Housing Dilemma….Part 1

As I have mentioned in previous posts in 2017, I am struggling with a Housing Dilemma which has paralyzed me for the last month and a half. It took me some effort to break out of it and write this post. In this post on my Housing Dilemma (Part 1), I will try to detail two big dilemmas I am facing. Your feedback will be very much appreciated. In Part 2 of the post, I will write about my decision…which hopefully will give me some peace and closure.

Looking back…

I discovered Financial Independence…kind of by accident around 2003. My first blog post ever via this blog was on 07/21/2014. I re-read that first post again and realized that my goal of FI was 10 years from 07/21/2014 i.e. by 07/21/2024, I should have achieved Financial Independence . To be honest, it was more of a stake-in-the-sand kind of goal rather than a well thought out date based on pure math. But, setting this date has got me far ahead of my expectations from when I started this blog.

My goals when I started this blog…

I went back to read what Financial Independence meant to me. From there, I got the following goals. These early goals were refined a bit more…but they still are the main pillars of my FI strategy.

  1. Emergency Fund for 12 months of expenses
    1. Achieved
  2. Multiple Passive Income Streams that produce $50000 per year for years 50-70
    1. On hindsight, this goal was too aggressive at my current funding level 🙂
    2. Depending on my housing decision, I may need additional funds OR more time. But I am happy with the current progress (Jan 2017) and will surely continue with this goal!
  3. College Fund for my kid
    1. Will be achieved in the next 8 years
  4. A retirement fund that covers 30 years of expenses for years 70-100
    1. Will be achieved in the next 8 years
  5. A paid off roof for my family
    1. The biggest question mark 😦 More on this later
  6. A $100K medical fund to help fix emergency health issues…not sure about insurance with preexisting health issues.
    1. In 10 years, if I do not dip into the emergency fund, that fund will be folded onto the medical fund. And I will need to add some more money of course.
    2. But, will surely be achieved.
  7. Life Insurance to cover my family.
    1. Note that this is insurance coverage outside of work to protect my family.
    2. Achieved!

Biggest Question Mark

Financial Independence to me meant that the family abode was paid off. Basically, zero debt with a healthy passive income to boot was my dream. I have come to realize that the big decision of buying a family abode is comprised of a few smaller decisions:

  • Location:
    • I live in a HCOL (high cost of living) area…can we move out of here to a LCOL (low cost of living) area?
    • For various reasons, moving is not an option for our family. All our connections (family and close friends) are here and uprooting everything is not practical.
  • Money:
    • The best case scenario for me is a mortgage amount of somewhere between $425K to $525K. I analyzed this in three posts….the final one was this. Links to the other two are within.
    • No mortgage => no tax deduction on the mortgage interest. I have been paying more tax than needed for the past couple years while I was building my passive income engine. Need to correct this.
  • Kid’s Deadline:
    • We have moved 3 times within the last 7 years and that has taken a toll on my kid the most…3 different schools and zero long term friends. My kid enters middle school next year and I want to drop down roots before that…most possibly another school change but hopefully the last one until high school. So, I have appx 1.5 years left to buy a house.
  • Satisfaction:
    • After visiting many open houses and considering the needs and wishes of our family (size, school district, space, layout, etc), I have come to the decision that a “satisfactory” house is a 3B/2B SFH in a reasonably good school district with low crime. This will cost me anywhere between $850K to $950K…depending on how far into suburbia I am willing to move to. Trust me, you will not get a mansion for this…welcome to my HCOL area 😦
    • In waiting to buy a house, our family spent a few vagabond years. We were saving up for the down payment as well as building the passive income streams. Whatever house we buy will be the one we will stay for the next 18 years atleast. So, the criterion of a 3B/2B SFH is not something I can relax.

So, it seems to me that the only criterion I can relax are:

  • Money
  • Kid’s Deadline

Depending on which of the above two criterion I relax, there can be a few different directions I can go in. And here comes the dilemma.

Housing Dilemma 1: Relax Money criterion and stick to Kid’s Deadline

A mortgage size between $425K and $525K will fit into my FI window. Assuming the worst case cost of $950K for a house, I will need a down payment of $325K to even bid for the house. I have some down payment money but accumulating $325K will take me many many more years.

Vivianne suggested one way: sacrifice some retirement funding to build this down payment up.The stock market is at insane levels…so, perhaps not investing in 401K for a year is not a bad idea. Cons are:

  • Even if I stop investing in 401K and stop adding new funds to my passive income streams, I can save a max of $20K to $25K over the next year and a half.
  • 401K funding is the only tax-efficiency move I have going for me….don’t want to lose this…
  • Can I sacrifice my passive income streams? Hmm…..

So, lets say I relaxed my mortgage limit and took a $625K mortgage (analysis)…the jumbo loan limit in my HCOL area. This means my FI plan will need to be extended to 15 years at least. Say, I am agreeable to this as well. So, what is the dilemma then? Buying at the peak.

One of the good articles that explain what I am trying to say is Case-Shiller House Prices Bubble 1.0 vs today. 2006-2007 was the largest housing bubble in history. And in my HCOL area, prices today are much much more than 2007 prices. If 2007 bubble was the largest bubble, what does it make the house prices we have today? It is really insane 🙂

I concur with the above article as I have personal proof of it. Here is one example of a sfh that a friend bought in Dec 2007….

  • Dec 2007: 922K
  • Dec 2009: 699K
  • Dec 2013: 883K
  • Dec 2016: 1200K

Even if I assume that 2016 is Bubble 2.0, if the bubble pops, I cannot expect the prices to go back to 2009 prices…at best, the prices might settle around 883K (2013 prices).

Conclusion: With this background, is this the right time to bug a house? Is this the right time to commit to a huge mortgage that will require mandatory full employment for the next 15-20 years? Even if we deduct mortgage interest deduction of $20-$30k ($625K mortgage @ 4.5%), if the house price drops by 200K, would it be a smart buy? I am not so sure….especially since even refinancing will be ruled out for underwater homes.

Housing Dilemma 2: Relax Kid’s deadline and keep Money 

Lets say I will wait for the house prices to fall to a reasonable value…say appx $800-850K for a sfh 3br/2b home in a reasonably good school district with low crime. Let us say that this price reduction will only happen in 2020 i.e. three years from now. I can save money for the home down payment and still stick to the $525K mortgage. But, this means I have to continue to rent and potentially move again for my kid’s middle school i.e. continue the Vagabond family life 😦

I hate to put my family through another temporary move, but lets see what this option of delaying a home purchase till 2020 brings us.

  • I can save enough money for a down payment to let me pick a $525K mortgage i.e. stick to my FI schedule of 10 years….
  • I am not buying at the peak of the market….a peak which is really really historic. I have seen my close friends struggle in the 2008 housing bubble , lose jobs and houses and saw first hand what devastation it can cause for families.

So, what do I lose by postponing my purchase?

  • Obviously, I feel that I am not being a responsible parent and husband by elongating the vagabond life by another three years.
  • I am going to lose the tax benefits of a mortgage…most probably in the highest earning years of my life….i.e. when I could most benefit from a deduction in taxes.
  • House prices may rise up even more….hey, anything is possible 🙂

I cannot do anything about the first con and the third is not realistic in my opinion. But I can do something about the second. What if I purchased one or more cash-flow positive rentals in a LCOL area? Here are some positives:

  • Use leverage to add one more income stream
  • Diversify my income stream to include rental income along with dividend income
  • Get the mortgage tax deduction

Some negatives are:

  • The rental purchases also will be at the top of the housing market bubble…unless I identify a market that is not so frothy.
  • Remote rental management…lack of time is so prevalent in my life now…so, how does one manage remote properties? Can I identify a rental management agency to help me out? Doable but will take some work.
  • If housing market falls in 2018, I will not have enough money to take advantage of it.

Conclusion: With this background, is this the right time to postpone purchase of family residence and buy a rental property instead? I will be getting the tax benefit and hopefully get the renters to pay off most of the mortgage. And over time, diversify my passive income stream as well. Am I being too selfish in signing up my Kid and wife for few more years of Vagabond life?

Readers

If you have read this far, I truly appreciate it! As I said before, the above two dilemmas have paralyzed me for the last month and a half. If I may ask one favor, do you have any thoughts on how I can solve my dilemma? Which option should I pick: Dilemma 1 OR Dilemma 2? Am I missing any pros/cons in each dilemma? Feel free to share your valuable opinions! Thank you very much!

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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

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

Mortgage Case Study 1: $625K mortgage

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.

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