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.

Links

How to fund my Retirement?

I learnt about Financial Independence in early 2014 (here). I spent a lot of time studying the different blogs that talk about Financial Independence and came to a definition of what Financial Independence means to me. I also realized that there are two different kinds of retirement…early and real retirement phases. Since I wanted to gain financial independence by year 50 (wish me luck), I decided that my retirement will have two phases.

  • Early Retirement (50-70yrs)
  • Real Retirement (70-100yrs)

Now, with my health issues, I am sure I will not live until 100. But, I do not want my family to run out of money. So, I am going to plan assuming retirement lasts until 100…if we have a few down years in the market, this additional planned period should help compensate.

The next question is: how do you fund the two retirement phases? Here is my high level design

  • Early Retirement (50-70 yrs)
    • Funded by Passive Income Streams
  • Real Retirement (70-100 yrs)
    • Funded by 401k and IRAs

Early Retirement Funding (50-70 yrs, $50000 pa)

Having decided that passive income streams will fund my early retirement years, the following questions come next.

  • Why Multiple Passive Income streams?
  • What kind of Passive Income?
    • My choice are Interest from cash and Dividends from stocks and bonds.
    • Details here
  • What are the core principles I should follow for my Passive Income Streams?
  • How should I implement the passive income design principles?

I established multiple passive income streams in 2014 and let them fly. In 2015, I would like to put the investments on auto pilot and let the investments compound from all the automatic investment amounts and the dividends that each investment produces. The progress of these investments are tracked here.

Real Retirement Funding (70-100 yrs, $30000 pa)

For real retirement, I wanted to use the traditional funding vehicles like 401k and IRAs. To support 30 years of $30000 pa, I would need at least $900K in my retirement fund. Since I had 401Ks from multiple companies, I decided to combine my previous employers’ 401Ks into one single Vanguard IRA. The next important question was how to invest the money inside the IRA.

There are a few main ideas I wanted to follow for my IRA investments

  • Automated rebalancing
    • I.e. Target retirement funds
  • Spread the risk across 5 year time periods
    • Lets take a 2030 Target date retirement fund.
    • This fund will get super conservative as it approaches 2030 i.e. sell stocks and move that money to bonds and cash.
    • If there was a 5 year bad stretch of the market preceding 2030, then all the stock investments sold will be at a loss.
    • So, I wanted to make sure that not all the money is invested in 2030…some in 2035, some in 2040, some in 2045, etc. This will spread the risk of a bad 5 yr market performance across many 5 year periods.
    • In addition, this will keep the IRA money in buckets with different conservative basis i.e. there will be a growth component as well for some of the funds.

Considering the above main ideas, I have spread the IRA money into different 5 year buckets:

  • Vanguard Target Retirement 2030 Fund (55 yrs of age)

  • Vanguard Target Retirement 2035 Fund (60 yrs of age)

  • Vanguard Target Retirement 2040 Fund (65 yrs of age)

  • Vanguard Target Retirement 2045 Fund (70 yrs of age)

The goal is that when I reach 70 years of age, the above four funds would have reached their most conservative state and be ready for consumption during the retirement years.

Conclusion

My expectation with the two pronged attack (early and real retirement funding) is that a combination of the passive income streams and the retirement fund should provide a reasonably comfortable money pool for each month spent in retirement.