Author Topic: Questions about Mortgage and FI  (Read 386 times)

NoMoneyMoProblems

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Questions about Mortgage and FI
« on: August 12, 2017, 06:37:48 AM »

​Hello,

I'm hoping you all can help me with a quick financial gut check and answer a specific question related to paying down our mortgage vs investing while we are working overseas for the next little while. We recently purchased our first home and subsequently were offered a job (with housing provided) overseas for the next 2 - 3 years, which means we've got to figure out what to do with our townhouse while we are gone. The plan is to leave next summer. We live in the Washington DC metro area.

The thing is, we will still have a mortgage (about ~$2500 in total per month) but will not have to pay for housing overseas. This begs the question of what should we do with the money that we would have been paying for the mortgage, assuming we can get decent renters in our place for a majority of the time we are gone. Should we continue to put that money towards the mortgage (~$5000/month total) to pay it off quicker and reduce the total amount of interest paid, or should we instead basically let the renter pay our mortgage and put the $2500 into the market? We already max out all available tax-advantaged accounts (401k and IRAs) each year.

We would probably sell the house (or rent it out) and move out of the area upon achieving financial independence, and I suspect that timeline should affect our decisionmaking about what to do while overseas. Problem is I don't really know when that will be because there are too many variables. We had been saving about 50% of my take home pay with the match but that was before the house. Here is some other info that may be pertinent:

Income: $125k / year
Married filing jointly with two young kids; We are both in our early thirties
House: 30 year fixed at 3.75%; Purchase $460k (balance on loan now is about $391k; next summer when we leave should be around $384k)
Assets: $140k in retirement accounts (2040 target date funds through Vanguard); $69,000 equity in house; $40k in cash
No debt other than the house

​For any FIRE-related considerations, let's assume a $40,000 annual withdrawal rate at 4%, so a $1 million target. An average 7% return from now until 2035 when I am 50, continuing to contribute $50k per year, should get us to $1 million without the house. Theoretically, I should be eligible to retire at 50 with a federal pension anyway but I'd like to do it much earlier.

Thank you and I look forward to hearing your thoughts.​ I'm just having a hard time wrapping my brain around all this.


SwordGuy

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Re: Questions about Mortgage and FI
« Reply #1 on: August 12, 2017, 07:35:12 AM »
First of all, congrats!  You are doing great financially.   If you keep on doing what you're doing, you'll end up well off regardless of this decision.  That's awesome.

You can clearly handle an occasional big repair bill if one comes up or the lack of a tenant for awhile, so you're not taking on too much risk to rent it out instead of sell it.

Historical US stock market returns are about 7% after inflation and 10% before inflation.
Your mortgage is a fixed 3.75%. 

Investing an extra $100 in your mortgage will save you $3.75 in interest next year.  Investing it in a low fee, total US market fund mix should make you about $10.00 per year ON AVERAGE.  Some years it will be way more, other times it will be much less.  But on average, the expectation is about $10.00.

I would put the money in the market in your shoes.  At some point, when you want to FIRE but need the mortgage paid off to make the numbers work, you can wait until the market is up, sell some shares and pay it off all at once.   If you pump the money into the mortgage and you need more cash for awhile because you've both lost your jobs, it will be a lot harder to get the cash you need out of the mortgage.



dreams_and_discoveries

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Re: Questions about Mortgage and FI
« Reply #2 on: August 12, 2017, 10:27:22 AM »
I'd invest it, much better returns if you can handle the risk.

RWD

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Re: Questions about Mortgage and FI
« Reply #3 on: August 12, 2017, 10:47:54 AM »
Invest and join the club.