Navigating Mortgage Options for Doctors: A Guide to Fixed Rate vs. ARM Loans

As you begin shopping around for a house, you also need to look for a home loan. Few people can afford such a large purchase without borrowing. The good news is that a number of mortgage programs are aimed at doctors, and these programs tend to have more flexible underwriting criteria. 

You also need to decide between a fixed-rate loan, which keeps the same interest rate over the life of the loan, or an adjustable-rate mortgage (ARM), which has an initial interest rate that changes periodically over the loan term.

Because doctor loans can be larger, your mortgage rate can make a big difference over time. Choosing between a fixed-rate mortgage and an ARM can be challenging. Here’s what you need to know.

Fixed vs ARM: The basics

As you move forward with homeownership, potentially using a physician loan program, you need to understand the difference between a fixed-rate loan and an ARM. Let’s take a look at these two types of mortgages so you can make an informed decision.

Fixed-rate physician mortgage

With a fixed interest rate, your mortgage rate remains the same for the entire life of the loan. You have the same monthly mortgage payment regardless of what’s happening in the market. The 30-year fixed-rate mortgage is one of the most common types of mortgage because it allows you to spread your payments over a long period of time.

Pros of fixed-rate physician loans

• You have the same monthly mortgage payment, making it easier to plan your budget.
• You can easily track your mortgage balance through the amortizing schedule.
• You don’t have to worry about a higher rate change, resulting in a higher payment amount.

Cons of fixed-rate physician loans

• If mortgage rates drop, you still pay the higher amount.
• It can be harder to qualify for a mortgage if the fixed-rate loan comes with a higher payment.
• You might have a slightly higher rate than you’d see with an ARM.

ARM for physician loans

An adjustable-rate mortgage comes with an initial fixed-rate period. You might start with one rate, but the rate resets as market conditions change.

For example, you might have a 5/1 ARM that has a low introductory rate. However, after five years, the rate can reset to reflect market conditions. Then, each year after that, the rate can change again. While you might have a lower interest rate initially, higher rates later can lead to a higher monthly mortgage payment.

Pros of ARM physician loans

• Lower ARM rates make first-time homebuyers eligible for loans with lower down payments.
• Some ARMs only require interest payments during the introductory period.
• After your income increases, you might be able to take advantage of refinancing to a fixed rate to lock in a rate before the initial period ends.
• If interest rates fall, you could end up with a lower monthly payment.

Cons of ARM physician loans

• Your interest rate (and monthly payment) can change, making predictability with your budget difficult.
• If the mortgage interest rate rises, so does your monthly payment (up to the rate cap).
• You might not be able to refinance as expected, leaving you stuck with a higher interest rate.
• If you only pay interest during the initial period, you won’t build home equity.

ARM vs. fixed-rate loans: Understanding the differences

When considering whether to get an ARM vs. fixed-rate mortgage, it’s important to know how each loan type works. Here are some mortgage terms to understand as you compare your mortgage options.

Margin

Lenders set their mortgage rates based on a benchmark. Then, they add a “margin” to the total. Your mortgage paperwork should include the index used to set the rate, plus the number of percentage points added to the indexed rate,. For example, the lender might have the indexed rate plus 1%. So, if the indexed rate is 4.5%, you can expect your best rate to be 5.5%.

With a fixed-rate loan, your rate is quoted based on current market conditions, plus the additional amount added by the lender.

An ARM, on the other hand, will reset at regular intervals based on the indexed rate plus margin. The adjustment period, usually every year after your introductory period, means a new rate and a new monthly payment.

Rate limits

Most ARMs come with rate caps. So, even if mortgage rates climb to a much higher number, you have some protection. Additionally, some ARMs have rate limits based on the amount of an increase. For example, your paperwork might cap each adjustment period at no more than 0.5%, and the total rate cap might be 7%.

That way, you know that your interest rate won’t increase by more than 0.5% each year, and you won’t ever be above 7%.

With a fixed-rate loan, you don’t have to worry about rate limits because your rate doesn’t change during the life of the loan. The limit is what you agreed to when you got the loan.

Interest rates

In some cases, an ARM loan will come with a special introductory rate or an interest-only period. An interest-only ARM is one in which you only make interest payments during the initial period. You won’t pay down your original amount owed, but the monthly payments can be much more manageable for a newly-minted doctor.

On the other hand, with a fixed-rate mortgage, you have predictability without worrying about higher rates, but you might not qualify for a more expensive home. Over time, though, you’re also building equity because a portion of your payment goes toward reducing your loan balance.

Eligibility and qualifications

Any mortgage loan comes with underwriting criteria and qualifications. You’ll need to meet certain income and credit requirements. Additionally, your debt-to-income ratio will be included.

A lower interest rate means a lower monthly payment, meaning your debt-to-income ratio will be more favorable with an ARM vs. a fixed-rate mortgage.

Additionally, some mortgage lenders offer special programs for doctors, including home loans during residency. You might be able to get a bigger loan with no down payment — and more flexible income requirements.

Related: The Great Debate: Physician Loan vs. Saving for a Down Payment

Term length

Most mortgages have a term of 30 years, regardless of whether you get an ARM or a fixed-rate loan. With a 30-year fixed-rate mortgage, though, it’s pretty straightforward. You make the same payment each month, and the loan is paid off over time.

An adjustable-rate mortgage, on the other hand, has different parts. You have the initial loan period, which is the amount of time when your mortgage rate is fixed. This might be three, five or seven years. However, after that introductory period, your rate resets regularly, often every year. So, for the remaining mortgage balance, you might have varying monthly payment amounts.

Mortgage payment 

As mentioned, you have a predictable mortgage payment with a fixed-rate loan. With an ARM, your payment could adjust over time. Initially, an ARM might provide a lower payment. Don’t forget, though, that your monthly payment is more than just principal and interest. You need to factor in homeowners insurance and property taxes, if applicable.

Using our physician mortgage calculator, you can run the numbers to compare your initial payment with a fixed-rate mortgage vs. an ARM.

Item	5/1 ARM	30-year fixed
Loan amount	$700,000	$700,000
Interest rate	3.7%	6.0%
Monthly payment	$3,222	$4,197

When an ARM makes sense

An ARM makes sense if you need a lower monthly payment to qualify for homeownership but you’re early in your career or just starting residency. If you have a reasonable expectation that your income will increase, ARM can be a good choice. This might be especially true if you think you’ll stay in your home for a long time and refinancing to a fixed rate is possible down the road.

Additionally, in an environment with higher mortgage rates, an ARM can help you get a lower introductory rate. Later, if rates drop, you can consider refinancing to lock in a fixed rate.

When a fixed-rate mortgage is ideal

A fixed-rate loan might make more sense if you value predictability in your personal finances. If you make enough money to qualify for a higher payment and you want to build home equity at a set pace, getting a fixed-rate mortgage can be a solid financial move. As your financial situation improves, and if mortgage rates fall, you can refinance to a lower fixed rate later.

Choosing fixed-rate vs. ARM

Carefully consider your own needs and situation. As a new doctor, you have physician loan options that can help you get into a home sooner than you expected. However, you need to make sure you understand the implications if you choose an ARM with a lower rate and payment. Despite your best efforts, there is a possibility that your payment may increase and you may not be ready for it.