This is a three part case study in finding out how much mortage should I take on to fit into my plan to FI in the next 10 years.
I wrote about preparing for the next recession here. In fact, what I really meant is that I want to not just prepare but PROFIT from the next recession instead of bracing myself and riding it out. One of the important lessons I learnt from past recessions, from personal experience and that of others, is as follows:
- Big items (houses and cars) should always be purchased in a recession or bust period.
- A mistake make in either of the two can take years and years to recover from…especially the house.
My main goal for the next upcoming recession is to buy a home for our family. We have sacrificed a lot over the past years. We had to rent in many places due to affordability issues and my kid has taken the brunt of all the moves…in terms of not having a constant set of friends both at home and in school…especially in school due to the many times we have moved and changed schools. I am ready to put down roots in one place so that my family can settle down.
Questions to answer
I live in a HCOL (high cost of living) area on the west coast. Moving out of here is not an option for me and my family….this is where my family is, this is where my friends are and this is what I call home. So, got to live the life here, including the high cost of housing. So, the questions that come to my mind are:
- How much does a 3Bed/2Bath home cost in my area?
- What is the monthly mortgage payment going to look like?
- How soon can I finish paying for the house? Considering my ideal goal is to reach FI in 10 years……
How much does a 3Bed/2Bath home cost in my area?
As of today (04/20/2015), a reasonable 3B/2B home costs appx $1.2 million dollars. Yep…I am not kidding about this…sad but true. There seems to be no value for money. Since this is way way above my price range, I will wait it out for the next recession to calm the prices down a bit. It may happen in the next year OR the year after….not sure. But, whatever the cost of the house is, here are my rules:
- I will not get a mortgage above $625,000.
- This is the jumbo loan limit and I am not paying Mortgage Insurance and not maxing out my financial slavery.
- Since the higher limit on my mortgage is fixed, the rest of the money has to come from the down payment
- If I have $300,000 for down payment, then I can afford a house that costs $925,000
- If I have $200,000 for down payment, then I can afford a house that costs $825,000
- If I have $150,000 for down payment, then I can afford a house that costs $725,000
Doing it this way, I can calculate the worst possible price and anything under will be a nice to have! Assuming that, I am going to crunch numbers on a $625,000 mortgage and calculate the following:
- What does my monthly payment look like for a $625,000 mortgage?
- How soon can I pay off the $625,000 mortgage?
My Mortgage Assumptions
The basic assumptions I will make about the mortgage, beyond the max amount of $625000, are:
- Interest rate per year 4.5
- Mortgage start date May 2016
- 30 year mortgage
With that, I am going to crunch some numbers for a 30 year mortgage. My ideal early retirement is in approximately 10 years. But, I cannot afford a 10 year mortgage…trust me on this…I have crunched the numbers and it is not pretty. The best case for me is a 30 year mortgage. Why?
- It is a safe bet because
- the monthly payment is the lowest among 10, 15 and 30 year mortgages
- in case there is a loss of income, having a lower monthly payment is very helpful until the income source restarts
- It is very flexible
- If there is money available, then I have the option of paying more to simulate a 10 or 15 year mortgage
Hence for safety and flexibility, a 30 year mortgage is the best option for me.
What does my monthly payment look like for a $625,000 mortgage?
I have used a mortgage amortization calculator (link below) which gives me the details on how my monthly mortgage payment is split into interest and principal repayment and how long before my entire loan is repaid. I am going to use that calculator to come up with the nos below.
Case 1
Mortgage term in years 30
Monthly payments $3,166.78
Case 2
Mortgage term in years 30
Monthly payments $3,166.78
Monthly extra payment $800
Case 3
Mortgage term in years 30
Monthly payments $3,166.78
Monthly extra payment $1600
How soon can I pay off the $625,000 mortgage?
Case 1: $3166 pm
Mortgage term in years 30
Monthly payments $3,166.78
DATE PAYMENT PRINCIPAL INTEREST TOTAL INTEREST BALANCE
June 2016 $3,166.78 $823.03 $2,343.75 $2,343.75 $624,176.97
June 2031 $3,166.78 $1,614.42 $1,552.36 $360,535.55 $412,347.79
May 2046 $3,166.78 $3,154.95 $11.83 $515,041.95 $0.00
Repayment time is 30 years.
Case 2: $3966 pm
Mortgage term in years 30
Monthly payments $3,166.78
Monthly extra payment $800
DATE PAYMENT PRINCIPAL INTEREST TOTAL INTEREST BALANCE
June 2016 $3,966.78 $1,623.03 $2,343.75 $2,343.75 $623,376.97
June 2031 $3,966.78 $3,183.67 $783.11 $298,634.57 $205,646.81
April 2036 $2,998.48 $2,987.27 $11.20 $322,092.87 $0.00
Repayment time is 20 years.
Case 3: $4766 pm
Mortgage term in years 30
Monthly payments $3,166.78
Monthly extra payment $1600
DATE PAYMENT PRINCIPAL INTEREST TOTAL INTEREST BALANCE
June 2016 $4,766.78 $2,423.03 $2,343.75 $2,343.75 $622,576.97
June 2031 $3,712.62 $3,698.75 $13.87 $236,733.59 $0.00
Repayment time is 15 years.
Missing expenses
In all the above calculations, the astute reader might have noticed that I left out two parts from the above calculation:
- Property taxes from the calculation.
- Assuming a 1.25% property tax rate, it is not unreasonable to have a $1000 per month property tax in my HCOL area.
- But, assuming that this expense is tax deductible, I will ignore this cost.
- House maintenance expenses
- From the experience of our current rental, I estimate house maintenance expenses to be roughly about $2500 per year i.e. $appx $200 pm
- Home insurance
- Lets estimate this to be $200 pm.
So, appx $500 more per month needs to be budgeted for house maintenance and insurance expenses.
Conclusion
Even without adding the “Missing expenses”, having a $625,000 mortgage will definitely not fit into the 10 year FI plan that I have. Note that we are talking close to a $5000 pm mortgage payment. Adding 5 more years to the FI plan will be sufficient. So, if I get a $625K mortage, the following things have to happen:
- Pay $5000 pm mortgage
- Work for 15 more years
The next two case studies will tackle a $525K mortgage and a $425K mortgage.
Humble FI 
$900K is way too expensive, but I guess that’s the price to pay to live close to family. I’m not sure if I’d go for that type of house. That is “against” the retirement community philosophy. Taking MMM or early extreme retirement. The MMM live in a multifamily unit or always have roommate to share the cost.
the EER live in a mobile home. Lifestyle changes to afford the early retirement plan is the easier way to go. There has to be some “scarifies”, otherwise you’ll need incredible luck for all of this to happen again.
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Thanks for dropping by Vivianne!
Yes. $900K is very expensive and as I have calculated in this blog post, it will take me 15 years to payoff the mortage…5 years longer than my plan for FI. I also agree that without sacrifices, we cannot achieve everything. So, what is my plan?
When I wrote this blog post on $625K mortgage, it is one part of three ideas. I am going to explore the three ideas in subsequent posts to see how my FI plan can hold and we still get our family home paid.
+ Price:
++ $525K mortgage and $425K mortgage.
++ This would definitely mean sacrificing size i.e. a townhome
+ Move
++ Move to a more affordable area in our HCOL area
++ This would definitely mean sacrificing good schools
+ Higher Mortgage interest rates
++ Low mortgage interest rates have led to highly inflated prices due to over bidding
++ When the mortgage interest rates rise, the overbidding will reduce and prices may come down
++ This would definitely mean that the down payment has to increase to compensate for higher
mortgage interest rates.
I will explore all of the above three options in upcoming blog posts. Something has to give…so, which makes the most sense? I will find out over the next couple of weeks. Would welcome your thoughts on them 🙂
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I went to a school that rank 1/10 now. I don’t say any swear words. Generally, that’s because at home we have our rules, then when I go out to the world, I apply the same rules. The point is you can’t leave everything to the educator, you have to do your part as parents.
Some of the perks going to a “bad” school:
I get to play varsity on everything if I choose to play anything, most kids don’t like to get involve, so if I get involved on freshman year, by sophomore year, I’m varsity. I played varsity golf.
I graduated top of my class. It would be a lot harder to achieve when I go to a “good” school. This open door to tons of scholarship. I had 4 full tuition package at my fingertip.
People were less pretentious. Of course there were some peer pressure of what to wear. But these HS kids still poor, vs in rich area, it will be super hard being frugal. I spend $0 on prom, just borrowed a dress from my cousins.
Teachers are much younger, so they have a lot of motivations. Well, they are fresh out of college, can’t get into a good school, so they are stuck with a “bad” school. They saw a dedicated kid like myself, recommendations from them were top notch.
Just saying, ehheehhe
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There is a lot of wisdom here. I am really thankful for them. As a parent, I want my kid to have it better than me. But, that leads to indecisiveness. Sometimes all it takes is wisdom like you have shared to push me over the indecisiveness. Much much appreciated.
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Wow- Unless you want to work for the rest of your life a $625,000 mortgage is definitely out of the question – Heck I think even 425,000 plan is way too much. The secret for saving a large portion of you income is to minimize monthly spending. Unless your family lives next door to you it is definitely worthwhile to consider moving to LCOL areas. (If you can make >100K in a LCOL area that is really the secret to FI!).
Chef
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