FIRE locations and mortgages

[Travis]

I'm still about 5 years from FIRE, but I'm starting to put numbers to where would be the best place for us to retire.  This wasn't easy since not every municipality keeps their utility and tax rates in the same place (or uses the same scale).  I based my assessments off of how much energy and water we're using now, but as I get more comfortable with the numbers I might adjust them by season.  Here's my question for the group:

After spending a few nights looking at the housing markets, I have a general idea what I might have to pay for a house in each area. What I'm not clear on is what kind of mortgage to go for which alters my FIRE goal.  I qualify for a first-time home buyer VA loan and my credit score is nearly maxed out.  For the sake of comparison I just said each loan was at 4% and I'm putting 20% down.  A 15 year loan greatly increases the monthly payment, but gets the loan finished sooner.  Between 15 and 30 years, a $250k mortgage would save me $100k in interest; however, by my rough math the 'stache could grow by a couple times that if I spread it out over 30 years. Having a larger mortgage payment also seems to require a larger FIRE amount to hedge against sequence of returns risk even if that expense goes away after 15 years.  On the emotional side of the equation, the thought of still having a mortgage at age 70 bothers me.  I might be convinced to get over that last part if I fully understand the situation and there's more to this that I'm not seeing.

[Abe]

I was thinking about this same issue recently and came to the conclusion that since there is no penalty on paying a mortgage down early, consider taking a 30 year and budgeting to pay more money than necessary before retiring, then downshift to the normal schedule afterwards. This will mitigate the losses from the higher interest payments early on in the mortgage term, while avoiding a lock-in to a 15 year mortgage.

[Another Reader]

I had no problem carrying a mortgage in retirement, because the cost of borrowing was so low.  At 3.125 percent, there is simply no point to paying off the loan.  However, in your shoes, I would not use 4 percent as the mortgage rate in any calculations.  Rates today are in the high fours, and heading higher.  In a more "normalized" environment, 6 percent is what I would expect to see.  That's likely to be the case five years out and that's the figure I would use if I were making any decisions about where to live then.  Mortgage rates affect house prices, especially outside of the most competitive markets, but the economy is a bigger factor.

Not sure where you are looking in California, but in a competitive market it's extremely difficult to buy with a VA loan.  With five offers on the table, a seller is going to choose the offer with the fewest contingencies and the highest likelihood of closing on time.  A buyer with a VA loan will be at the bottom of the list.  If the market normalizes and is balanced or there are more sellers than buyers, you will have a better chance.

Another problem you will encounter is lending requirements.  Lending standards are designed for W-2 wage earners, not early retirees with a stash and an Army pension.  Unless you have a history of stable monthly withdrawals from your paper asset accounts, that income will not be counted in qualifying you.  Only the pension income will be counted.  That will limit the amount of mortgage you will be able to get.  There are a few lenders that will do asset based mortgages, but the rates are higher. 

It's really early to do detailed calculations of housing costs.  You can be precise in your math, but completely inaccurate in your conclusion.  In your shoes, I would focus on the barriers I will likely encounter and finding ways to overcome them.  For example, can you save more in taxable accounts to up your down payment to 50 percent?  Can your wife continue her job at the new location so her W-2 income would be counted in the mortgage qualification calculation?

One more thing.  Utility costs are outrageous here.  I think the SRP base rate in Phoenix is about 8.7 cents per kilowatt hour.  PG&E is two to three times higher. Peak price is around 34 cents per kilowatt hour, last I checked.  I would look at your bill and then your in-laws' bill for comparison. 

[Travis]

AR, thanks for the analysis.  Someone else told me over the weekend that VA loans can take much longer to complete so it might not be the ideal vehicle for getting a mortgage.  I know this is early to be making firm decisions, but I wanted to at least start working out the variables. 

I'm looking at the greater Sacramento area for where to live.  My in-laws live in Yuba City and being in that general area would be ideal.  The inventory in Yuba isn't very big, but as you said we're still a few years out.  I was horrified to see that PG&E baseline rates are around $.22/KWhr.  My in laws in Yuba got solar panels installed last year and they appear to be making a profit, though I will have to verify the numbers with them.  It certainly seems to be the only way around those costs.  Figuring out water was a head scratcher. My in-laws pay a flat rate, my SIL is on a well, but the municipal website only advertises a per gallon rate.

I had no idea about the W-2 vs 'stache income being a factor.  I've maintained a life-long membership with a Sacramento-based credit union just in case I might need it to buy a home someday. I'll have to talk to them as we get closer and see what reality is going to look like.

We found a couple cities elsewhere that would have a lower CoL than Sac, but one of our FIRE goals is to be closer to friends and family and after a few trips the costs start to rise the further away we live.

[boarder42]

when are you looking to buy this house if its in 5 years then there is no sense in running the numbers now b/c the interest rates will change dramatically by then.  Carrying a mortgage makes 100% sense with today's low rates but in 5 years if rates are 6-8% it probably no longer makes sense. 

[Travis]

Would there be any point to picking a place now, buying, and then renting it until we're ready to move in? Or is that just putting us on the hook for taking care of it while we're still trying to save?

[Another Reader]

Sacramento is where people from the Bay Area go to buy when prices get too high here.  It goes up in price later in the cycle and comes down earlier as a result.  I would personally not buy there today.  When the cycle turns, it will be cheaper than it is now.

There is no guarantee that in five years you will still be focused on moving there anyway.  You still have to get your promotion IIRC and your in laws' situation may change.  Sacramento is a poor rental market as well.  You will be nowhere near the one percent rule and you will have to deal with tenants, which is not always easy.

[doggyfizzle]

I'm looking at the greater Sacramento area for where to live.  My in-laws live in Yuba City and being in that general area would be ideal.  The inventory in Yuba isn't very big, but as you said we're still a few years out.  I was horrified to see that PG&E baseline rates are around $.22/KWhr.  My in laws in Yuba got solar panels installed last year and they appear to be making a profit, though I will have to verify the numbers with them.  It certainly seems to be the only way around those costs.  Figuring out water was a head scratcher. My in-laws pay a flat rate, my SIL is on a well, but the municipal website only advertises a per gallon rate.

Much of the Sacramento area is served by municipal electric utilities (SMUD), etc, so the baseline PG&E rates in Yuba City might not be accurate everywhere.  As a Sacramento native, my advice on buying would be to more focus on finding a home not built in the flood-plain areas that were recently developed out by ARCO Arena.  I've worked on the levee systems out there, and I shudder everytime I drive by there on I-80 and see all those homes built in vulnerable areas.

I'd personally looking a little bit further east (Roseville, Granite Bay, El Dorado Hills, Auburn, Cameron Park, etc).  The foothills of the Sierras are much better for recreation etc than the Sacramento flatlands.

[bocopro]

I can vouch for farther north, as I grew up in Chico, CA.

It's a college town (pros and cons) with a somewhat mixed reputation due to college-goers (they make it onto some "top party schools" list every year) but it has a great small-town vibe, cool downtown, great park (Bidwell Park) and not too bad of cost-of-living. It's about 40-50 minutes north of Yuba City.

Not too many Chicoans use wealth as a flashy thing, although farmers in the area are multi-millionaires. Lots of active hiking, walking, running, and a good bike scene. Good weather if you can handle the heat, and a mere two hours from Lake Tahoe, and an hour from Mt. Lassen National Park.

My parents/aunts/etc. all transplanted there in child-raising years and are still there (though not for long, I think) - good houses can be $300-400k, but a solid smaller home with DIY potential can be $200, which is drastically cheaper than even sacramento, let alone the bay area....ouch!

[Abe]

Any thoughts on the Merced or Fresno areas? I'm being recruited for a job out there. Cost of living is a fraction of my anticipated pay, but want to make sure it's an OK area to raise a family.

[Travis]

I can vouch for farther north, as I grew up in Chico, CA.

It's a college town (pros and cons) with a somewhat mixed reputation due to college-goers (they make it onto some "top party schools" list every year) but it has a great small-town vibe, cool downtown, great park (Bidwell Park) and not too bad of cost-of-living. It's about 40-50 minutes north of Yuba City.

Not too many Chicoans use wealth as a flashy thing, although farmers in the area are multi-millionaires. Lots of active hiking, walking, running, and a good bike scene. Good weather if you can handle the heat, and a mere two hours from Lake Tahoe, and an hour from Mt. Lassen National Park.

My parents/aunts/etc. all transplanted there in child-raising years and are still there (though not for long, I think) - good houses can be $300-400k, but a solid smaller home with DIY potential can be $200, which is drastically cheaper than even sacramento, let alone the bay area....ouch!

Chico might work for visiting the in-laws, but that would put me 2 hours from my friends and family in the Sac/Roseville area.  I know I'm limiting myself by trying to make a FIRE location work for non-monetary reasons, but it's important to me to be near them.  As others have said I have some time to figure this out.

[bocopro]

Chico might work for visiting the in-laws, but that would put me 2 hours from my friends and family in the Sac/Roseville area.  I know I'm limiting myself by trying to make a FIRE location work for non-monetary reasons, but it's important to me to be near them.  As others have said I have some time to figure this out.

Ah! Missed the "friends/community in Sac area" part - very important! Just had to put in a not-subtle hint for a cool area of (truly) northern California. Sacramento is cool too!