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
Humble FI 
Great that you found your number. You said that a 15 year mortgage isn’t feasible, but wonder if you can tweak your numbers any other way to make it work. With a 15 you get a lower interest rate, of course, but also given the amortization you do pay a lot less in interest and keep more of that money going to your principle.
FWIW, we bought way below what we could afford and have never regretted it. Less we have to pay off = less time we have to work before reaching FI!
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Two questions:
1. Since you’re aiming for a mortgage that is between $425k-$525k, does that mean you’re also anticipating having to put 40-50% down or have you decided to downsize the actual house your planning on purchasing? If I’m not mistaken, you have $0 saved towards the down payment. How long do you anticipate it will take to reach your down payment goal?
2. Regarding the extra monthly payment of $2847, do you plan on making that extra payment on a monthly basis or will you pay it via a lump sum basis at a set time? Specifically, I’m inquiring about your contingency plan in the event of job loss. For example, paying 6 months worth of additional payments as a lump sum when you have 1 year’s additional payment reserve on hand. The other option is of course, increasing your emergency fund. Or does your $72k already cover the potential job loss?
Really enjoying this series of posts as my wife and I are in a similar position, looking at similar numbers as far as housing costs, though we’re not looking to purchase for another 4-5 years.
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Great to see you have a range now for your mortgage. I second the questions from Stephen.
Good luck on finding a house. Any reason you plan it for June 2016.?
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Good luck !
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Why don’t you take out an extra 25% and buy a duplex instead? Have your tenant pay 1/2 – 2/3 of the mortgage. This way you can put more toward the portfolio and not tie all of your wealth into a property.
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Unless you can swing a substantially lower interest rate on 15 yr it makes the most sense to take a 30yr fixed mortgage and overpay every month- Lower payments on the 30 yr allows for flexibility if something to happen (medical/ lost job)
Chef
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