To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

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zagguru
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Joined: Sat May 23, 2020 11:02 pm

To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by zagguru »

I am having the following dilemma and I thought I would bring it up to the entire forum
(Disclaimer: i spent some time reading the forums and saw that the general consensus among most bogleheads is to not pay for points - but as you will see, I believe my situation is different)

Purchasing a house and utilizing a Physician loan with allows me 10% down with NO PMI.

Purchase: 1.3M
Loan Amount: 1.17M

Rate options:
30 Year Fixed: 2.75% .25 Points - $2950
30 Year Fixed: 2.5% 1.25 Points - $14750

7/6 ARM: 2.0% No Points
10/6 ARM: 2.25% .25 points or 2.375 No Points

It is really hard to tell what my long term plans are for this house, but I do imagine I would be here for around 10 years, but perhaps longer. After I move, we would try to rent (if the situation makes sense), if not, we would sell.

My logic is, if we aren't going with the ARM, then its best to buy down the rate. Otherwise, it would just make sense to go with ARM.
I know that no one knows where rates will be in the future, but I am having a really hard time imaging rates go down so much more in the future. I am in NY and refinancing does come with a hefty price tag, so the rate would have to drop significantly, to make it worth it. We also dont want to be in a position in 10 years, where rates are 5% and we are kicking ourselves with higher payments on a lower principal balance.
Additionally, since it is a physician loan, if I refi and I am less than 20%, I believe I would get hit with PMI
Finally, being that house prices are so inflated, AND I am putting very little money down, in a couple years if the market does settle and the price of my home goes down, I certainly would not be at the 20% to refi, which means I would have put more down money to get a refi of 20%. I also do have a significant amount of Student Loans which they dont count to the debt to income ratio since I am on an income driven repayment plan (something specific to physician loans). All these items could make refi in the future rather difficult or impossible

Which is why I am leading towards going with the fixed and some combo of points. If you think fixed, does it make sense to buy down the rate? Breakeven is around 5 years considering investing the money at 7% and the tax benefits

Thoughts?
Update: Added points calculator for comparison
Image
Last edited by zagguru on Sat Oct 23, 2021 10:21 pm, edited 4 times in total.
CletusCaddy
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by CletusCaddy »

zagguru wrote: Sat Oct 23, 2021 9:08 pm I know that no one knows where rates will be in the future, but I am having a really hard time imaging rates go down so much more in the future.

We also dont want to be in a position in 10 years, where rates are 5% and we are kicking ourselves with higher payments on a lower principal balance.
Rates do not only go up or go down.

There is a third possibility- they stay the same.
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David Jay
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by David Jay »

I definitely would not take the ARM risk for a half percent (or maximum .75%, depending on which rates you compare). Not when inflation is threatening.
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skierincolorado
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by skierincolorado »

ARMs are not worth the risk. Usually the breakeven on points is staying around 5 years without refinancing... usually I'm a no on points because the probability that rates drop and I refinance, or that I need to move for some reason, is pretty significant... in your situation it might be a closer call but a toss up would be my guess.. there are online calculators for this
Last edited by skierincolorado on Sat Oct 23, 2021 10:03 pm, edited 2 times in total.
pizzy
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by pizzy »

zagguru wrote: Sat Oct 23, 2021 9:08 pm I am having the following dilemma and I thought I would bring it up to the entire forum
(Disclaimer: i spent some time reading the forums and saw that the general consensus among most bogleheads is to not pay for points - but as you will see, I believe my situation is different)

Purchasing a house and utilizing a Physician loan with allows me 10% down with NO PMI

Purchase: 1.3M
Loan Amount: 1.17M

Rate options:
30 Year Fixed: 2.75% .25 Points - $2950
30 Year Fixed: 2.5% 1.25 Points - $14750

7/6 ARM: 2.0% No Points
10/6 ARM: 2.25% .25 points or 2.375 No Points

It is really hard to tell what my long term plans are for this house, but I do imagine I would be here for around 10 years, but perhaps longer. After I move, we would try to rent (if the situation makes sense), if not, we would sell.

My logic is, if we aren't going with the ARM, then its best to buy down the rate. Otherwise, it would just make sense to go with ARM.
I know that no one knows where rates will be in the future, but I am having a really hard time imaging rates go down so much more in the future. I am in NY and refinancing does come with a hefty price tag, so the rate would have to drop significantly, to make it worth it. We also dont want to be in a position in 10 years, where rates are 5% and we are kicking ourselves with higher payments on a lower principal balance.
Additionally, since it is a physician loan, if I refi and I am less than 20%, I believe I would get hit with PMI
Finally, being that house prices are so inflated, AND I am putting very little money down, in a couple years if the market does settle and the price of my home goes down, I certainly would not be at the 20% to refi, which means I would have put more down money to get a refi of 20%

Which is why I am leading towards going with the fixed and some combo of points

Thoughts?
What is the 30 year no points?
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
Topic Author
zagguru
Posts: 30
Joined: Sat May 23, 2020 11:02 pm

Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by zagguru »

pizzy wrote: Sat Oct 23, 2021 10:01 pm
zagguru wrote: Sat Oct 23, 2021 9:08 pm I am having the following dilemma and I thought I would bring it up to the entire forum
(Disclaimer: i spent some time reading the forums and saw that the general consensus among most bogleheads is to not pay for points - but as you will see, I believe my situation is different)

Purchasing a house and utilizing a Physician loan with allows me 10% down with NO PMI

Purchase: 1.3M
Loan Amount: 1.17M

Rate options:
30 Year Fixed: 2.75% .25 Points - $2950
30 Year Fixed: 2.5% 1.25 Points - $14750

7/6 ARM: 2.0% No Points
10/6 ARM: 2.25% .25 points or 2.375 No Points

It is really hard to tell what my long term plans are for this house, but I do imagine I would be here for around 10 years, but perhaps longer. After I move, we would try to rent (if the situation makes sense), if not, we would sell.

My logic is, if we aren't going with the ARM, then its best to buy down the rate. Otherwise, it would just make sense to go with ARM.
I know that no one knows where rates will be in the future, but I am having a really hard time imaging rates go down so much more in the future. I am in NY and refinancing does come with a hefty price tag, so the rate would have to drop significantly, to make it worth it. We also dont want to be in a position in 10 years, where rates are 5% and we are kicking ourselves with higher payments on a lower principal balance.
Additionally, since it is a physician loan, if I refi and I am less than 20%, I believe I would get hit with PMI
Finally, being that house prices are so inflated, AND I am putting very little money down, in a couple years if the market does settle and the price of my home goes down, I certainly would not be at the 20% to refi, which means I would have put more down money to get a refi of 20%

Which is why I am leading towards going with the fixed and some combo of points

Thoughts?
What is the 30 year no points?
2.875 with $3k credit to me.
Topic Author
zagguru
Posts: 30
Joined: Sat May 23, 2020 11:02 pm

Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by zagguru »

skierincolorado wrote: Sat Oct 23, 2021 10:00 pm ARMs are not worth the risk. Usually the breakeven on points is staying around 5 years without refinancing... usually I'm a no on points because the probability that rates drop and I refinance, or that I need to move for some reason, is pretty significant... in your situation it might be a closer call but a toss up would be my guess.. there are online calculators for this
So if your logic is to refi or move within 5 years, making points not worth it, wouldnt an ARM make sense then?
CTinVA
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by CTinVA »

If you looked at the pre-tax difference between paying points and not, you might have found that investing $11,800 in a 30-year stream of monthly $153.51 cash flows breaks even in 6.5 years and has an IRR of 16.60%. That might seem tempting.

But that leaves out the tax effect—interest on up to $750,000 of mortgage is deductible. The interest paid changes each month, but at the start of the mortgage the difference (interest on 2.75% vs 2.50%) is $156.25/month.

Assuming you're in the 35% tax bracket, when we take taxes into consideration we find paying the points has a 9.5 year break-even, and an IRR of 11.02%. If you live in a state with income tax, the breakeven for paying points is even further out.

Conclusion: Don't pay the points.
pizzy
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by pizzy »

CTinVA wrote: Sat Oct 23, 2021 10:14 pm If you looked at the pre-tax difference between paying points and not, you might have found that investing $11,800 in a 30-year stream of monthly $153.51 cash flows breaks even in 6.5 years and has an IRR of 16.60%. That might seem tempting.

But that leaves out the tax effect—interest on up to $750,000 of mortgage is deductible. The interest paid changes each month, but at the start of the mortgage the difference (interest on 2.75% vs 2.50%) is $156.25/month.

Assuming you're in the 35% tax bracket, when we take taxes into consideration we find paying the points has a 9.5 year break-even, and an IRR of 11.02%. If you live in a state with income tax, the breakeven for paying points is even further out.

Conclusion: Don't pay the points.
You beat me to it.
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
Archimedes
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by Archimedes »

Unless you are quite certain that you will be moving in a few years, you should take the 30 yr fixed with no points,
skierincolorado
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by skierincolorado »

zagguru wrote: Sat Oct 23, 2021 10:04 pm
skierincolorado wrote: Sat Oct 23, 2021 10:00 pm ARMs are not worth the risk. Usually the breakeven on points is staying around 5 years without refinancing... usually I'm a no on points because the probability that rates drop and I refinance, or that I need to move for some reason, is pretty significant... in your situation it might be a closer call but a toss up would be my guess.. there are online calculators for this
So if your logic is to refi or move within 5 years, making points not worth it, wouldnt an ARM make sense then?
The probability of move or refi is less than 100%, probably less than 50%.. but high enough to not make points worth it.. there's a tail risk to the ARM
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zagguru
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by zagguru »

CTinVA wrote: Sat Oct 23, 2021 10:14 pm If you looked at the pre-tax difference between paying points and not, you might have found that investing $11,800 in a 30-year stream of monthly $153.51 cash flows breaks even in 6.5 years and has an IRR of 16.60%. That might seem tempting.

But that leaves out the tax effect—interest on up to $750,000 of mortgage is deductible. The interest paid changes each month, but at the start of the mortgage the difference (interest on 2.75% vs 2.50%) is $156.25/month.

Assuming you're in the 35% tax bracket, when we take taxes into consideration we find paying the points has a 9.5 year break-even, and an IRR of 11.02%. If you live in a state with income tax, the breakeven for paying points is even further out.

Conclusion: Don't pay the points.
pizzy wrote: Sat Oct 23, 2021 10:19 pm
CTinVA wrote: Sat Oct 23, 2021 10:14 pm If you looked at the pre-tax difference between paying points and not, you might have found that investing $11,800 in a 30-year stream of monthly $153.51 cash flows breaks even in 6.5 years and has an IRR of 16.60%. That might seem tempting.

But that leaves out the tax effect—interest on up to $750,000 of mortgage is deductible. The interest paid changes each month, but at the start of the mortgage the difference (interest on 2.75% vs 2.50%) is $156.25/month.

Assuming you're in the 35% tax bracket, when we take taxes into consideration we find paying the points has a 9.5 year break-even, and an IRR of 11.02%. If you live in a state with income tax, the breakeven for paying points is even further out.

Conclusion: Don't pay the points.
You beat me to it.
I dont really follow. Here is my calculation. What am I missing?

Image
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dodecahedron
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by dodecahedron »

zagguru wrote: Sat Oct 23, 2021 9:08 pm We don't want to be in a position in 10 years, where rates are 5% and we are kicking ourselves with higher payments on a lower principal balance.

...

Thoughts?
From the perspective of a boomer who can remember the early 1980s when 30-year fixed rates were in the high teens and 1-year adjustables were in the low teens, I would also want to consider possibility that rates could be a lot higher than 5% in 10 years. Is there a rate cap on adjustments?

Another thought: what is the interest rate on your student loans? How about instead of buying down your interest rate, instead you throw that $14,750 at paying down your student loan balances? You said you were on some kind of income-based repayment system but if interest is continuing to accrue at a high rate, I would focus on getting your student loans paid off ASAP.
CletusCaddy
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by CletusCaddy »

skierincolorado wrote: Sat Oct 23, 2021 10:20 pm
zagguru wrote: Sat Oct 23, 2021 10:04 pm
skierincolorado wrote: Sat Oct 23, 2021 10:00 pm ARMs are not worth the risk. Usually the breakeven on points is staying around 5 years without refinancing... usually I'm a no on points because the probability that rates drop and I refinance, or that I need to move for some reason, is pretty significant... in your situation it might be a closer call but a toss up would be my guess.. there are online calculators for this
So if your logic is to refi or move within 5 years, making points not worth it, wouldnt an ARM make sense then?
The probability of move or refi is less than 100%, probably less than 50%.. but high enough to not make points worth it.. there's a tail risk to the ARM
The tail risk to the ARM is capped by the terms of the note; typically the rate cap is 5% above the intro rate. So if the 10/6 is priced at 2.375% for the first 10 years, the remaining 20 years are capped at 7.375%.

So the ARM risk is actually more like this, what are the chances that:

1. OP will stay in the house for the next 10 years, AND
2. Over the next 10 years, interest rates will rise and not come anywhere close to where they are now (if they go up over the next few years and come back down again, OP can always refi into a new ARM and reset the clock for another 10 years), AND
3. The new rate in 10 years time will stay high for long enough to have erased all of the savings from the intro rate relative to today’s 30 year fixed rate, AND
4. OP’s investment gains from the 10 years of interest savings plowed into the stock market are wiped out by the higher interest paid, AND
5. In 10 years’ time, OP’s overall liquidity is not high enough to wipe out a significant portion of the outstanding principal, if not extinguish the loan completely, AND
6. The new interest paid 10+ years from now is more expensive in real terms than the initial rate

If any of these conditions don’t hold, the ARM wins.
Last edited by CletusCaddy on Sat Oct 23, 2021 10:45 pm, edited 1 time in total.
Topic Author
zagguru
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by zagguru »

dodecahedron wrote: Sat Oct 23, 2021 10:38 pm
zagguru wrote: Sat Oct 23, 2021 9:08 pm We don't want to be in a position in 10 years, where rates are 5% and we are kicking ourselves with higher payments on a lower principal balance.

...

Thoughts?
From the perspective of a boomer who can remember the early 1980s when 30-year fixed rates were in the high teens and 1-year adjustables were in the low teens, I would also want to consider possibility that rates could be a lot higher than 5% in 10 years. Is there a rate cap on adjustments?

Another thought: what is the interest rate on your student loans? How about instead of buying down your interest rate, instead you throw that $14,750 at paying down your student loan balances? You said you were on some kind of income-based repayment system but if interest is continuing to accrue at a high rate, I would focus on getting your student loans paid off ASAP.
I believe the ARM has a 5% cap rate on top of the fixed rate (so 7.75% roughly).
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dodecahedron
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by dodecahedron »

CTinVA wrote: Sat Oct 23, 2021 10:14 pm If you looked at the pre-tax difference between paying points and not, you might have found that investing $11,800 in a 30-year stream of monthly $153.51 cash flows breaks even in 6.5 years and has an IRR of 16.60%. That might seem tempting.

But that leaves out the tax effect—interest on up to $750,000 of mortgage is deductible. The interest paid changes each month, but at the start of the mortgage the difference (interest on 2.75% vs 2.50%) is $156.25/month.

Assuming you're in the 35% tax bracket, when we take taxes into consideration we find paying the points has a 9.5 year break-even, and an IRR of 11.02%. If you live in a state with income tax, the breakeven for paying points is even further out.

Conclusion: Don't pay the points.
Does your analysis take into account that the upfront points (prorated amount based on $750K) would be deductible in the first year?
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zagguru
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by zagguru »

dodecahedron wrote: Sat Oct 23, 2021 10:42 pm
CTinVA wrote: Sat Oct 23, 2021 10:14 pm If you looked at the pre-tax difference between paying points and not, you might have found that investing $11,800 in a 30-year stream of monthly $153.51 cash flows breaks even in 6.5 years and has an IRR of 16.60%. That might seem tempting.

But that leaves out the tax effect—interest on up to $750,000 of mortgage is deductible. The interest paid changes each month, but at the start of the mortgage the difference (interest on 2.75% vs 2.50%) is $156.25/month.

Assuming you're in the 35% tax bracket, when we take taxes into consideration we find paying the points has a 9.5 year break-even, and an IRR of 11.02%. If you live in a state with income tax, the breakeven for paying points is even further out.

Conclusion: Don't pay the points.
Does your analysis take into account that the upfront points (prorated amount based on $750K) would be deductible in the first year?
That is what I was wondering as well.
My calculator does take that into account
skierincolorado
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by skierincolorado »

CletusCaddy wrote: Sat Oct 23, 2021 10:39 pm
skierincolorado wrote: Sat Oct 23, 2021 10:20 pm
zagguru wrote: Sat Oct 23, 2021 10:04 pm
skierincolorado wrote: Sat Oct 23, 2021 10:00 pm ARMs are not worth the risk. Usually the breakeven on points is staying around 5 years without refinancing... usually I'm a no on points because the probability that rates drop and I refinance, or that I need to move for some reason, is pretty significant... in your situation it might be a closer call but a toss up would be my guess.. there are online calculators for this
So if your logic is to refi or move within 5 years, making points not worth it, wouldnt an ARM make sense then?
The probability of move or refi is less than 100%, probably less than 50%.. but high enough to not make points worth it.. there's a tail risk to the ARM
The tail risk to the ARM is capped by the terms of the note; typically the rate cap is 5% above the intro rate. So if the 10/6 is priced at 2.375% for the first 10 years, the remaining 20 years are capped at 7.375%.

So the ARM risk is actually more like this, what are the chances that:

1. OP will stay in the house for the next 10 years, AND
2. Over the next 10 years, interest rates will rise and not come anywhere close to where they are now (if they go up over the next few years and come back down again, OP can always refi into a new ARM and reset the clock for another 10 years), AND
3. The new rate in 10 years time will stay high for long enough to have erased all of the savings from the intro rate relative to today’s 30 year fixed rate, AND
4. OP’s investment gains from the 10 years of interest savings plowed into the stock market are wiped out by the higher interest rate, AND
5. In 10 years’ time, OP’s overall liquidity is not high enough to wipe out a significant portion of the outstanding principal, if not extinguish the loan completely, AND
6. The new interest rate 10+ years from now is more expensive in real terms than the initial rate

If any of these conditions don’t hold, the ARM wins.
Strong argument, but I disagree on #6. If the nominal rate is higher than the fixed rate, he is losing money after the 10 year mark relatively speaking. If inflation is high, he might have a low real rate, but the fixed rate would have been even lower - negative most likely.

But based on 1-5, an ARM could make sense in his situation
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dodecahedron
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by dodecahedron »

zagguru wrote: Sat Oct 23, 2021 10:22 pm
Here is my calculation. What am I missing?

Image
A few things you (OP) are missing in the spreadsheet above:

1) Under current law, the 24% bracket is scheduled to go up to 28% after 2025.

2) Your bracket rate may go up even more than that as your income is likely to rise.

Edited to add:

3) If you are MFJ, your standard deduction is large ($25,900 in 2021) and scheduled to stay high until current law sunsets in 2025. So with SALT capped at $10K (again until sunset) your tax benefits for mortgage interest and points in the early years are not as big as they will be in the later years.
Last edited by dodecahedron on Sat Oct 23, 2021 10:55 pm, edited 1 time in total.
CletusCaddy
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by CletusCaddy »

skierincolorado wrote: Sat Oct 23, 2021 10:46 pm
CletusCaddy wrote: Sat Oct 23, 2021 10:39 pm
skierincolorado wrote: Sat Oct 23, 2021 10:20 pm
zagguru wrote: Sat Oct 23, 2021 10:04 pm
skierincolorado wrote: Sat Oct 23, 2021 10:00 pm ARMs are not worth the risk. Usually the breakeven on points is staying around 5 years without refinancing... usually I'm a no on points because the probability that rates drop and I refinance, or that I need to move for some reason, is pretty significant... in your situation it might be a closer call but a toss up would be my guess.. there are online calculators for this
So if your logic is to refi or move within 5 years, making points not worth it, wouldnt an ARM make sense then?
The probability of move or refi is less than 100%, probably less than 50%.. but high enough to not make points worth it.. there's a tail risk to the ARM
The tail risk to the ARM is capped by the terms of the note; typically the rate cap is 5% above the intro rate. So if the 10/6 is priced at 2.375% for the first 10 years, the remaining 20 years are capped at 7.375%.

So the ARM risk is actually more like this, what are the chances that:

1. OP will stay in the house for the next 10 years, AND
2. Over the next 10 years, interest rates will rise and not come anywhere close to where they are now (if they go up over the next few years and come back down again, OP can always refi into a new ARM and reset the clock for another 10 years), AND
3. The new rate in 10 years time will stay high for long enough to have erased all of the savings from the intro rate relative to today’s 30 year fixed rate, AND
4. OP’s investment gains from the 10 years of interest savings plowed into the stock market are wiped out by the higher interest rate, AND
5. In 10 years’ time, OP’s overall liquidity is not high enough to wipe out a significant portion of the outstanding principal, if not extinguish the loan completely, AND
6. The new interest rate 10+ years from now is more expensive in real terms than the initial rate

If any of these conditions don’t hold, the ARM wins.
Strong argument, but I disagree on #6. If the nominal rate is higher than the fixed rate, he is losing money after the 10 year mark relatively speaking. If inflation is high, he might have a low real rate, but the fixed rate would have been even lower - negative most likely.

But based on 1-5, an ARM could make sense in his situation
5 out of 6 ain’t bad :D
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zagguru
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by zagguru »

dodecahedron wrote: Sat Oct 23, 2021 10:51 pm
zagguru wrote: Sat Oct 23, 2021 10:22 pm
Here is my calculation. What am I missing?

Image
A few things you (OP) are missing in the spreadsheet above:

1) Under current law, the 24% bracket is scheduled to go up to 28% after 2025.

2) Your bracket rate may go up even more than that as your income is likely to rise.
Even so, it wouldnt make much of a difference. Considering the initial tax deduction for paying the points.
https://www.mtgprofessor.com/mpcalculat ... akEven.asp
Shorty
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by Shorty »

I agree with all your reasons to go fixed over ARM (debt, little down, high income, low (neg) asset value). Recommendations seems to be to not pay for the points, but the difference doesn't appear to be compelling.

IMO you're taking a pretty leverage position going for the "7% investment" and a large home loan on top of large amounts of student debt. What happens in a prolonged bear market? Even at low interest rates, what ~$1.5M+ (home + student loans) is a lot of debt. Or do you have substantial assets? Big difference in terms of your overall risk profile.

I think controlling your spending/budget (and increasing income) will be key, until you get to a positive NW to work for you. With low interest rates it might be debatable at the margin between paying down debt and investing alongside. When factoring in tax and considering risk, I doubt either will be a slam dunk. You'd do well by being thrifty and Prioritizing in accordance with standard recommendations. Also, I assume you've spent time on the White Coat Investor.
Last edited by Shorty on Sat Oct 23, 2021 11:33 pm, edited 1 time in total.
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zagguru
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by zagguru »

Shorty wrote: Sat Oct 23, 2021 11:26 pm I agree with all your reasons to go fixed over ARM (debt, little down, high income, low (neg) asset value). Recommendations seems to be to not pay for the points, but the difference doesn't appear to be compelling.

IMO you're taking a pretty leverage position going for the "7% investment" and a large home loan on top of large amounts of student debt. What happens in a prolonged bear market? Even low interest, what ~$1.5M+ is a lot of debt. Or do you have substantial assets? Major difference.

I think controlling your spending/budget (and increasing income) will be key, until you get to a positive NW to work for you. With low interest rates it might be debatable at the margin between paying down debt and investing alongside. When factoring in tax and considering risk, I doubt either will be a slam dunk. You'd do well by being thrifty and Prioritizing in accordance with standard recommendations. Also, I assume you've spent time on the White Coat Investor.
Thanks for that. I agree with you. My wife and I do save quite allot and invest accordingly (401k, Roth IRA, taxable low index funds etc). That would be the goal to continue to do so with all money saved from lower mortgage payments.
I think the consensus here is to go Fixed. The real question now is - should i buy down the rate given the historically low rate making a refi even more unlikely with the specific type of loan I am taking?
Shorty
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by Shorty »

I have a hard time imagining that difference being significant in the long run. Either case is "very good" from a historical perspective, especially with the possibility of long term inflation.

One anecdotal note - I paid a little instead of getting a small credit for a VA loan in Apr 2020 at 2.75% (historic low) with zero down (similar to physician). They'll go up to $1M. I was able to re-fi a year later at 2.25% at very low cost - missed even lower. Who would have guessed? However, last year we were hearing about negative rates and worried about deflation; now inflation seems to be a real deal (see all the I Bond traffic - Treasury paying on 7% inflation for the next 6 months).

From a personal finance perspective, I had liquid assets and decided to put 0% down because I could (like you) without PMI or other costs and the rate was solid. However, even with a very high salary, I would be very sensitive to level of debt especially compared to assets. I do not regret making a large extra principal payment while the market was hot - I won't do that again if this inflation continues at a high rate. I consider managing overall risk as a crucial part of the game. If I had a very high salary, I would maximize tax sheltered opportunity then prioritize the debt. Not saying you can't invest in taxable, but consider periods of poor market returns. Paying that debt offers a guaranteed return. This is unless you have some sort of employment forgiveness program, repayment, gov't subsidies, etc, skewing optimal behavior. Still, don't let FOMO drive you to taking on too much risk in attempt to eek out the difference of a percent or two. It can be tempting. Your compound growth with occur nicely with assets and time.

It sounds like you and your wife are savvy moving forward. You'll be amazed when crossing the debt threshold then when appreciating assets outweigh debt and become significant in addition to your high salary.
folkher0
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by folkher0 »

Is this your first job?

If so it is unlikely to be your last job and depending on your specialty you are likely to move at least once in the next 10 years.
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zagguru
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by zagguru »

So is everyone in agreement for the most part to go fixed with No points? Even though the calculator seems to show that points would be better off, especially with the initial tax benefit?
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Nate79
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by Nate79 »

D) none of the above. I would rent for a while until you pay off all or a significant amount of student loans.

You sound like you have docitis. I also wouldn't buy a new Mercedes or a new Lexus.
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zagguru
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by zagguru »

Nate79 wrote: Sun Oct 24, 2021 7:38 pm D) none of the above. I would rent for a while until you pay off all or a significant amount of student loans.

You sound like you have docitis. I also wouldn't buy a new Mercedes or a new Lexus.
Your response does not answer the question at hand. With all due respect, you have no idea what my financial abilities are. The question was not "should I rent or buy". It was a specific question about loan type and terms.
CTinVA
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Re: To go Fixed or to go ARM or Fixed w/ Points - Physician Loan

Post by CTinVA »

dodecahedron wrote: Sat Oct 23, 2021 10:42 pm Does your analysis take into account that the upfront points (prorated amount based on $750K) would be deductible in the first year?
Good catch—I left that out.
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