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.
- 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.
- 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.
- 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.
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.
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