Mortgage at FIRE or after?

[PAFire]

Hello everyone,

I am a longtime reader of MMM and an avid follower of these forums, so I appreciate all of the advice I have already gleaned from you.  I am hopeful you can offer me some suggestions as I plan for our retirements.  First, some background.  My wife and I plan to FIRE in 2025 and to max out our 403b and Roth IRAs until then (as we have been doing for three years now).  All additional funds I invest in my brokerage account or use to replenish our cash reserve after an unexpected purchase (such as the septic tank pumping that was required last month).  We currently owe about $320,000 on our house at 3.4%.  In 2025, we will still owe approximately $250,000 without any extra payments.  According to Zillow, our home is worth $410,000 today.

Our goal is to FIRE, sell our house, and use the proceeds to place a large down payment on a house in our new location (probably WA).  We are both teachers, so we will have pensions available to us immediately upon retirement, but they will be small pensions because we will not have put in the 30+ years to max them out.  I have read on several other topics here that getting a mortgage post-FIRE is difficult because of reduced incomes, so I am wondering in what order we should try to accomplish our goals, with the added caveat that we will not move until the end of the school year in 2025 (June) and of course that we are moving across the country from PA.

Should we sell our house before even looking for a new home in WA?
Should we get pre-approved for a mortgage while we are still working so that it is easier to obtain approval?

I have considered using cash as the down payment, but most of our investments are in our 403b accounts and thus inaccessible until we are 59.5, which will be 16 years after FIRE.  I estimate that I should have roughly $100k in my brokerage account, but I was hoping to use that as a buffer with our pensions for any extra expenses.  Right now, we are planning on having expenses less than our pensions.  In addition, I would like to be to make the largest down payment possible so that our future mortgage payments are as small as possible, but I am also concerned about being unable to sell our current home and thus being unable to make a contingency offer on a house in WA.

As you can see, I have myriad thoughts bouncing around in my head, some of which may actually make sense, so I would appreciate your guidance in making sense of this quandary.

[MDM]

PAFire, welcome to the forum.

You do have many different ways to approach this.  Given that your move is ~10 years away, it might be best to forget about it for another 5 years.

In 5 years, decide if there is anything special you need to do.  The answer might depend on what has happened during the intervening years, e.g.. to your
 - investment performance
 - desired general retirement location
 - desired specific retirement house size and location
 - existing home value
 - housing prices in your retirement location
 - etc.

There is a good chance "no need to do anything now" will be as true in 5 years as it is today.  Reset your alarm clock for another ~3 years.  At that point you might get serious about prequalification, etc.

One possible exception to "just wait" is if you
 - are practically certain of your desired retirement location, and
 - expect land values there to increase at a rate above inflation, and
 - would prefer to buy land and have a new house built there, and
 - don't mind the hassle and expense of maintaining undeveloped land for all those years.

Note that in addition to the $100K in your brokerage account you will have ~$110K in Roth IRA contributions that you may withdraw tax free in 10 years, provided you continue to contribute the $11K max each year.

[Highbeam]

A preapproval that you earn while still employed is worthless once you quit your job. The lender depended on your employed income when determining your fitness.

[PAFire]

A preapproval that you earn while still employed is worthless once you quit your job. The lender depended on your employed income when determining your fitness.

Highbeam, thank you for the reminder.  I should have remembered this from our previous mortgage closing process, but you are exactly right.  So it seems as if I will need to keep that in mind in terms of actually closing the loan prior to retiring since we most likely will not be able to pay cash for the whole price of the home.

There is a good chance "no need to do anything now" will be as true in 5 years as it is today.  Reset your alarm clock for another ~3 years.  At that point you might get serious about prequalification, etc.

One possible exception to "just wait" is if you
 - are practically certain of your desired retirement location, and
 - expect land values there to increase at a rate above inflation, and
 - would prefer to buy land and have a new house built there, and
 - don't mind the hassle and expense of maintaining undeveloped land for all those years.

Note that in addition to the $100K in your brokerage account you will have ~$110K in Roth IRA contributions that you may withdraw tax free in 10 years, provided you continue to contribute the $11K max each year.

MDM, thank you for your reply.  You are correct that much can occur in the interim, so it seems as if waiting is the best option and then reevaluating in several years.  To your exceptions list, we are certain of our desired location, but we do not intend to buy land and build a house (at least not right now) because of the expense.  My understanding is that purchasing land now and then building on it later would nearly always be more expensive than buying a comparable preexisting home in the same area.  Is that assumption incorrect?

Very true point about our Roth accounts, as well; however, I am leery of using too much of our savings at once and thus effectively using those gains for one large purchase as opposed to incremental withdrawals later. 

In addition, I realize that we could then take the proceeds from our current home's sale and reinvest them, but could we move those proceeds into a tIRA or a Roth?  Even though we will be in a lower tax bracket after FIRE, I would like to avoid putting all of the sale's proceeds into the brokerage account because of the tax treatment.  If my logic is off here, please let me know.

Thank you again for your help.

[MDM]

So it seems as if I will need to keep that in mind in terms of actually closing the loan prior to retiring since we most likely will not be able to pay cash for the whole price of the home.

Or spell out your plans with the lenders so they don't use your current work income in the qualification process. 

My understanding is that purchasing land now and then building on it later would nearly always be more expensive than buying a comparable preexisting home in the same area.  Is that assumption incorrect?

Depends on the relative inflation rates of the land vs. building materials and labor, so take your best guess....

In addition, I realize that we could then take the proceeds from our current home's sale and reinvest them, but could we move those proceeds into a tIRA or a Roth?

No.  You may add only $5500/yr ($6500/yr if 50 or older) to your IRA accounts.

[Fishindude]

I think you should either work long enough to fully pay off your house, or plan on living in something that you can pay cash for with the equity from current house sale.
Being burdened with a mortgage post FIRE is nuts in my opinion.

If your set up is anything like most teachers I'm familiar with, you already get summers off, spring break, Christmas break, snow days, etc.   What's the hurry to quit?
The benefit package and pension is the best thing about a teachers compensation.  Silly not to work long enough to get the full pension, unless you have a rich uncle you're not telling us about.

[catccc]

Is a roth pipeline move a possibility with a 403B?  You can rollover to a traditional IRA upon termination of employment, then gradually convert to a roth and then withdraw from the roth.  That way you are only looking at a 5 year gap betwee fire and being able to use the 403B funds.

[PAFire]

Or spell out your plans with the lenders so they don't use your current work income in the qualification process.

So would you suggest working with a smaller lender when the time comes?  I read in another post that often smaller lenders are more willing to work with unconventional circumstances than are larger banks.

Is a roth pipeline move a possibility with a 403B?  You can rollover to a traditional IRA upon termination of employment, then gradually convert to a roth and then withdraw from the roth.  That way you are only looking at a 5 year gap betwee fire and being able to use the 403B funds.

Catccc, I have been doing some reading about the Roth pipeline as you suggested, but I am uncertain if that strategy would help in this situation since I would need to use any 403b money for the actual down payment, which would occur at roughly the same time that I retire/separate from service.  Thus, I could not begin the pipeline until that time and thus could not utilize the funds for another five years.  Please let me know if I am misunderstanding anything about the pipeline process.  Certainly that strategy is something I will probably consider anyway for liquidity purposes, but I do not think it will assist me in having access to more money at the time I retire.

I think you should either work long enough to fully pay off your house, or plan on living in something that you can pay cash for with the equity from current house sale.
Being burdened with a mortgage post FIRE is nuts in my opinion.

If your set up is anything like most teachers I'm familiar with, you already get summers off, spring break, Christmas break, snow days, etc.   What's the hurry to quit?
The benefit package and pension is the best thing about a teachers compensation.  Silly not to work long enough to get the full pension, unless you have a rich uncle you're not telling us about.

Fishindude, although I agree that having a mortgage is not ideal in FIRE, from what I have read on these fora, many individuals would disagree with you.  I personally would like the freedom of having no monthly mortgage payment, but I do not believe that is a possibility in my situation.  Finding a home for $150-$200,000 in the areas we are considering, especially nine years from now, is most likely unfeasible.  I do believe I can retire, though, and have a reasonable mortgage payment that can be more than covered by my pension income alone, something that it seems many people on these fora suggest and have done.  Please correct me if I am wrong.

To your point about my pension and continuing to work, I respectfully wonder if you are asking the same questions of those in other occupations.  Do most people not have off every weekend and most likely two or more weeks per year?  Why would they ever want to FIRE in that situation?  Isn't that a sweet deal? 

Do most people not receive employer matching in their 401ks?  Why would they want to retire and give up that free money? Isn't that a sweet deal? 

I believe the answers to these questions are the foundation of MMM and most of our beliefs in general about the value of having freedom and not working one more year simply to obtain a larger pension.  I will have put in 22 years at the same job by the time I plan to FIRE, which is approximately four times longer than most millennial employees will work at any one job in their lifetimes; I believe the work I have done and will continue to do is far more demanding than many people who have never taught believe it to be.  I am no apologist for shiftless teachers or workers in general, so I only speak for myself, but I work from 5:50 a.m. to 3:30 p.m. each day and then grade papers and create lessons for an average of fifteen hours per week.  I then work another job during the summer so that I can FIRE when I want to and have the freedom to travel and to expand my horizons beyond the classroom.  I am no hurry to quit; I simply am interested in the same level of freedom as everyone else in these fora, including you, I assume.  Do we not all give up something when we make the decision to FIRE?  Why should my pension and benefits be a siren's song that is foolish to resist, but a computer engineer's 401k matching or six-figure salary are acceptable to walk away from and even applauded when given up?  I see a bit of a double standard here.

I appreciate the time you took to respond to my inquiry, but I do not believe you have a strong sense of what my job entails and/or why I may want to seek freedom beyond a two-decade career.  I would be happy to elucidate my reasons and my job requirements in more detail if you would like.

[partgypsy]

Or spell out your plans with the lenders so they don't use your current work income in the qualification process.

So would you suggest working with a smaller lender when the time comes?  I read in another post that often smaller lenders are more willing to work with unconventional circumstances than are larger banks.

Is a roth pipeline move a possibility with a 403B?  You can rollover to a traditional IRA upon termination of employment, then gradually convert to a roth and then withdraw from the roth.  That way you are only looking at a 5 year gap betwee fire and being able to use the 403B funds.

Catccc, I have been doing some reading about the Roth pipeline as you suggested, but I am uncertain if that strategy would help in this situation since I would need to use any 403b money for the actual down payment, which would occur at roughly the same time that I retire/separate from service.  Thus, I could not begin the pipeline until that time and thus could not utilize the funds for another five years.  Please let me know if I am misunderstanding anything about the pipeline process.  Certainly that strategy is something I will probably consider anyway for liquidity purposes, but I do not think it will assist me in having access to more money at the time I retire.

I think you should either work long enough to fully pay off your house, or plan on living in something that you can pay cash for with the equity from current house sale.
Being burdened with a mortgage post FIRE is nuts in my opinion.

If your set up is anything like most teachers I'm familiar with, you already get summers off, spring break, Christmas break, snow days, etc.   What's the hurry to quit?
The benefit package and pension is the best thing about a teachers compensation.  Silly not to work long enough to get the full pension, unless you have a rich uncle you're not telling us about.

Fishindude, although I agree that having a mortgage is not ideal in FIRE, from what I have read on these fora, many individuals would disagree with you.  I personally would like the freedom of having no monthly mortgage payment, but I do not believe that is a possibility in my situation.  Finding a home for $150-$200,000 in the areas we are considering, especially nine years from now, is most likely unfeasible.  I do believe I can retire, though, and have a reasonable mortgage payment that can be more than covered by my pension income alone, something that it seems many people on these fora suggest and have done.  Please correct me if I am wrong.

To your point about my pension and continuing to work, I respectfully wonder if you are asking the same questions of those in other occupations.  Do most people not have off every weekend and most likely two or more weeks per year?  Why would they ever want to FIRE in that situation?  Isn't that a sweet deal? 

Do most people not receive employer matching in their 401ks?  Why would they want to retire and give up that free money? Isn't that a sweet deal? 

I believe the answers to these questions are the foundation of MMM and most of our beliefs in general about the value of having freedom and not working one more year simply to obtain a larger pension.  I will have put in 22 years at the same job by the time I plan to FIRE, which is approximately four times longer than most millennial employees will work at any one job in their lifetimes; I believe the work I have done and will continue to do is far more demanding than many people who have never taught believe it to be.  I am no apologist for shiftless teachers or workers in general, so I only speak for myself, but I work from 5:50 a.m. to 3:30 p.m. each day and then grade papers and create lessons for an average of fifteen hours per week.  I then work another job during the summer so that I can FIRE when I want to and have the freedom to travel and to expand my horizons beyond the classroom.  I am no hurry to quit; I simply am interested in the same level of freedom as everyone else in these fora, including you, I assume.  Do we not all give up something when we make the decision to FIRE?  Why should my pension and benefits be a siren's song that is foolish to resist, but a computer engineer's 401k matching or six-figure salary are acceptable to walk away from and even applauded when given up?  I see a bit of a double standard here.

I appreciate the time you took to respond to my inquiry, but I do not believe you have a strong sense of what my job entails and/or why I may want to seek freedom beyond a two-decade career.  I would be happy to elucidate my reasons and my job requirements in more detail if you would like.

Can you put some of your retirement money in a roth? You can then take out the principal, use that and the equity from your house to buy a new house outright. It sounds like you are able to cover other expenses between the pension and other money you saved. If you are not able to do that, you may be cutting it too close. For example if one of you dies, does your spouse still have the pension? what about large house repairs, etc?

[PAFire]

Can you put some of your retirement money in a roth? You can then take out the principal, use that and the equity from your house to buy a new house outright. It sounds like you are able to cover other expenses between the pension and other money you saved. If you are not able to do that, you may be cutting it too close. For example if one of you dies, does your spouse still have the pension? what about large house repairs, etc?

Partgypsy, Thank you for the reply.  I am contributing the maximum to my Roth each year, so I agree that it seems as if using that money and/or my brokerage account to supplement the proceeds from our current home's sale will be the best option.  Regarding our expenses, yes, the pension is our plan to cover more than our yearly needs, at least at first before we can access our 403b funds.  In the event of either of our deaths, the surviving spouse does receive the pension, so it is a nice life insurance policy.  However, what you mentioned about large bills such as house repairs is one reason that I did not want to drain both my brokerage account and Roth principal so that we would still have some liquid assets that we could access in an emergency.  I suppose a HELOC could also work, but ultimately MDM is probably correct--we simply need to wait until we are closer to our FIRE date to make any final determinations. 

Thank you all for your help.