A physician mortgage can be a great way for a new doctor who wants to buy a home but is burdened by school debt to get their foot in the door of the property market.
According to the underwriting guidelines for such a mortgage, often known as a doctor loan, the underwriting procedure is less stringent than it would be for a conventional loan. However, before signing on the dotted line, weigh the advantages and disadvantages to ensure that this is the best decision for you.
Dr. Bryan Richardson, portfolio product manager at SunTrust Bank, situated in Richmond, Virginia, explains that the major advantages of doctor loans include access to financing with little to no money down and the absence of a requirement for private mortgage insurance. According to the company, "when compared to options that do not require mortgage insurance, this results in reduced payments."
When a borrower makes a down payment of less than 20 percent or refinances a mortgage with less than 20 percent equity in the home, conventional loans require private mortgage insurance, sometimes known as PMI, to be paid by the lender. In general, according to Bankrate, a personal finance website, private mortgage insurance (PMI) fees range from 0.3 percent of the original loan amount per year to about 1.5 percent of the original loan amount per year, depending on your credit score, mortgage product and term, and the size of your down payment as a percentage of the value of the home (LTV).
On a $200,000 loan, this equates to a payment of $2,000 per year, or $167 per month, providing a 1% private mortgage insurance (PMI) premium is paid. Richardson advises that the downside of a no-money-down option is that you would have little to no equity in the property. If property prices decrease, you may find yourself in a situation where you owe more on your mortgage than the home's fair market worth, which is known as being underwater.
For any affordable mortgage programme that offers a zero- or no-money-down option, such as government-sponsored loan programmes, this is a typical source of anxiety for borrowers. It is also common for a physician mortgage to have a little higher interest rate than a traditional loan. When paired with financing the whole purchase price of a home, this can result in a large increase in the amount of interest paid over the course of a loan.
Putting the numbers together
The following is an example of how the statistics break down on the purchase of a $300,000 residence: You put no money down and have a $300,000 debt on a 30-year with fixed Physician Loan Interest Rates in Michigan and a projected annual percentage rate of 4.5 percent. Your monthly mortgage payment is $1,520.06 (plus taxes and insurance). You will pay a total of $247,220 in interest throughout the course of the transaction.
In this example, you finance the $240,000 balance at an expected 4.25 percent interest rate using a traditional 30-year fixed rate loan and a 20 percent down payment ($60,000 in this case). Your monthly mortgage payment is $1,180.66, and you'll pay a total of $185,036 in interest over the course of the loan, assuming no principal reduction. However, if you pay down the same amount each month as the physician mortgage ($1,520.06), you will be able to pay off your mortgage in less than 19 years, rather than the traditional 30 years. In all, you will pay $112,243 in interest during the loan's term, which represents a savings of approximately $135,000 in interest compared to the doctor loan option.
