Ah, choices. So many choices, no?

For many new residents, Match Day is the same day they plan to pick up and move to a different city or state. After getting their minds around the new city they’re moving to, relocating residents often follow up their Match Day results with one question:

“Should I rent or buy a home with a physician loan mortgage?”

This question isn’t limited to new residents; it can impact established doctors moving to a different job, or anyone else outside of the medical industry. Fortunately, using a physician loan can make it easier for doctors and new residents to buy a house earlier on in their careers.

While potentially making buying your house easier, physician home loans may not be a perfect fit for you. Keep reading to see arguments for each side.

Factors That May Impact Your Decision

Flexibility – Both renters and buyers have extra flexibility in different areas. Renters don’t have to worry about leaks and maintenance issues, and can move wherever they want each year. Renting offers ultimate flexibility in that regard. On the other hand, homeowners can make improvements and changes to better suit their lifestyles. If you’d like to update your kitchen or bathroom, you can make that decision on your own. The flip side is that you’ll have to deal with issues as they come up, or hire someone who will do the repairs. This can quickly become a costly nuisance, especially in older homes.

How Long Do You Plan On Staying? – Knowing how long you will stay in an area has a huge impact on your decision. If you don’t plan to stay there long, it may make more sense to rent. If you plan on staying there longer (over 3 years), it would probably be beneficial to buy a house and start building equity.

One question to ask yourself is: “Would I regret not buying a house if I had to stay a few years longer?” If the answer is yes, you should consider buying. Online rent calculators like this one can help you see which option makes more sense for your situation.

How Do You Feel About Your Job Opportunities? – If you feel you will have a stable job and will stay where you go for your residency, you should consider buying. This goes hand in hand with the last factor: if you are confident that you will want to stay in a particular hospital or area, buying may be a better choice. If you aren’t sure how stable the market is where you moving, renting could be the better option.

Housing Market – Yet another factor to consider is the state of the housing market in the area you will be moving. Always do a little research to see if it’s a good time to buy a house in that particular area.

Your Credit Score – While a physician loan mortgage makes it easier for doctors to get a loan, your credit score will still play a major factor in the lender’s decision. Having a low score can negatively impact the terms and rates you qualify for.

Do You Have Pets? – Having pets can make finding a new apartment or rental home very difficult in some markets, especially if you want a yard. Many apartments and rental properties do allow pets, but you’ll pay a premium in addition to higher deposit fees. Buying your own home offers much more flexibility in this regard.

Have You Ever Considered Being a Landlord? – As a new resident or relocating physician, it’s possible to keep and rent our your old home after moving on to a new area. Property management companies make this easy by removing most of the headache from being a landlord. Most of them take care of everything from finding tenants to dealing with complaints and repairs; you just pay them a percentage of the monthly rent (8% – 10%) plus a tenant finding fee (1/2 month to 1 full month’s rent). Being a landlord isn’t for everyone, but if you’ve considered it in the past this may be something to think about.

Compare the Payments – Look at how much you will pay per month on your physician loan mortgage vs. how much you will pay in rent. Remember that a good chunk of your mortgage payment will go towards paying off your house, which is kind of like saving. With rent, you pay the entire sum to your landlord in exchange for a place to live. With a mortgage, you pay the bank a portion of your payment in rent (your interest payment), but the rest goes towards what you owe them (your principal).

1. For example, payments for a $200,000 30-year fixed mortgage with a 3.5% interest rate are $898.09 per month.
2. Of this $898.09 monthly payment, $583.33 is paid in interest, and $314.76 goes towards repaying the principal loan balance.
3. The longer you make payments, the less you pay in interest and the more you pay towards the principal.

When comparing rent and mortgage payments, you can use the money you pay on interest as the cost of your mortgage. The remaining money, in this case, $314.76, goes towards paying off your house. If you end up selling, and the home has increased in value, you will likely get this money back.

If you’d like to apply this methodology to your situation, this calculator can show you exactly how your mortgage payments will be broken out.

Some people who want to sell you a house will tell you, “Buying a house is a great investment.” This is not exactly true. Homes don’t have the best long-term rate of return and have historically underperformed compared to the stock market.

Roughly, average yields on a home are 3% as opposed to an average of 7% in the stock market. Everything being equal, and all other criteria aside, putting money in a house that returns 3% is better than spending it on rent. Therefore, you can think of paying off your mortgage as saving instead of investing.

If that’s all too much to take in don’t worry, you’re not alone. Online calculators like this one or this one are fantastic ways to get down to the essential numbers.

Physician Loan Mortgage vs Renting Conclusion

Owning a home isn’t a good or bad decision on its own, it depends on your individual situation and goals. Residents may benefit from buying with the intent to sell at a profit, as many have in the past. This allows them to live in a house while paying a mortgage, and then sell it when they want to move. Doing so often costs less than paying monthly rent, including maintenance costs.

Physician loans make it easier for relocating doctors and residents to buy a house, but buying isn’t for everyone.

Over the next few weeks, think about what would work best in your situation and how it will impact your post-Match Day move. By making the right decision, you’ll have one less thing to think about when starting your new job.

Whatever you decide, start putting money away now so you can have something saved for when you move; who knows what opportunities might appear.

Physician mortgage loans have many benefits, including a low down payment requirement, simple income verification process, and no PMI. Unfortunately, doctors and residents may pay slightly higher interest rates in order to take advantage of them.

As a borrower, you have the option to buy down your interest rate and lower the total cost of your physician mortgage. However, you will be required to pay for the rate reduction at closing. If you are considering a buydown, you will have to choose between reducing your closing costs and lowering your monthly mortgage payment.

What is a physician mortgage buydown?

A mortgage buydown occurs when a borrower makes an upfront payment to lower their interest rate. The interest rate reduction is quoted in points, and each point costs 1% of the total loan amount. The number of points you pay for at closing determines how far your rate will drop.

By buying down your interest rate you could save thousands of dollars over the life of your loan.

1. A doctor who qualifies for a 30 year fixed rate mortgage of $500,000 at 4.750% will pay $938,966 back to the lender over the full term.
2. If that doctor decides to buy down his interest rate by four points (a 1% rate decrease) he will have to pay $20,000 at closing.
3. However, he will save over $100,000 in interest over the next thirty years.

A buydown would also decrease your monthly payments. The doctor from the example above will go from a monthly payment of $2,609 to a payment $2,316 (principal and interest only).

Is it worth it?

For many borrowers, a buydown is cost prohibitive. The amount of your physician mortgage determines how much your points cost and, ultimately, how much you will have to spend on a buydown. Established doctors with cash reserves have more freedom to buy down their interest rates than residents or new doctors.

If you are able to buy down your interest rate it is also important to consider how long you will stay in your home. You can calculate your break even point by dividing the savings on your monthly mortgage payment by the total cost of your buydown.

The doctor from the example above will have to make 69 payments for 5 years and 9 months in order to break even on his investment ($20,000/$293).

You may benefit from a buydown if you are an established doctor with a long term assignment. Your job and your ties to the community will most likely keep you from moving within the next few years. By buying down your interest rate you will lower the cost of your monthly payment and save money for other expenses.

You might want to avoid an interest rate buydown if you are a medical resident. After you complete your residency, you will apply for a permanent position and potentially relocate to begin working. Doctors with short term assignments should also be cautious, especially if they are unsure of how long their work will last.

A buydown will not benefit you if you do not stay in the home past the break even point of your mortgage.

Conclusion

Physician mortgage loans may have slightly higher rates of interest than most conventional mortgages. By buying down your interest rate at closing you can save money over the course of your loan.

Established doctors will most likely benefit from a buy down, while residents and doctors with temporary assignments might want to refrain from buying down their interest rates. Purchase points only if you have the funds available and if you plan to stay in your home past the break even point of your mortgage.

A buydown is designed to maximize the benefits of your mortgage, and physician mortgage loans are no exception. Thoroughly consider a buydown, then choose the best option for you and your home.