Provided By Josh Mettle, Senior Loan Officer at The Physician Group at City Wide Home Loans
For many, purchasing a house is the largest transaction they will ever negotiate, not only from a dollar standpoint but also an emotional one. This crucial decision has a lasting impact on all aspects of your daily life and affects future financial decisions. Many factors and variables can complicate the home buying process, but asking yourself these three questions early in the process can help you approach this milestone in your life with more clarity.
1. Is the Home Affordable?
Other than a divorce or lawsuit, little else can be as financially damaging to a physician’s cash flow than buying a home that is too expensive. Families purchasing their first house should avoid having a mortgage any larger than two times their annual household income. That said, most lenders will likely offer physician mortgage loans that are considerably more than that. In other words, a bank’s pre-approval does not always equal a wise financial decision.
An “affordable” home will usually meet the following criteria:
- Payment should not prevent you or your family from pursuing the other things that you consider important.
- The mortgage should be completely paid off or one should have the ability to pay it completely by the time they reach their desired retirement age.
- Rising interest rates or declining reimbursements should not leave you wondering if you can afford the mortgage payment in the future.
2. How Much Should I Put Down?
Where you go to obtain your mortgage can determine the products available to you and the closing costs you will incur. Traditional banks and mortgage brokers are the two primary lending vendors. The mortgage market is dynamic, so it’s worth looking into both options to determine which alternative will provide the best solution for your situation.
Truthfully, if your mortgage meets all the “affordability” criteria defined above, the actual amount of the down payment matters very little. The only caveat is that you might receive a lower interest rate by putting more money down. However, every situation is unique and several variables need to be considered such as cash flow, emergency reserves, asset protection issues, psychological attitudes towards debt and risk.
3. How Should I Structure My Mortgage?
Properly coordinating your mortgage with current industry trends can put you in a position to have it paid off by your desired financial independence age, if not sooner. Maximizing tax deductions is a crucial element of structuring physician mortgage loans. The mortgage deduction is one of the largest federal tax deductions that most doctors are eligible to receive, which is available for up to $1 million of combined mortgages on your home and one other personally-owned residence. An additional deduction is available for interest paid on up to $100,000 of home equity loans for the same properties.
Families should consider the following course of action when determining their mortgage structure:
- Acquire a 30-year amortized loan with a fixed interest rate that lasts for either seven to 10 years, or the length of time you plan to remain in your home – whichever is greater.
- Structure your payments to remain small so that your cash flow is not all tied up by the mortgage, as long as you are saving enough extra to pay the home off by your desired financial independence age.
- Investigate financing options with mortgage bankers and brokers to determine the best loan pricing available.
Many mortgage professionals recommend a seven to 10-year Adjustable Rate Mortgage (ARM). Statistics show that few people ever keep a mortgage for longer than five to eight years because they either move or refinance. Physicians can often save a lot of unnecessary interest payments over time by using a longer-term ARM with a substantially lower interest rate than a traditional, 30-year fixed loan would offer.
Every situation is unique, especially since states have different laws in regards to home equity and the degree to which it is protected from lawsuits. These are highly complex transactions, which is why it is beneficial to have a financial advisor with knowledge of your family’s individual circumstances managing this process. Coordinating the expertise of your advisor with a good mortgage professional can help make the process of moving into your dream home a reality.
Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.
Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal or tax advice or services. Please consult the appropriate professional regarding your legal or tax planning needs.