Rates Rise: How to Navigate Home Buying in Today’s Market
By Eileen Derks, Senior Vice President, Head of Mortgages at Laurel Road; A 2022 Platinum WCI Medical School Scholarship Sponsor
Since the start of 2022, the Federal Reserve has raised mortgage rates several times in an effort to curb inflation. After remaining at historic lows throughout 2020 and 2021, interest rates are at their highest levels since 2009 and are expected to continue to rise in 2023.
However, rising rates should not necessarily discourage you from buying a home. For physicians considering buying a home, now may be the time to buy. Even though rates have increased significantly since 2020, they are still at historic lows in the context of the past decades. For example, the average annual interest rate from 1973 to 1992 remained above 8%, reaching as high as 16.63% in 1981. Compared to this nearly 20-year period, current rates are still quite low. .
For doctors looking to buy a home, now may be the time to act, as rates are expected to continue rising next year. In this type of environment, the earlier you act, the better, as it can help you get a lower rate. Let’s look at some aspects of getting a mortgage that physicians should also consider given current market conditions.
Understanding fixed and ARM options
The two main types of mortgages are fixed rate and variable rate (ARM). Which one is best for you will depend on your personal financial situation and goals.
- With a fixed rate mortgage, the interest rate remains the same throughout the life of the loan, which means that your monthly payment will remain the same. The main advantage of this type of loan is predictability, which allows borrowers to budget for repayment. Good credit could help you get a low rate.
- With a adjustable rate mortgage, after the initial fixed rate period (initial fixed rate options are three, five, seven or 10 years), the interest rate changes periodically to reflect current market conditions. If market rates go up, your rate, and therefore your loan repayment, will go up. If rates go down, you’ll pay less. Generally, there is a cap and a floor that limit the increase or decrease in the interest rate you will pay. This can be a good option for buyers who don’t plan to be in the house beyond the fixed rate period or for those who prefer a lower rate upfront and can absorb volatility later in the loan.
Some borrowers prefer the stability of a fixed rate, while others are willing to risk a rate hike given the opportunity to save money if rates remain low or fall. Factors such as whether you plan to move in a few years, whether you know your income will increase significantly in the future, and whether you are comfortable with refinancing are all important factors when choosing between fixed rate mortgages. and variable rate, in addition to looking at where the rates currently are.
Benefits of Locked Rates
When applying for a mortgage, your lender may offer you a rate lock, an option to lock in your interest rate between the time you sign a purchase agreement and the time you close on the home. A rate lock protects you from market fluctuations and guarantees that a mortgage lender will honor a specific interest rate for a specified period of time. Typically, there is no charge for locking your rate. Shopping around and comparing rates as well as processing and loan fees is a best practice when looking for a mortgage versus a simple interest rate.
Be sure to take care of your credit and financial situation during the application process, whether you’ve locked in your rate or not. Any changes in these areas or your loan amount can affect your rate. Policies and terms differ by lender, so be sure to read the fine print when evaluating lenders.
Mortgage Options for Physicians
As a doctor or dentist, special mortgage options are available that can help you save time and money. When comparing physician mortgages, it is important to carefully consider several factors:
- Annual Percentage Rate (APR): This is a standard calculation meant to represent the cost of borrowing and is a combination of the interest rate and many fees associated with the mortgage.
- Terms: Including term of loan, fixed or variable nature of interest rate, mortgage insurance requirements and any unique features, such as prepayment penalties. Take the time to explore which term best suits your unique situation.
- Loan amount limits: These limits are based on the mortgage itself, so a loan with a limit of $1 million and a down payment requirement of 10% means you can consider homes with a purchase price of approximately $1.1 million.
- GPA: Generally, if you have less than 20% for a down payment, you will need to pay for private mortgage insurance (PMI). But some physician mortgages will let you skip the PMI (even without the 20% down payment), which increases your affordability and can potentially save you hundreds of dollars each month.
The Laurel Road Physician Mortgage is a specially designed home loan for doctors and dentists offering up to 100% funding1 or without down payment, for loans of $1 million or less, without PMI2. Additionally, these mortgages have fewer restrictions than conventional mortgages, which recognizes the creditworthiness and earning potential of medical professionals. Laurel Road also offers lender fee discounts with no processing or application fees – a $1,095 value – and closing cost credits up to $650.3
Career Stage Considerations for Buying a Home
Where you are in your career will likely affect when you buy your home and what home price you can afford. Resident physicians are always striving to reach their maximum earning potential and often manage significant medical school debt within their budget. Before making the decision to buy a home, residents might want to ask themselves questions such as:
- What motivates me to consider buying a home right now? Short-term and short-term financial goals? Life events, ie marriage, children, new job?
- Is there a high probability that I will have to move to another region within 3 to 5 years?
- What are my career goals? Will I need to attend more schools or training to specialize in an area?
- If I don’t buy now, what is the cost of not buying a house now?
- What are my budget limits and how would a monthly mortgage payment fit into a 50/30/20 plan? If you apply this budgeting approach, your monthly mortgage payment is included in bucket 1 along with your “basic needs,” which should be no more than 50% of your budget.
- How urgently do I need accommodation? For example, if you have a growing family, you may have an immediate need for more space.
After considering questions like the ones above, it may be wise to wait to buy a home until you are further along in your career. Nevertheless, these factors should not prevent residents from considering buying a home before the end of their residency. With current unusual market conditions and the likelihood of rates rising over the next year, it may make sense for residents to buy as soon as possible and start making money on their homes now.
To understand if buying a home is right for you at this stage of your career and under these market conditions, talk to an experienced mortgage professional about your goals and budget. They can help guide you and determine the best path for your home purchase. Learn more about Laurel Road physician mortgage options here.
100% financing and no private mortgage insurance (PMI) is only available to trainees, residents, fellows, physicians, dentists, clinical professors, researchers, or physician managers with a current license and a Doctor of Medicine (MD), Doctor of Osteopathic Medicine (DO), Doctor of Podiatric Medicine (DPM), Doctor of Dental Surgery (DDS) or Doctor of Dental Medicine (DMD) degree. 100% financing is available on the purchase or cashless refinance of a principal residence and the loan amount does not exceed $1,000,000. Retired physicians are not eligible. Additional conditions and restrictions may apply.
Only available to Trainees, Residents, Fellows, Physicians, Clinical Professors, Researchers, or Physician Managers with current licensure and Doctor of Medicine (MD), Doctor of Osteopathic Medicine ( DO), Doctor of Dental Medicine (DMD), Doctor of Dental Surgery (DDS) or Doctor of Podiatric Medicine (DPM). Retired physicians are not eligible. Additional conditions and restrictions apply.
The absence of processing/application fees represents a savings of $1,095. Other loan fees apply. Refer to your loan estimate for any other potentially applicable fees. See FAQs for more details. Laurel Road offers up to $650 in lender credit towards your mortgage closing costs. Loans cannot exceed the borrowers actual costs to close. For more information, refer to the Rewards program here.
[Editor’s Note: Many thanks to Laurel Road, one of our Platinum Level (contributing $8,000+) Sponsors for the WCI Medical School Scholarship and its longtime relationship with WCI. This is the second of our five scholarship-sponsored posts for 2022. Over the years, Laurel Road has helped thousands of readers refinance their student loans and secure home mortgages with great service and rates. Thank you for supporting those who support this site and especially the scholarship. All proceeds go to the scholarship winners.]