Tag: loans

The fundamentals of mortgage loans – Part 3

fundamentals of mortgage loansThis post is the third part in the series on mortgages and my experiences:

 

Today I will continue where we left off previously with online mortgage lenders, considerations, and what I learned in the process.

To summarize, online mortgage lenders may actually have storefronts in other states, but are licensed to lend in your state. You can poll the top lenders online through Costco’s website or through BankRate.com. I did both in my search. Having multiple offers allows you to have more flexibility and knowledge in the process.

Most of these lenders offer very generic information such as the rate, term, fees, and credits. I would say that the majority of online lenders had very low or NO lenders fees. Many of these lenders even offered lender credit! Let’s go through these in detail:

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Lender fees.

This is the black box in most lending statements. These fees are always convoluted and often masked by terms like origination fees, application fees, processing fees, and underwriting fees. My local lender had all of the above terms. Many of the online lenders had NONE of the fees. This is quite bizarre to see such a wide range of costs. These numbers can run in the hundreds of dollars each, and total in the thousands!

That’s right. Straight out the gate, you can end up spending a few extra thousand dollars depending on which lender you are going through. I asked the online lenders why they can still give borrowers a relatively low rate and have almost no fees, but most of the answers did not seem too convincing:

“We run a very lean operation, and pass on the savings to the consumers.”

“We have a small physical footprint, so our costs are low.”

I also asked for a “Truth in Lending Statement”, which typically outlines various closing costs and fees. One online lender provided a rudimentary form with most of the blanks empty, while the others told me that they no longer provide these statements, given that all loans signed after October 2015 are not mandated to provide one. Instead, there are “Loan Estimate” statements that are provided. However, most of the online lenders were very vague—they all only provided an interest rate plus a certain lender credit given the type of loan requested.

My local lenders were, for some reason, more forthcoming with their expenses. All of them provided me with a “Loan Estimate”. There was some variability in some of the numbers, but certainly gave me a better idea of the closing costs that a mortgage incurred.

The following is a list of common closing fees and my comments:

  • Appraisal fee. This is mandatory, and is a means for your lender to determine whether the property you are purchasing is worth their risk in lending you money. This price is not negotiable as the lender typically chooses the appraiser. There is variability among lenders but I would estimate that it should cost around $500 or less.
  • Title fees. These fees are dependent upon which title company you choose. You can choose which title company to help close the sale. However, depending on how your realtor arranged the sale, the escrow company that handles earnest money may actually be the title company as well. When I placed a deposit of earnest money, the escrow company was the same as the title company. This meant that it would have been very difficult to make other arrangements outside of the predetermined company.
  • Origination fees and Lender fees. This number is negotiable. A portion (or all) of these fees will go to your loan originator as “commission”. Some lenders will be more willing to budge than others on this number depending on how they are paid.

 

What other fees have you seen on your closing cost sheets?

 

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Photo courtesy of Flickr.

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The Basics of Home Mortgages and How Not To Get Scammed

the basics of mortgage and how not to get scammedI’m in the process of purchasing a home, and figure that I should document the process that I’m going through, the problems that I’ve encountered, and what to do to get the best deal possible. If anything, I’m sure that it will be helpful for me in the future if I decide to purchase another home.

First off, this series will detail the process of purchasing a residential home through a mortgage lender. If you are purchasing a property for commercial purposes (such as rentals), the process will be different.

 

When do I need a loan?

 

There is an obvious answer for most of us, but there are also plenty of people who are in the position to purchase a property outright. That means a cash deal without having to go through a bank. The advantages of avoid loans altogether include not having to deal with a lender. You can agree on a set price with the seller and close the deal once you agree on a price and finish up any inspections. In contrast, going through a mortgage lender may delay your closing date by several months!

 

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There is also validity in obtaining a mortgage even if you are able to purchase a property with cash. With interest rates as low as they are now, you might even consider investing the difference. The Internet is littered with debates on this subject, so scroll around the web for discussion. I may revisit this debate in the future, but this has less to do with obtaining a mortgage.

 

Where can I get a loan?

 

In general banks and credit unions are the most obvious sources for loans, but these are actually not the most common institutions offering loans. Mortgage lenders and loan originators are individuals who work for certain institutions that are able to secure loans for potential buyers as well. Consider these guys the middlemen in loan dealings. Your real estate agent will likely have a list of agents (and probably their favorite one) who have helped clients secure loans.

 

You can obtain a mortgage through Costco!

 

If you are like the average upper middle class American, you probably have a Costco membership. If you don’t, you can even consider getting one. A Costco Executive membership costs $110 annually. You might save more than that on lender fees.

Costco assists with mortgage lending by pairing you up with potential lenders involved with their program. You can fill in your lending terms and potential lenders will bid for your business. These lenders are not likely to be in your local area, but are all licensed to lend to you.

The motivation behind going through lenders outside of your local area is that they might be able to offer you a better rate and terms than your local lender. Moreover, speaking to multiple lenders will allow you to familiarize yourself with more of the terminology, what terms are negotiable, and how different lenders approach the lending process.

Stay tuned for upcoming installments on mortgages! We will talk about the steps I went through and my experiences with the Costco lenders.

Photo courtesy of Flickr.

Public Service Loan Forgiveness for Doctors

Many professionals incur significant amounts of student loan debt. The average loan debt for my medical school was $133,000 this year, which actually seems low. I incurred approximately $190,000 of loan debt that I eventually paid off. I fortunately went into a career in medicine where I have relative job stability and earn potential, unlike many poor graduate students without funding who enter a career in art restoration.

One viable option for repayment includes the Public Service Loan Forgiveness Program (PSLF). Under PSLF, your loans are forgiven after 120 payments as long as you are working for a qualified public organization. These organizations include government facilities, non-profit organizations, and certain not-for-profit facilities. Many hospitals are considered non-profit entities.

Why is PSLF a good deal?

 

While 120 monthly payments seems like an eternity, most of our training occurs in non-profit hospitals. What this means is that if you are financially savvy early in your career, you can strategically select a residency that qualifies for PSLF. Since many of us inadvertently spend a good 5-7 years of our youth in some form of residency and fellowship, you might as well consider saving some money in the process.

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Take, for instance, someone who wants to be an electrophysiologist. This route typically includes three years of internal medicine residency, three years of cardiology fellowship, and another year of fellowship. That’s right. Seven years to put in a pacemaker! If you do all of your training at a qualified non-profit institution, you only have three more years of minimum payment before your student loans are forgiven by Uncle Sam! You’d have to consider truly how much debt you’d be saving by going through PSLF rather than paying it off outright. In this case, how much you’d owe depends on really how much you are capable of earning during your first three years after fellowship.

For most doctors, this depends whether you remain in academics or join a private group. In our hypothetical electrophysiologist who spent seven years training at a non-profit institution, the following may be how her income plays out afterward:

Academic CardiologistPrivate Group CardiologistAcademic for 3 years, then private
Year 1$325,000$300,000$325,000
Year 2$325,000$400,000$325,000
Year 3$325,000$425,000$325,000
Year 4$325,000$450,000$300,000
Year 5$325,000$600,000$400,000
Total$1,625,000$2,175,000$1,675,000

From a strictly financial perspective, a private practice doctor will earn more money than an academic doctor. However, PSLF may be a great financial move if you definitely will go into academic medicine. It will work even better if you have a high amount of student loan debt.

Doctors whose income falls in the low six-figures regardless of academic or private practice situation would benefit from PSLF.  If you’re stuck with the same income no matter what institution you work for, you might as well work in one that offers you the potential to forgive your loan debt.

Why PSLF doesn’t work for many doctors

 

PSLF can fall apart in a few key scenarios:

  1. If your residency is relatively short, like in family medicine or emergency medicine (EM). This case is most egregious in EM, where residency can be as short as three years, and starting income can fall in the $300’s the first year on the job in private practice. If you need twelve years of minimal payments at a non-profit institution and your residency is only three, you have to remain in a similar environment for at least 9 years. In these 9 years, you potentially forgo large amounts of income. This added income could have been used to help repay your student loans earlier.
  2. If you are entering a high income specialty, PSLF loses its advantage. In most cases, you should be able to repay your student loans entirely within the first five years after you start your career. It won’t come automatically, but you can live like a resident initially so that you become debt-free sooner.
  3. If the government gets rid of PSLF, you are screwed. There is no initial enrollment process that “locks” you into the program when you are repaying your loans. Going a decade with the possibility of losing this advantage is a risk you’d have to live with.

In my case, I was not even aware of PSLF when I finished medical school. I hustled during my residency to repay my loans and eliminated them after my first year on the job. Had I known about it, I’m still not sure if I would have gone through the process. Ten years is a long time to give the government to change the laws against your favor.

Do you plan to or have already had PSLF forgive your student loans?

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What is a jumbo loan and how it applies to doctors

jumbo loan for mansionsAs a newly minted doctor, your many years of hard labor are now paying off. You have a salary, and you’re now itching to get the new house you’ve always dreaming of owning. Maybe it’s the million dollar home that your non-professional husband has been eyeing for the past decade. While there are many practical considerations of even getting a McMansion, one term that you should familiarize yourself with is jumbo loan. 

For most people, you will not be buying a house in cash. You will be taking out a loan, perhaps with a standard 20% down payment. So if you buy a $1 million home, you are asking for an $800,000 mortgage. Guess what, in most places in the United States, any loan greater than $417,000 becomes a jumbo loan.

A jumbo loan is simply a larger loan. If you live in a high cost of living area like California, New York, or Connecticut, you’ll probably need a jumbo loan anyway to afford the housing. Here is a list of top considerations for jumbo loans:

  1. You will have a higher interest rate. Large loans have higher risk, and thus you will likely have to pay an extra 0.5-1%.
  2. If your first job doesn’t work out or you don’t make partner and have to move, you’re out of luck. It’s going to be more difficult to sell an expensive house.
  3. Make sure that you can afford the higher monthly payment. Remember, you make more as an attending than as a resident, but you likely have greater expenses now.
  4. The value of your house can go down. Your mortgage can go underwater, and it would be difficult to refinance in the future.
  5. Pay attention to the private mortgage insurance (PMI) requirements. Before your McMansion accumulates equity, you will have to pay PMI. Certain lenders will allow you to terminate PMI after you achieve a certain amount of equity.

Any more suggestions? Sound out below!

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Pay your student loan interest while your salary is still low

pay off student loan interest

Tax season is in full season, and it is timely to go over a few pointers to help everyone out.

For most medical students and residents, student loans remain in deferment or forbearance. This means that you aren’t obligated to make any monthly repayments. It also means that interest accrues and compounds during that time. It also means that your mid-6 figure loan debt continues to grow.

Ideally, you should try to make monthly payments whether it is on a 15 or 30 year repayment plan, to keep the magic of compounding from working against you. Financially, you ought to repay at least $2,500 annually in student loan interest for a tax deduction at the end of the year. It only works before you attain attending status, because there is an income limit that you will exceed after training. For 2012 and 2013, phaseout for student loan deduction begins at $60k for a single filer and $125k for a joint filing. In 2014, it starts at $65k and $130k, respectively. If your annual adjusted gross income (AGI) exceeds the limit, then there will be no deduction for payment of loan interest.

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