Savings required to pay mortgage after FIRE

[Dada Almond]

I was thinking about the amount of money required to pay a mortgage after FIRE.  Any standard category of spending would require 25x yearly outlay saved to cover using the 4% rule, but mortgages are not indexed to inflation.  So if I'm thinking about this correctly, you would need less than 25x coverage since your effective payment "decreases" over time.

It seems to me that you can reverse the formula for calculating your monthly mortgage payment to find out how much you need to save.
Instead of:

A = P * r*(1+r)^ⁿ   
            (1+r)^ⁿ - 1

where A = monthly payment, P = initial loan principal, r = interest rate (per month), and n = total number of months remaining on the loan

you can flip it to:

P = A * (1+r)^ⁿ - 1 
             r * (1+r)^ⁿ

where A = monthly payment, P = initial stash needed to pay off loan over time, r = ASSUMED investment return, not adjusted for inflation (per month), and n = total number of months remaining on the loan

Is this right?

**My searches came up empty for this topic, so please direct me to the right thread if this has been discussed already.**

[Dada Almond]

Example:

$300,000 30 year mortgage at 4% = monthly payment of $1432.25, assume 8% investment return before inflation

4% rule = 1432.25 x 12 x 25 = $429,674 required

formula above only requires $195,192 to pay mortgage out of stash assuming 8% return before inflation

I know not many people get a large new mortgage right before FIRE but it seems like it would make a pretty big difference in the amount of savings required.
Am I missing something?

[maizefolk]

Try searching for threads on whether or not it makes sense to pay off your mortgage before FIRE, there was a fair bit of discussion on the math/logic/reasoning of the issue you bring up there.

Generally if you have your non mortgage expenses (including property taxes and home insurance) covered by the 4% rule, all you need is enough extra saved to cover the remaining balance on your mortgage (I think credit for pointing this out goes to Brooklyn Guy).

Whether if makes more sense to use that money to pay off your mortgage or invest it created such a long debate that I don't think we need to reopen it, but either way, saving enough to cover the balance is enough, you don't need 25x your annual mortgage principal/interest payments.

[SubmarineNavigator]

When I was working, we invested in apartment complexes. [rouoghly one property at each place where I was stationed]. Our tenants paid us the money to cover the mortgage plus taxes and maintenance, and we made extra principal-only payments every month to buy down those mortgages.

When I retired we used the equity to buy our retirement home with cash.

At that time, we planned on keeping one set of apartments, to re-build it's equity. In the hope that we would be able to tap into that equity again in 10 years.

Then the Recession hit, our tenants all lost their jobs and we eventually lost that property in a bankruptcy.

However our retirement home was left un-touched.

The only way that I would have a mortgage in retirement, is if the property had at least five apartments, and the net income covered all of it's expenses.

[Dada Almond]

Generally if you have your non mortgage expenses (including property taxes and home insurance) covered by the 4% rule, all you need is enough extra saved to cover the remaining balance on your mortgage (I think credit for pointing this out goes to Brooklyn Guy).

Whether if makes more sense to use that money to pay off your mortgage or invest it created such a long debate that I don't think we need to reopen it, but either way, saving enough to cover the balance is enough, you don't need 25x your annual mortgage principal/interest payments.

Good points maizeman, that makes more sense now.  In the case of having many years left on the mortgage, you wouldn't need to have the total remaining principal balance saved.  In a more realistic scenario the difference would probably be pretty small.  Thanks!

SubmarineNavigator, I am not a real estate investor so I wasn't thinking of it as the coverage for income properties.  I would probably reduce my risk tolerance for something like what you described.

[Proud Foot]

I don't see anything wrong with your math to calculate how much would be needed to cover the mortgage payments. With this method you there are situations where you could knock many years off your timeline and FIRE by unlocking a significant amount of equity in your house. In your example of  the 300k mortgage, if it is all cashed out equity there is another $105k to invest above what is required to cover the payments.

Like maizeman mentioned, there is a whole thread of whether it makes sense to do it or not and I don't think that needs to be reopened.