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.
Humble FI 
Pingback: Mortgage Case Study 1: $625K mortgage | Humble FI
I’m guessing in the background you’re calculating what the money you put into paying off the mortgage would earn if you invested instead. (Maybe I didn’t read carefully.) I hate being a lawyer, so another year of working most definitely would not be acceptable. 😉 You are doing the smart work of careful number-crunching before taking the plunge. Kudos.
LikeLike
Thanks for dropping by. My goal in this post and others in this mortgage series is to find a mortgage size that would allow me to be financially independent in 10 more years.
For example, a $625000 mortgage will make me work for at least 15 years, paying $5000 pm for mortgage. Note that I still need to take care of expenses like food, 401k, etc for me and my family. So, the minimum salary commitment will be around $7000 per month for 15 years…too much 🙂 So, my analysis says that $625K mortgage is not possible.
The current post is telling me that for a $525000 mortgage, I need to work for 11 years…i.e. one more year than my 10 year FI plan. This is better than the $625K mortgage, but still has a 11 year commitment. I agree with you though…why work an extra year if you can avoid it 🙂 I will find a way!
LikeLiked by 1 person
Looking at the numbers before jumping is a good idea.
Your approach looks like ours… We started with a 30 year mortgage but never intended to take that long. The advantage is a lower mandatory monthly pay. The rest of our money now has options, and as freedom fighters, we like options! We lifted in the mean time the following options: house extension, garden remodelling, investing in index funds and accelerated repayment.
Today we have 9,5 years left, this would bring the total to 18,5. But in the mean time, our mortgage is each month 20 pct less than initially, so, creating even more options.
I hope you find the number you like!even more important, i hope you find the house you like.
LikeLiked by 1 person
Hey, thanks for the kind words and the words of wisdom! You have correctly identified my strategy. I like your idea of generating options by keeping the monthly payment low. I did not think about this angle…will add it to my checklist. Thanks!
Last year, I initiated multiple passive income streams. If I fund them for another year, most of the streams will become self sustaining. For example, one of the streams now returns $130 per month in dividends and I invest $150 more each month…if the dividend per month becomes close to $200pm, I will stop adding my $150 it and let dividend reinvesting take care of funding that passive income stream.
Once a few of my passive income streams become self sustaining, I will be able to devote more money towards funding my mortgage. I just want to be ready with analysis for the size of the mortgage and how I will pay for it before my mortgage payment actually starts. Hopefully by this time next year, I will have found a “home” for our family. Thanks for your best wishes…truly appreciate it.
Best of luck in your journey as well!
LikeLike
From having both a 30 and a more recently financed 15, I will be honest in telling you that the 30 year mortgage is a complete waste of money. A fixed rate 30 year mortgage is almost entirely interest. You won’t even make a dent in the principal for years to come. It’s important to note that we qualified for the prime rate on both mortgages. Good luck!
LikeLike
Thanks for your comments! Yes, I agree that a 30year mortgage can lead to a lot of money paid as interest i.e. many many years of slavery.
The one case where I have found it to be advantageous is when a real estate bubble is forming. In that case, a 30 year mortgage keeps the monthly payment low and hence allows one to qualify for a bigger mortgage. If the house is cashed out before the bubble bursts, then the long mortgage is kind of helpful i.e. leverage to the max to gain the max. But, I was not smart enough to be in that position. So, trying to find a mortgage that I can pay off with only 10 more years of slavery 🙂
LikeLiked by 1 person
Pingback: Mortgage Case Study 3: $425K mortgage | Humble FI