Mortgage Case Study 3: $425K mortgage

This post is the third in a three part case study in finding out how much mortgage should I take on to fit into my plan to FI in the next 10 years. The first post is here and the second post is here.

In the first post, I considered the feasibility of a $625K mortgage. My conclusion was that having a $625,000 mortgage will definitely not fit into the 10 year FI plan that I have. From the calculations in that post, 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

In the second post, I considered the feasibility of a $525K mortgage. My conclusion was that having a $525000 mrtgage will not fit into the 10 year FI plan that I have BUT will will fit into 11 years i.e. one more than my 10 year FI plan. So, if I get a $525K mortage, the following things have to happen:

  • Pay $5000 pm mortgage
  • Work for 11 years

Adding one additional year of work seems most acceptable 🙂

This post will consider a $425K mortgage and see how t fits into my 10 year plan for FI.

My Mortgage Assumptions

The basic assumptions I will make about the mortgage, beyond the max amount of $425000, 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 $425,000 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 $2153 (Total = $2153 pm)

Case 2

Mortgage term in years 30
Monthly payments $2153
Monthly extra payment $800  (Total = $2153+$800 = $2953 pm)

Case 3

Mortgage term in years 30
Monthly payments $2153
Monthly extra payment $1600 (Total = $2153+$1600 = $3753 pm)

Case 4

Mortgage term in years 30
Monthly payments $2660
Monthly extra payment $2847(Total = $2153+$2847= $5000 pm)

This case is a new one for this $425K post to have one case for $5000 monthly payment that was there in the $625K post.

How soon can I pay off the $425,000 mortgage?

Case 1: $2153 pm

Mortgage term in years 30
Monthly payments $2153

DATE         PAYMENT  PRINCIPAL  INTEREST   TOTAL INTEREST       BALANCE
June 2016  $2,153.41  $559.66       $1,593.75    $1,593.75                   $424,440.34
June 2031  $2,153.41  $1,097.81    $1,055.60    $245,164.17               $280,396.50
May 2046   $2,153.41  $2,145.37    $8.05           $350,228.52               $0.00

Repayment time is 20 years.

Case 2: $2953 pm

Mortgage term in years 30
Monthly payments $2153
Monthly extra payment $800

DATE           PAYMENT  PRINCIPAL   INTEREST   TOTAL INTEREST   BALANCE
June 2016    $2,953.41  $1,359.66    $1,593.75     $1,593.75                $423,640.34
June 2031    $2,953.41  $2,667.05    $286.36        $183,263.19            $73,695.52
Sept. 2033    $732.16     $729.42       $2.74           $187,088.56            $0.00

Repayment time is 18 yrs approximately.

Case 3: $3753 pm

Mortgage term in years 30
Monthly payments $2153
Monthly extra payment $1600

DATE          PAYMENT   PRINCIPAL   INTEREST  TOTAL INTEREST  BALANCE
June 2016   $3,753.41   $2,159.66    $1,593.75    $1,593.75              $422,840.34
Sept. 2028  $2,502.98   $2,493.63     $9.35          $129,254.63          $0.00

Repayment time is 12.5 years approximately.

Case 4: $5000 pm

Mortgage term in years 30
Monthly payments $2153
Monthly extra payment $2847

DATE          PAYMENT   PRINCIPAL   INTEREST  TOTAL INTEREST  BALANCE
June 2016  $5,000.41    $3,406.66     $1,593.75   $1,593.75               $421,593.34
Dec. 2024  $2,677.86    $2,667.85     $10.00         $87,719.94            $0.00

Repayment time is 8.5 years.

Additional 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, approximately $500 more per month needs to be budgeted for house maintenance and insurance expenses.

Conclusion

Having a $425,000 mortgage will definitely fit into the 10 year FI plan that I have. Note that this with a $5000 pm mortgage payment. So, if I get a $425K mortage, the following things have to happen:

  • Pay $5000 pm mortgage
  • Work for 8.5 years

This plan seems the most acceptable one from a money perspective 🙂

Conclusion from the 3-part mortgage series

I considered three different mortgages and their feasibility to pay them off within my 10 year FI plan and the results are:

  • $625K Mortgage:
    • Pay $5000 pm mortgage
    • Work for 15 more years i.e. 5 more years than my FI period of 10 years
    • PLAN FAILS by 5 years
  • $525K Mortgage:
    • Pay $5000 pm mortgage
    • Work for 11 more years i.e. 1 more years than my FI period of 10 years
    • PLAN FAILS, but only by 1 year
  • $425K Mortgage:
    • Pay $5000 pm mortgage
    • Work for 8.5 years i.e. well into my FI period of 10 years
    • PLAN SUCCEEDS!!

So, the best case scenario for me is a mortgage anywhere between $425K to $525K. Yeah!! I am super happy to have this number!!

Links

Advertisements

Mortgage Case Study 2: $525K mortgage

This post is the second in a three part case study in finding out how much mortgage should I take on to fit into my plan to FI in the next 10 years. The first post is here.

In the first post, I considered the feasibility of a $625K mortgage. My conclusion was that having a $625,000 mortgage will definitely not fit into the 10 year FI plan that I have. From the calculations in that post, 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

This post will consider a $525K mortgage and see if it fits into my 10 year plan for FI.

My Mortgage Assumptions

The basic assumptions I will make about the mortgage, beyond the max amount of $525000, 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 $525,000 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 $2660      (Total = $2660 pm)

Case 2

Mortgage term in years 30
Monthly payments $2660
Monthly extra payment $800  (Total = $2660+$800 = $3460 pm)

Case 3

Mortgage term in years 30
Monthly payments $2660
Monthly extra payment $1600 (Total = $2660+$1600 = $4260 pm)

Case 4

Mortgage term in years 30
Monthly payments $2660
Monthly extra payment $2340 (Total = $2660+$2340 = $5000 pm)

This case is a new one for this $525K post to have one case for $5000 monthly payment that was there in the $625K post.

How soon can I pay off the $525,000 mortgage?

Case 1: $2660 pm

Mortgage term in years 30
Monthly payments $2660

DATE         PAYMENT    PRINCIPAL    INTEREST   TOTAL INTEREST   BALANCE
June 2016  $2,660.10    $691.35        $1,968.75     $1,968.75                $524,308.65
June 2031  $2,660.10    $1,356.12     $1,303.98     $302,849.86            $346,372.15
May 2046  $2,660.10     $2,650.16     $9.94            $432,635.24            $0.00

Repayment time is 30 years.

Case 2: $3460 pm

Mortgage term in years 30
Monthly payments $2660
Monthly extra payment $800

DATE           PAYMENT  PRINCIPAL   INTEREST   TOTAL INTEREST   BALANCE
June 2016   $3,460.10   $1,491.35    $1,968.75    $1,968.75                 $523,508.65
June 2031   $3,460.10   $2,925.36    $534.74       $240,948.88             $139,671.17
Feb. 2035   $2,947.53   $2,936.51    $11.01         $253,009.45             $0.00

Repayment time is 19 years.

Case 3: $4260

Mortgage term in years 30
Monthly payments $2660
Monthly extra payment $1600

DATE         PAYMENT   PRINCIPAL  INTEREST    TOTAL INTEREST    BALANCE
June 2016  $4,260.10   $2,291.35    $1,968.75    $1,968.75                  $522,708.65
Mar. 2030  $2,914.45   $2,903.56    $10.89          $180,830.60             $0.00

Repayment time is 14 years.

Case 4: $5000

Mortgage term in years 30
Monthly payments $2660
Monthly extra payment $2340

DATE          PAYMENT   PRINCIPAL   INTEREST  TOTAL INTEREST  BALANCE
June 2016   $5,000.10   $3,031.35     $1,968.75   $1,968.75               $521,968.65
July 2027    $3,519.20    $3,506.05    $13.15        $143,532.21            $0.00

Repayment time is 11 years.

Additional 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 “Additional expenses”, having a $525,000 mortgage will definitely not fit into the 10 year FI plan that I have. Note that this is even with a $5000 pm mortgage payment. Adding 1 more years to the FI plan will be sufficient. So, if I get a $525K mortage, the following things have to happen:

  • Pay $5000 pm mortgage
  • Work for 11 years

Adding one additional year of work seems most acceptable 🙂

The next case study (last) will tackle a $425K mortgage.

Links