate is 4.5% today...the best interest rate with the physician loan i have been offered is 5%, so a difference of 0.5%, how significant is this? is this worth keeping the 200k in the bank for?
this will not be a forever home i am sure, we are 30 and would ideally move after 5 years and then either sell or rent it out , hoping to work for 30 + more years

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Just for fun I put in a 500k mortgage at 4.5% and 5% (left insurance and tax at zero for convenience sake) and did a 30 year fixed loan.

5% with 0 down will run you 2600 just on the house itself. 4.5% with 20% down is 2000. So a difference for the year of about 7k/year. A 7% ROI on invested money isn't crazy, so investing that 100k down payment works out to be about the same on average.

 

[colbgw02]

this will not be a forever home i am sure, we are 30 and would ideally move after 5 years and then either sell or rent it out , hoping to work for 30 + more years

Based on this, I would go with the physician loan. I would not tie up that kind of money in an illiquid investment like real estate if you have a 5-year horizon.

I’ll reiterate the question about buying this much house in a market where you’re expecting a big correction? Or are we talking about Silicon Valley or something where $1MM gets you a 1500 sq. ft. 3/2 ranch?

 

[spiffycats]

Based on this, I would go with the physician loan. I would not tie up that kind of money in an illiquid investment like real estate if you have a 5-year horizon.

I’ll reiterate the question about buying this much house in a market where you’re expecting a big correction? Or are we talking about Silicon Valley or something where $1MM gets you a 1500 sq. ft. 3/2 ranch?

yes unfortunately we are in a high demand market where 900k gets u a 3 bath 2bed 1800 sq feet, i really dont know if it will ever truly correct here as even 600k 2 bedroom condos have multiple offers over asking

 

[atomi]

My choice was to put the 20% down. There is more risk in equities and I think the potential downside outweighs the potential upside. Plus it's a lot simpler.

 

[colbgw02]

yes unfortunately we are in a high demand market where 900k gets u a 3 bath 2bed 1800 sq feet, i really dont know if it will ever truly correct here as even 600k 2 bedroom condos have multiple offers over asking

A lot can happen in five years. I bought in a similar market with a 5-year timeline too, which was 2006. Bam - the Great Recession hits and I'm stuck writing a hefty check just to get out from under the thing.

I'm not saying that the market will do what it did for me in 2008-09, but I would only purchase a home at that price point if I were willing to become a landlord (for that specific property) when it's time to move on. The thing about homes at that price point is that even relatively small market drops percentage-wise translates to a lot of money. Make sure you're in a position to ride out the storm, should one come.

 

[Arcan57]

A lot can happen in five years. I bought in a similar market with a 5-year timeline too, which was 2006. Bam - the Great Recession hits and I'm stuck writing a hefty check just to get out from under the thing.

I'm not saying that the market will do what it did for me in 2008-09, but I would only purchase a home at that price point if I were willing to become a landlord (for that specific property) when it's time to move on. The thing about homes at that price point is that even relatively small market drops percentage-wise translates to a lot of money. Make sure you're in a position to ride out the storm, should one come.

The issue with becoming a landlord is if you're doing it because the market cratered then you may be looking at years of a slow leak because a lot of physician houses aren't going to be able to be rented for what the mortgage+maintenance cost.