Author Topic: Getting a mortgage after FIRE  (Read 5155 times)

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Getting a mortgage after FIRE
« on: November 21, 2013, 01:28:38 PM »
In reading through this thread discussing whether or not to pre-pay your mortgage and how that's related to FI, there seemed to be a consensus that it's somewhere between extremely difficult and impossible to get a mortgage without a non-stock income stream.  And even then, it's much more difficult than the traditional way. (i.e. having a full time job)

As a lifetime renter, who will continue to rent unit FIRE when moving to a much lower COL area (area TBD), the only assets I'll have are stocks.  (plus a handful of bonds and cash)  So if I want to buy a house, what would my options be?

I could pay cash, but as discussed in the previously linked thread, that's least optimal version of an already sub-optimal strategy.
I could purchase a house pre-FIRE while I still have a job, but my original plan was to rent initially in the low COL area to make sure it was a good fit before buying anything and being locked into a place that I've never lived before and don't know if I'll enjoy.
What other options are there?  Co-signers? Larger down payments?  Anything I'm missing?



Spork

  • Walrus Stache
  • *******
  • Posts: 5753
    • Spork In The Eye
Re: Getting a mortgage after FIRE
« Reply #1 on: November 21, 2013, 01:45:05 PM »

so... I get why folks want to get mortgages at the current rates.  I totally do.  Really.

That said: there is an option of just paying for it.  Nobody wants you to do it.  Builders don't.  Realtors don't.  Insurance agents don't.  But it is totally doable.

It also sounds like we're talking about some undetermined time in the future.  I wouldn't count on mortgage rates being falsely held below market forever.  This is a market timing thing.  If you want a below market rate, get 'em while they're hot.  There may be a day some day where they're closer to market rates.

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Getting a mortgage after FIRE
« Reply #2 on: November 21, 2013, 02:09:29 PM »
Correct, this is at some yet to be determined point in the future.  You make a good point that as interest rates rise, paying cash will become a better idea.  But is that my only option?  I'd like to have options.  (wouldn't we all!?)

Spork

  • Walrus Stache
  • *******
  • Posts: 5753
    • Spork In The Eye
Re: Getting a mortgage after FIRE
« Reply #3 on: November 21, 2013, 02:18:13 PM »

No guarantees here but ...  another option is to try a smaller bank.

I wasn't FIRE at the time, but I bought a piece of property a few years ago that NONE of the major players would finance.  The land was worth more than the house.  I went to a small local bank, where I could walk in and talk to the VP in charge of loans.  He was awesomely helpful and we worked out a very non-conventional loan.

Numbers Man

  • Guest
Re: Getting a mortgage after FIRE
« Reply #4 on: November 21, 2013, 02:25:05 PM »
Rent with an option to buy and convince the seller to carry the financing. A generous down payment wouldn't hurt to seal the deal.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28231
  • Age: -999
  • Location: Seattle, WA
Re: Getting a mortgage after FIRE
« Reply #5 on: November 21, 2013, 05:21:25 PM »
Buy in cash, take out a HELOC and invest the money.

See: Nord's extensive reports on this.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Getting a mortgage after FIRE
« Reply #6 on: November 21, 2013, 05:52:56 PM »
Buy in cash, take out a HELOC and invest the money.

See: Nord's extensive reports on this.

Ah yes, that makes sense.  I'll stalk him and find some posts on it.

--------

To everyone:  Any thoughts on the co-signing thing?  Would that potentially work as well?  Say I got my parents to co-sign for my mortgage.  I've not really heard of this before, but that has to happen, right?

Plus the conversation would be most excellent.  "Guess what Mom and Dad?  I'm retired!  BTW, will you co-sign my mortgage loan?"

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28231
  • Age: -999
  • Location: Seattle, WA
Re: Getting a mortgage after FIRE
« Reply #7 on: November 21, 2013, 06:16:07 PM »
Er, sorry, I believe Nord's is a traditional mortgage on his primary, which he has refi'd a few times over the last 10 years or so to lower the rate, but specifically to invest the money, even though he could pay it off.

clifp on the e-r.org forums, otoh, I believe is using the low rates afforded by a HELOC to invest in real estate, so that does happen as well, just realized when I came back and read your reply that I misspoke and needed to clarify.  :)

To atone for that, I will offer a link with relevant reading: http://www.early-retirement.org/forums/f28/covering-a-mortgage-without-losing-your-ass-ets-15237-6.html

Only the two final posts are necessary to read, but as Nords notes, there's some other fun stuff in there too, you can click to go back to the beginning of the thread if interested.
« Last Edit: November 21, 2013, 06:21:45 PM by arebelspy »
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Undecided

  • Handlebar Stache
  • *****
  • Posts: 1088
Re: Getting a mortgage after FIRE
« Reply #8 on: November 21, 2013, 06:58:44 PM »
Buy in cash, take out a HELOC and invest the money.

See: Nord's extensive reports on this.

Or, if it seems likely to be cheaper, and you know where you want to move somewhat in advance, buy while still working and finance it as a vacation home or investment property, depending on what you will do with it in the interim. We got a 4%, no points 20-year fixed loan on a potential (speculative? uncertain?) post-RE house and are renting it out for now (while still working elsewhere). Unfortunately it won't work if your plan is to retire and then wander the globe looking for your next home.

burly

  • Stubble
  • **
  • Posts: 151
  • Location: East
Re: Getting a mortgage after FIRE
« Reply #9 on: November 21, 2013, 07:03:59 PM »
You can purchase a home without a traditional W-2 or 'earned' income. All you need are at least 2 years of investment income/dividends to be used for cash flow... You can also purchase with cash and at the bank I work for (I am a lender), we take 5% of liquid investments as cash flow for debt service, so often times that's even better.



dragoncar

  • Walrus Stache
  • *******
  • Posts: 8890
  • Registered member
Re: Getting a mortgage after FIRE
« Reply #10 on: November 21, 2013, 08:29:27 PM »
Buy in cash, take out a HELOC and invest the money.

See: Nord's extensive reports on this.

I think this is a really bad idea in most cases.   Unless you can get a fixed rate non_callable heloc

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Getting a mortgage after FIRE
« Reply #11 on: November 21, 2013, 09:27:36 PM »
we take 5% of liquid investments as cash flow for debt service, so often times that's even better.

Thanks Nathan.  Can you explain what you mean by this?  I'm not quite sure I understand.

aj_yooper

  • Handlebar Stache
  • *****
  • Posts: 1091
  • Age: 8
  • Location: Chicagoland
Re: Getting a mortgage after FIRE
« Reply #12 on: November 22, 2013, 05:27:25 AM »
Buy in cash, take out a HELOC and invest the money.

See: Nord's extensive reports on this.

I think this is a really bad idea in most cases.   Unless you can get a fixed rate non_callable heloc

+1  HELOCs often have a maturity date-mine is 10 years.  Then, you need to re-up; not hard, if you have done well, but a risk or maybe a problem.

Bbqmustache

  • Stubble
  • **
  • Posts: 221
  • Age: 2015
    • Financial Literacy Conversations
Re: Getting a mortgage after FIRE
« Reply #13 on: November 23, 2013, 04:58:02 AM »
As a banker, I would echo the warnings about using HELOCs.  The contract will have a draw period (often ten years), but banks and loan companies also give themselves the ability to close the HELOC at any time.  A lot can happen to a financially illiterate person's finances over that period (and also to the bank's finances too!). 

Nords

  • Magnum Stache
  • ******
  • Posts: 3236
  • Age: 59
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Getting a mortgage after FIRE
« Reply #14 on: November 24, 2013, 07:31:12 AM »
Buy in cash, take out a HELOC and invest the money.
See: Nord's extensive reports on this.
I think this is a really bad idea in most cases.   Unless you can get a fixed rate non_callable heloc
Er, sorry, I believe Nord's is a traditional mortgage on his primary, which he has refi'd a few times over the last 10 years or so to lower the rate, but specifically to invest the money, even though he could pay it off.

clifp on the e-r.org forums, otoh, I believe is using the low rates afforded by a HELOC to invest in real estate, so that does happen as well, just realized when I came back and read your reply that I misspoke and needed to clarify.  :)

To atone for that, I will offer a link with relevant reading: http://www.early-retirement.org/forums/f28/covering-a-mortgage-without-losing-your-ass-ets-15237-6.html

Only the two final posts are necessary to read, but as Nords notes, there's some other fun stuff in there too, you can click to go back to the beginning of the thread if interested.
I know another military retiree who's financing his rental properties with PenFed's cheap 5/5 HELOC.  However he's also working at a civil service job and he's been paying them down with that employment income.  He's planning to pay them off before they get to a reset point. 

In 2000 we took out a 30-year fixed-rate mortgage to buy our residence.  My spouse and I were still on active duty so we had enough income to qualify.  When the stock market fell apart in 2001 we realized that it made cash-flow sense to take out another 30-year fixed-rate mortgage on our rental property as well.  (We invested that mortgage money in shares of Berkshire Hathaway which were on sale...)  I retired to my active-duty pension in 2002.

In 2000-2001 the logic was that we had easy access to mortgages while we were on active duty, and during ER I'd have the annuity income (military pension) to cover the payments.  At the time we also expected that after retirement we'd never be able to qualify to refinance a mortgage.  Yet when my spouse and I were both ER'd and mortgage interest rates were dropping, our pension/rental/dividend income also enabled us to refinance the rental mortgage twice and our residence mortgage six times.  Each time we were absolutely positive that interest rates couldn't possibly get any lower-- but after the new smaller payments had paid for the refi costs, we'd end up doing it all over again.  It was a lot of "fun" doing refis in 2003-2007, but it's been painful since then.  Now we're paying 3.625% (residence) and 4.625% (rental) and those loans will be paid off by the time I'm 80 years old.

I started that E-R.org thread nine years ago to track the 2004 refinance on our residence.  At the time, FIRECalc gave a 74% chance of beating the stock market (the small-cap value index ETF IJS) with the mortgage's 5.5% interest rate.  Like most leverage that went great until 2008, then not so great for a couple years, and now it's back to great again.  The key to mortgage arbitrage is cash flow (in my case, a pension with a COLA) and no bonds in the retirement portfolio (unless their return exceeds the mortgage rate).  If interest rates keep going up over the next year or two we'll cross a point where we might be able to arbitrage the mortgage interest rate with long-term CDs at 4.5%, but that's a mighty thin profit margin with mismatched durations.

The mortgage on the rental has worked out fine, too, because it's been constantly rented to military tenants and rents have steadily risen while the mortgage payments remain fixed.  But again, Hawaii real estate ties up a tremendous amount of capital.  We can also handle a surprise vacancy out of pension cash flow for a few months.

Just to beat this concept into the ground, I believe that mortgage arbitrage is only appropriate when an investor has long-term low-risk annuitized income (like a federal pension) to offset the payments and is willing to invest the remainder of their capital in higher-risk assets (equities, no bonds).  I essentially sold 30 years of my pension to mortgage companies.

One of the keys to ER is that you have more time & opportunities to figure out how to buy dollar bills for 90 cents.  I never would have had the time, energy, or mental bandwidth to do that during my working years.

I'm going to have to update that thread for 2013 data, but here's a summary of the overall APY of the invested mortgage funds from 2004 to the date:
2005:  17.1%
2006:  13.3%
2007:  13.5%
2008:  5.3%
2009:  2.0%  (IIRC it actually turned negative for a few months during this period.)
2010:  3.27%
2011:  2.3%
2012:  5.9%

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28231
  • Age: -999
  • Location: Seattle, WA
Re: Getting a mortgage after FIRE
« Reply #15 on: November 24, 2013, 07:53:25 AM »
Great post Nords, thanks for chiming in.

I would add one other case where I think a mortgage in ER is appropriate: when the interest rate is lower than your SWR.  In other words, a 5.5% interest rate may be worth paying off, where if you can get something at 3.6% or whatever stupid low number yours is at, that's worth keeping.

If your investments can't return that, your ER will fail anyways. 

And, of course, use www.cfiresim.com heavily to run calculations with and without the mortgage (and corresponding invested stache) to see how much more you'd have ended up with historically as well as how much more your portfolio would have failed, and see if the tradeoff is worth it.

The fixed payment is such a great hedge against inflation though, I think low rate long term fixed mortgages is great for early retirees (to be paid off right around the time they hit regular retiree age, if one is so inclined).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Getting a mortgage after FIRE
« Reply #16 on: November 25, 2013, 01:36:38 PM »
http://www.early-retirement.org/forums/f28/covering-a-mortgage-without-losing-your-ass-ets-15237-6.html

Thanks.  I did read through this whole thread from the start.  It's pretty entertaining, especially regarding interest rate speculation compared to what actually happened.

burly

  • Stubble
  • **
  • Posts: 151
  • Location: East
Re: Getting a mortgage after FIRE
« Reply #17 on: November 26, 2013, 03:48:33 PM »
we take 5% of liquid investments as cash flow for debt service, so often times that's even better.

Thanks Nathan.  Can you explain what you mean by this?  I'm not quite sure I understand.

Hey Eric,

No problem - So with traditional lending, most banks lend entirely on cash-flow and not necessarily asset-based.. so you could have a home worth a million dollars, but if you can't cash-flow a $20,000 mortgage - forget it, you're not going to be approved.

That being said, cash-flow can come from your typical wage earner in a 1099 or W-2 or a K-1 from partnerships, LLCs etc... However, for retired or FI clients, their cash-flow may derive from interest, dividends, 401ks, IRAs, or taxable investment accounts.  Depending on your lender, they may look at cash-flow differently. I work for a Wealth Management division of a major US bank and am a Private Banker in our group. So as you can imagine, most of my clients have very high liquidity which depending on how they are invested, may not result in strong cash-flow from interest and dividends. For example, if your portfolio is mostly invested in growth stocks there will be less income from dividends than value stocks, or likewise stocks versus bonds is an example where typically (except in today's rate environment) bonds would earn a premium versus stocks in interest, however would not necessarily appreciate in capital.

The way we lend at my institution when looking at a client with let's say $1 million in non-qualfied retirement funds under the age of 59.5 would be to take 5% of the balance and use it towards cash-flow. Often times we hear about the 4% safe-withdrawal rate, and that is similar. We are assuming that the client will continue to use up to 5% of their liquid investments per year to service any debts outstanding.

In the scenario of the OP, they are interested in getting a mortgage after FIRE. A traditional mortgage will look at just what you have on your 1040 in terms of interest and dividends to use as income - some banks are different - but they want to package these loans to sell. What you can do, is take a loan against your portfolio (so there's no recognition of capital gains), purchase the home, and refinance using a home equity - which are usually not packaged and resold. In the case of my financial institution, we'll take 5% of liquid, so 50,000 from $1MM in liquid investments and will loan up to 45% debt-to-income ratio including taxes and insurance.

So to answer the OP's question. Yes, it's completely possibly and done all the time, you just have to find a bank that deals with high-net worth individuals... The typical branch won't know what to do since they're used to just W-2 income to support debts.

Does that make sense?
« Last Edit: November 26, 2013, 03:59:40 PM by nathanc »

burly

  • Stubble
  • **
  • Posts: 151
  • Location: East
Re: Getting a mortgage after FIRE
« Reply #18 on: November 26, 2013, 03:56:21 PM »
That being said... Moderators, let me know if I can't do this - I'd love to work with anyone on loans if interested.. I can lend in any state except Texas. However, to be eligible for my division, you must have at roughly $1 million liquid (stocks, bonds, cash, 401k, etc) or $2MM net-worth, however we do make exceptions.
« Last Edit: November 26, 2013, 04:04:10 PM by nathanc »

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28231
  • Age: -999
  • Location: Seattle, WA
Re: Getting a mortgage after FIRE
« Reply #19 on: November 26, 2013, 04:32:24 PM »
[Mod Hat On.]
The above post is fine.  It doesn't have any links, and if someone is interested they can contact you directly though PM.  As long as you don't spam it (i.e. keep posting it in other threads), but just keep it to that single invitation, it's fine.  Thanks for checking.
[Mod Hat Off.]
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Getting a mortgage after FIRE
« Reply #20 on: November 27, 2013, 12:13:35 PM »
Thanks again Nathan.  That's good to know and yeah that's clear now.  If you're still there in ~7 years I'll look you up!