Nate Reineke (00:13)
Hello, physician moms and dads. I'm Nate Renneke, certified financial planner and primary advisor here at Physician Family Financial Advisors. I have no guest hosts with me today, so I'm just going to jump right into your questions. I have a few of them for you and we'll get right into it. First question is from an anesthesiologist in Oklahoma. Said, I want to refinance the arm, that's adjustable rate mortgage, I took out a couple of years ago. What rate can I get?
So rates, mortgage rates are somewhat unique to your own mortgage situation, but I'm not talking about credit score here, folks, because most physicians or all physicians I've run into, they don't have an issue with their credit score, nor do they have an issue with their debt to income ratio. This is the traditional way mortgages are sort of priced, which is credit score, debt to income ratio. ⁓ And that's what
everyone's rates based off of, but you generally have a much better ⁓ credit score and debt to income ratio than the average person. This is why you can't go on Google and say, are interest rates today? Because when you go look at the average interest rate, I don't know if you knew this, but you're better than average when it comes to finances. So ⁓ this is why you see doctor loan programs and
⁓ It's why these things were created for you. It's because you are literally the most desirable profession for mortgage companies to lend their money to. So what is the main driver for you and what's going to determine your rate? This is your loan to value, the loan to value on your home. So what that ratio is, ⁓ your loan size and the term you choose. So I'll go into each one of those. ⁓
The loan to value ratio, there's this magic number with mortgages where you have to have an 80 % loan to value to get the best rate. So that means if you have a million dollar home, your mortgage can only be $800,000 if you want the best rate. Now for physicians, you can refinance a loan that has a higher loan to value ratio. So if you owe 900, you can still get a loan, but you won't get the best rate.
What this means is if you have, let's say in that same scenario, you needed to get that loan down to 800,000 to get the best rate and the rate was a big improvement from the current one that you have, but you actually owed 825. What you should do in that situation is look under the couch cushions and find $25,000 so that you can pay down your mortgage before you refinance it.
and that should save you a ton of money in the long run. You can't really do that once you refinance and you refinance that $825,000 loan. You can't pay it down to $800,000 and then get a better rate afterward. So you'd want to pay it down first and then consider refinancing. When you're shopping around, you want to let your mortgage broker know that this is an option for you. ⁓ For loan size, it's similar to loan to value, but actually much different.
You want to, if you can, get below the jumbo loan rate. So a jumbo loan limit is usually anything below $832,750. Okay, now that is in Oklahoma City, which Oklahoma City is not a high cost of living area. And so what that number is, is that is the limit
If anything below that is considered a conventional loan, anything above that is considered a jumbo loan. Usually, this wasn't the case during pandemic times, but usually a jumbo loan has a worse rate than a conventional loan. Sometimes ⁓ families will ask me, what is that? Well, you don't really need to know exactly what a conventional loan, jumbo loan is. All you need to know
is that there are certain limits and certain sort of magic numbers with mortgage brokers and mortgage companies that if you get below that limit, they have deemed you less risky. Jumbo loans are riskier. In high cost of living areas, your loan needs to be below, it's like 1.25, $1.249 million if it's below that in a high cost of living area, think very high cost of living areas.
then you are below the Jumbo Loan Limit. So two boxes here to check, below 80 % loan to value, below the Jumbo Loan Limit. Next one is your term. Your term, generally either a 30-year term or a 15-year term. There are 20, there are others, but that's what everyone works with generally. If you have the cash flow to pay your house off on a 15-year term, there's some pretty good savings.
Once again, not a big difference during the pandemic times when we were, it was a, we had an inverted yield curve, which we'll get into that maybe on a different episode, but in some odd times where everything's flipped on its head when it comes to cash and loans, this doesn't the case, but generally a 15 year mortgage is less risky, right? Bank doesn't have to hold your loan for 30 years, they don't have to hold it for 15. So they give you a better rate.
So as of today, if you have a loan that is below, well actually you know what, let me start with the worst number, start with the bad news first. If you are above 80 % loan to value and you are below the conventional loan limit, you can get a rate today of about, I just checked this morning with a family, so this is the rates I saw, roughly 6.5 % interest.
on a 30-year fixed mortgage. If you're wondering if you continue to go and maybe refinance into another adjustable rate mortgage, you will run into the same situation that this family did, which is eventually you got to refinance out of it or your loan rate will adjust at some point. Usually that's uncomfortable for people. If you're still interested, you could use the adjustable rate tool. I call it a tool. They're not evil.
these loans, even though many people view them that way because of the 2008 mortgage crisis, but they are just a tool. And if you think maybe you won't be in the house for a long time, you can use an adjustable rate. Or if the savings is just so good, you're willing to take the risk, ⁓ then you can refinance to an adjustable rate. But ⁓ for a fixed 30 year mortgage with all these boxes checked,
We're at about 6.5 % right now. For a 15 year, I saw 6.25 % today. These are round numbers, you can shop around and some will be better than others, but this is generally what I'm seeing for doctors. That is if you are, I'm sorry, I may have misspoke. If you are above the 80 % loan to value rate, those are the rates. If you are below the 80 % loan to value,
meaning you have a conventional mortgage, you can get a 6 % rate on a 30 year mortgage. And if you have the cashflow to go for a 15 year mortgage and make a little bit of higher payments, you can actually get into the low fives, a 5.25 % mortgage. I chose this question today because I know many people, you know, a year or two ago had bought houses at a 7 % interest mortgage.
5.25 would be a great improvement. 6 % would be a great improvement. And you should seriously consider refinancing if you are one of the lucky few who bought a house in the last couple of years. If you are a client of mine, Chelsea's or Kyle's, ⁓ reach out to us and see if it makes sense to shop around. Next question is from an emergency medicine doctor in Georgia.
As a 1099 emergency medicine doctor, should I max out the employer side of my solo 401k or contribute to my IRA? So as you know, you may know if you listen to the show often enough, if you're a 1099 worker, then you can open up a solo 401k. That means that you are the employer and the employee. And so what that means is you can contribute to
the employee side of the 401k, just like most of my W-2 families do. You can also contribute to the employer side, which gives you a great opportunity to defer even more in taxes. Normally, you don't see that much go into your 401k if you're a W-2 employee, because your employer just simply doesn't offer that much of a match or that much money, but you can contribute a whole bunch of money into a solo 401k. And the question is,
Should we contribute any extra money to the IRA or the employer side? The obvious or most straightforward answer is you should definitely be doing both. You should be maxing out the employee side of your solo 401k. If you can, you should max out the employer side of the solo 401k. That's 72,000 bucks deferred taxes. So you're not paying any taxes this year and you can hopefully get a lower rate when you start.
paying taxes on those withdrawals and retirement. ⁓ But you should also be contributing to an IRA. And for every physician I meet, they are needing to contribute to an IRA and then convert that over to a Roth IRA because you make too much money to deduct. But if you had to choose, if I had to choose, I would say you should defer the money. You should defer the money into your employer side of your solo 401k. ⁓
so that you can play this tax game a little more efficiently. ⁓ I have yet to meet a doctor that doesn't want to do both, but sometimes in some situations, there's just not enough money to invest and maybe in a given year. So you should focus on anything that defers taxes now, which would be the solo 401k employer side.
Okay, next question is from a family medicine doctor in Florida. I'm 50 years old, behind on college savings and retirement savings. Which should I fund first? I'm sorry to hear that, that you're behind on both. ⁓ I also sometimes find that you may feel like you're behind on both, but after you get a real plan in front of you,
you might find out that you're closer than you thought. And if you feel like you're behind on college, that's probably true, but sometimes physicians feel like they're behind on retirement no matter how much money they have. So get a real plan in place is my first answer. But let's just imagine, you know, great financial advisors like physician family wrote you a plan. They wrote you a retirement plan, they wrote you a college plan. You find out you were behind on both and you needed to play some catch up over the next
10, 15 years. ⁓ The great Kyle Hesley has a saying, he says, if the plane is going down, put your oxygen mask on first. So my answer is that you should certainly fund your own retirement first. Imagine instead you funded your children's college first, and then as a physician who made a great living their whole life, your children had to support you in your older age.
what would be the point of paying for college if later they just have to pay you back. Right. So this is ⁓ an unfortunate situation. But if this truly is the case, I think you should certainly fund retirement. Now, let me take a step back and say this is generally the only time that I see physicians really need to cut back their spending. mean, truly, truly cut back their spending. ⁓ If you're 50 and
You have at least one doctor in the house. Usually spending is an issue if you're not saving. ⁓ this is, know, so it may get uncomfortable for a bit is what I'm trying to say. And ⁓ the good news is that I have yet to see an impossible situation for a physician. ⁓ If you cut back spending, you make some hard choices, which generally means telling kids, you know, hey, we're not gonna buy you a new car.
That means telling your family, we're not going to go on the same trips we normally go on because we're behind. And that is a bit of an ego blow, but it is required in this situation. So just remember, it's not impossible. Get your spending down and adjust your expectations of when you can retire. Retiring at 65 for a physician is certainly possible if you save like crazy for the next 15 years.
And the great thing about having a good income is you can essentially, ⁓ through brute force, save your way into retirement if you don't want to retire really early. And I would consider that around mid 60s.
So, not impossible, but get a plan, understand what's required, and get on track.
All right, the last question of today comes ⁓ from a double doctor family in Illinois. Should we aggressively pay down our 5 % home loan or invest more for retirement?
All right, this is the age old question and it continues to be a question because no matter who you talk to, you probably are getting different answers. So you talk to a financial advisor, you talk to a mortgage broker, they're going to tell you to invest, right? Because most financial advisors, not us, not physician family, but most financial advisors make money based on how much you invest. Mortgage brokers,
Generally, they make more the more you borrow. They want your loan to be as big as possible. Their explanation for why you should do this is, of course, you're going to get better than a 5 % return in the stock market. They are either new here or they are very confident in something that I don't believe that they have any control over. An automatic 5 % return,
It is not automatic. It's not a real thing. You are taking more risk when you invest more. Usually, historically at least, that has turned out to be better than 5 % if you're invested in at least some stocks, some equities. Then you go talk to your parents or your grandparents or your uncle or whoever, and they might say, down your house, because it's the prudent thing to do in their mind. It just doesn't go any further than that.
But you will either feel, this is just what I hear physicians say and what I've heard for many years now, you will either feel like you're missing out on something in the stock market or you're just taking too much risk. And that probably comes from a family that just doesn't like to take on debt. And no matter what form it is in, they don't like debt. So you'll probably feel ⁓ unsatisfied either way.
The only thing I have heard that makes physician families feel secure and make they feel good about their decision is when they do two things. One is invest enough, at least enough to be on track for retirement. And then two, at the same time, pay down your mortgage enough, at least enough for it to be paid off before you retire.
At that point, depending on where you're at with your plan, usually there is some money left over. At that point, if there's money left over, you get to decide. But I have yet to feel or hear a physician ⁓ regret doing a little bit of both. There's nothing wrong with that. Taking the automatic 5 % return.
way I would look at it, by paying down your mortgage, there's nothing wrong with that. That is a great guaranteed return. Investing a little bit more for retirement and not paying down your mortgage a whole bunch, most likely, mean historically, you will get a great return, at least one that is better than 5 % over a very long period of time. So you get to decide after you're on track for retirement, which is paying down your mortgage,
and investing for retirement, you get to decide what to do with the rest. And most physicians generally, they end up paying down their mortgage if it is actually above 5%. 5 % or above, most people see that and they say, look, know, this is a pretty high rate, at least compared to let's say what bonds are paying, maybe not stocks, but bonds. I'd like to pay this down. And then if they have...
a rate that is sub 5 % in the fours, in the threes, there's still a few of us out there that are in the twos. Once they are on track to pay their mortgage off by the time they retire and they have a sub 5 % mortgage, they generally invest the difference. This is not a ⁓ prescription. This is a description of what I'm seeing out there and how people generally handle this.
but you are kind of handcuffed and you don't know what decision to make until you're on track, paid down your mortgage on time for retirement, and you're investing enough. Now, if things change in the future and you need to make an adjustment, that's easy to do. So let's say something changes in your life and all of a sudden you're not on track for retirement anymore. Well, don't be so married to the idea that you're gonna pay down your mortgage in just a few years. You can move some of that extra payment toward retirement.
and vice versa. If you refinance your home or let's say, sorry, you move and your rate goes up, why don't you just start saving enough for retirement and pay down that more expensive mortgage? You can whittle this thing down to a point where your mortgage is really manageable. You have a good rate, a reasonable rate, and you're on track for retirement along the way. That is it for today's episode. Thank you so much, everyone listening.
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