Most banks offering doctor loans have fixed-rate and adjustable-rate mortgage products. Depending on the type of property and the state you’re buying in, you have a variety of options:
- 15-Year – Conventional Fixed Rate Conforming/Nonconforming
- 30-Year-Conventional Fixed Rate Conforming/Nonconforming
- 40-Year-Conventional Fixed Rate Conforming/Nonconforming
- 10/20 Conforming/Nonconforming Fixed Rate Interest Only
- 10/30 Conforming/Nonconforming Fixed Rate Interest Only
- 3/1 ARM – 30 Year and 40-year Loan Term
- 5/1 ARM – 30-Year and 40-year Loan Term
- 7/1 ARM – 30-Year and 40-year Loan Term
- 10/1 ARM – 30-Year and 40-year Loan Term
- Conforming and Nonconforming-interest only
Check in with your lending officer to confirm these mortgage products are available for the doctor loan provided by the bank you’re working with.
What is the difference between a fixed rate and adjustable rate doctor loan?
These are the two main types of mortgages available today. There are hybrid options, but typically you’ll need to choose one or the other, so we’ll focus on the difference between these.
Fixed rate mortgages do not change interest rates over the life of the loan. Whether you choose a 15, 20 or 30 year mortgage, the interest rate will always remain the same. In turn, your payment will remain the same for the life of the loan. If you’re paying $1,300 a month for PITI (principal, interest, taxes & insurance) on your single family home in 2015, you’ll pay $1,300 30 years later on your last year paying off the loan in 2045.
A fixed rate means no surprises. You can plan on making the same payments over and over, without worrying about your rate and monthly payment going up.
However, fixed rate mortgages usually have higher rates than ARMs initially do.
Adjustable Rate Mortgages or ARMs change rates as the loan matures. Typically the rate will stay the same for a couple of years and then adjust upwards every year after that. For example, a 7/1 ARM will maintain the same interest rate for seven years, and adjust every year after that.
ARMs typically have lower initial rates than fixed mortgages, and can make it easier to purchase a more expensive home with less income.
However, ARMs can be very unforgiving if your rate goes up and you’re not ready. If you are considering an ARM, make sure you are disciplined and have a plan ready for the day it goes up.
You’re probably well aware of the financial meltdown the United States experienced in 2009. A large percentage of this event was caused by predatory lending and adjustable rate mortgages expiring and moving up to higher rates. People could no longer afford to make their monthly payments and started defaulting in droves.
There is no right or wrong between ARMs and fixed rate mortgages. Just make sure you think each option through and make a selection based on your financial goals, personal style and risk tolerance levels.