Author Topic: ? for those of you w/ mortgages in FIRE  (Read 4494 times)

Mr. Green

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? for those of you w/ mortgages in FIRE
« on: September 26, 2016, 04:04:36 PM »
Do you count the part of your mortgage payment that goes to principal as "spending?"

In an ongoing effort to reassess my plans for the immediate future (returning to work temporarily, and whether to hire out part of our home construction) I'm considering the possibility that my wife would quit her job while we're still building. On the plus side, I get an able bodied helper, she'll learn just as much as I will, and we'll get to have a cool experience as a couple. On the negative side, we'll be paying a mortgage on our current house while we build the new one which, at first glance, boosts our spending rate above a 4% SWR. Our spending this year is on track to be $50,000. However, we have a 15 year mortgage so $10,000 of our $17,000 in mortgage payments goes directly to principal. For the principal amount, I suppose we're just temporarily shifting that money from equities to real estate, as we intend to sell this house once the new house is built. I don't expect this situation will be more than 9 months, a year at the most if it takes a few months to move the old house. How do other folks in retirement with mortgages view this, especially those whose mortgages are temporary and then the house equity becomes liquid again?


Mr. Green

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Re: ? for those of you w/ mortgages in FIRE
« Reply #1 on: September 26, 2016, 06:38:56 PM »
I'll add my 2 cents. First of all I'd seriously consider getting a 30 year mortgage. Rates are so low that trying to pay off a mortgage sooner is not an attractive use of money.

Another thing to consider is that the 4% safe withdrawal rate assumes that withdrawals are being indexed with inflation. That makes sense for living expenses like food and rent that generally track inflation. However your mortgage payment is fixed and so you can actually have a higher safe withdrawal rate for fixed expenses, more like 5.3%. I generally count fixed expenses at 75% when adding them to expenses that track inflation. Something you might want to consider if it gives you peace of mind.
Unfortunately, since we're planning to sell our current house within a year (as soon as the new house is built) it doesn't really make sense for us to refinance. Using our last refinance (into the 15 year) as a measuring stick, it would cost at least $2,000 in fees. The rate on our 15 year is ridiculous anyway, 2.875%. Also, if I moved to a 30 year, I'd just be putting more of the payment to interest, which I'd never see again. My total payment with the 15 year may be higher, but a substantial amount will come back to me in the form of home equity when we sell.

SwordGuy

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Re: ? for those of you w/ mortgages in FIRE
« Reply #2 on: September 26, 2016, 06:54:16 PM »
Good points, Freedom17.

I'm planning on being FIRE next year with a mortgage.

So do I count it as "spending"?    Hell yes.  If I don't send in that check the bank takes away my home.  It really IS as simple as that.   So I better budget for spending that money if I want to keep the same roof over my head.

Can I also count the principal pay-down as an investment?   No, not really.  I can add it to my net worth as equity in the house, but it's not making me money (because I won't be selling it), so it's not an investment.


moof

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Re: ? for those of you w/ mortgages in FIRE
« Reply #3 on: September 27, 2016, 11:14:45 AM »
... Also, if I moved to a 30 year, I'd just be putting more of the payment to interest, which I'd never see again. My total payment with the 15 year may be higher, but a substantial amount will come back to me in the form of home equity when we sell.

Keep in mind the missed opportunity as well.  Paying $2000/mo on a 15 year instead of $1500/mo on a 30 year looks like a win in raw dollars spent on interest, but misses out on what the other $500/mo could have been used for.  The other $500/mo even put into a bond fund at 5% will win out on average.  You are more leveraged, but when borrowing rates are well below stock and bond return rates it becomes counterproductive to shovel money into the mortgage rather than stock market.

RoseRelish

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Re: ? for those of you w/ mortgages in FIRE
« Reply #4 on: September 27, 2016, 11:29:21 AM »
I count the whole thing as a cost. In your shoes, I wouldn't stress over the breakdown if it temporarily boosts your WR above your target.

For my situation, having a mortgage vs. not having a mortgage is worth 0.20% on my withdrawal rate. That's not enough to stress me out. Breaking it down to principal vs. interest (at ~50% each), means we're really splitting hairs on withdrawal rate impact.

If you're trying to split P vs. I to ease your mind and keep your WR below 4% - go for it. But I think the both are costs the more I think about it.

Mr. Green

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Re: ? for those of you w/ mortgages in FIRE
« Reply #5 on: September 27, 2016, 02:22:58 PM »
Alternatively: subtract your mortgage balance from your investment total and only count property taxes from your house payment as spending. This simulates paying off your mortgage while keeping the money productively invested.
Were this a long term situation, subtracting the mortgage balance definitely works in our favor. We owe 140k, which amounts to $5,600 @ 4%. Our P&I payment is $14,500 a year, well beyond 4% of the lump sum.

Spork

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Re: ? for those of you w/ mortgages in FIRE
« Reply #6 on: September 27, 2016, 02:52:48 PM »
It really depends on what you are measuring.  I don't think "spending" is a real accounting term.  (Technically you are "spending" money to buy Vanguard funds... but it is by no means an expense.)

*If you are just looking to compute savings rates... 
savings=income-expense
The principle payment is not an expense, it is an asset transfer (checking account to home equity).  Interest, insurance and taxes are the expense.  If you correctly categorize everything as asset/liability/expense/income, this measurement "just works."

*if you are looking at cash flow, then of course you have to consider it.  You have to make your mortgage payment.  You have to have the cash to do it.

*if you are talking about "stash available for FIRE" ... then I would not personally count the amount of money you put into home equity as FIRE stash unless you have a plan to sell that house and rent or move to lower cost of living area.

Personally, I compute savings rate according to the first bullet above.  However, when considering retirement stash, I categorize my assets into "financial assets" and "other assets".  "Other assets" contains my house and vehicles.  I only use financial assets for FIRE calculations.

marty998

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Re: ? for those of you w/ mortgages in FIRE
« Reply #7 on: September 27, 2016, 03:35:16 PM »
... Also, if I moved to a 30 year, I'd just be putting more of the payment to interest, which I'd never see again. My total payment with the 15 year may be higher, but a substantial amount will come back to me in the form of home equity when we sell.

Keep in mind the missed opportunity as well.  Paying $2000/mo on a 15 year instead of $1500/mo on a 30 year looks like a win in raw dollars spent on interest, but misses out on what the other $500/mo could have been used for.  The other $500/mo even put into a bond fund at 5% will win out on average.  You are more leveraged, but when borrowing rates are well below stock and bond return rates it becomes counterproductive to shovel money into the mortgage rather than stock market.

Bernie Madoff may be the only person to get a 5% bond fund return when interest rates are at zero.

Mr. Green

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Re: ? for those of you w/ mortgages in FIRE
« Reply #8 on: September 27, 2016, 04:04:05 PM »
... Also, if I moved to a 30 year, I'd just be putting more of the payment to interest, which I'd never see again. My total payment with the 15 year may be higher, but a substantial amount will come back to me in the form of home equity when we sell.

Keep in mind the missed opportunity as well.  Paying $2000/mo on a 15 year instead of $1500/mo on a 30 year looks like a win in raw dollars spent on interest, but misses out on what the other $500/mo could have been used for.  The other $500/mo even put into a bond fund at 5% will win out on average.  You are more leveraged, but when borrowing rates are well below stock and bond return rates it becomes counterproductive to shovel money into the mortgage rather than stock market.

Bernie Madoff may be the only person to get a 5% bond fund return when interest rates are at zero.
lol....kinda.
« Last Edit: September 28, 2016, 05:37:02 AM by Mr. Green »

Goldielocks

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Re: ? for those of you w/ mortgages in FIRE
« Reply #9 on: September 27, 2016, 04:53:53 PM »
WRT having a helper, we found it best to only have one of us working on the house full time and the second evenings and weekend and vacation time. There as many one person tasks and getting supplies where the second less skilled person just waits.   But enough two person tasks for half the time. ( siding and pulling wires through, for example).

msilenus

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Re: ? for those of you w/ mortgages in FIRE
« Reply #10 on: September 29, 2016, 09:50:58 PM »
Do you count the part of your mortgage payment that goes to principal as "spending?"
...
I don't expect this situation will be more than 9 months, a year at the most if it takes a few months to move the old house. How do other folks in retirement with mortgages view this, especially those whose mortgages are temporary and then the house equity becomes liquid again?

I simulate it in CFireSim.  I have a conservative estimate for how much the house will sell for, and have a big cash infusion in year X when I plan to sell it.  There's also some temporary annual spending that ends in year X, to reflect the extra housing spending.  Cash infusion gives me back the equity, and temporary spending models the cash flow impacts until we sell.

Don't think if I'd bother for 9-12 months.  Would probably just focus on what I expect the picture to look like after the house situation is resolved.

bownyboy

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Re: ? for those of you w/ mortgages in FIRE
« Reply #11 on: October 12, 2016, 05:19:19 PM »
We're not due to FIRE until 2021. We will still have a mortgage, it won't be huge, around 50k. Our plan is to throw overpayments into Stocks and Shares ISAs instead of overpaying the mortgage. Hopefully the growth of the stock market will be greater than the 2.19% mortgage and we can either choose to pay off the mortgage or keep it and continue to pay the mortgage.

I used to be completely against debt, however since reading lots of FIRE blogs over the last 2 years I've come to realise that low interest debt like a mortgage is an opportunity. Keep the low interest debt and use excess money to invest.