Author Topic: Yet another should-I-pay-off-the-mortgage question - with a FIRE twist  (Read 1267 times)

waltworks

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Here's the scoop, friends:

-We owe about $200k on a really, really expensive house.

-30 years, 3.75%, not something I would normally even consider paying off any faster than necessary.

-We like our house (for a variety of reasons) but don't like our neighborhood and we will *definitely* move in the next 5-6 years, but quite possibly sooner (this year, even) if something in our preferred neighborhood came on the market.

-We have very little income thanks to semi-FIRE status (I work part time for myself, wife doesn't work at all) which means qualifying for a loan is next to impossible unless it's for a very very small amount.

-Thus in order to move we'll need to 1: sell our current house and 2: probably dip a bit into stock/bond/etc investments to pay cash for the new house.


So here's the question: given this information, would you pay down/pay off the mortgage? Given the short timeframe (at least by my definition) I'm leaning toward just paying it down/off relatively soon. Worst case scenario I suppose is that we change our minds and stay in our current house, and then we'll lose out over the long term not having that money invested in the market. I think this is extremely unlikely, though.

-W

SumBum

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You might talk with a lender now and ask them how a lower mortgage balance versus a higher savings balance would affect things.  Especially since you don't show a lot of income, a bank may want to see that you have plenty in savings.  In that case, you may want to build up a fund instead of paying down the mortgage.  Some lenders will consider investments as "savings" (money you -can- tap into in case of emergency) but not all will.  Another pro in favor of building up savings is in the scenario that your house doesn't sell immediately.

lhamo

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I don't really see what advantage paying it off now gives you -- keeping the cash on hand in case the house you want to buy comes on the market gives you the option of making a large down payment on that, which can be attractive to buyers.  Not as much as an all-cash, short close offer, but close.

If you really want it paid off more quickly, maybe meet somewhere in the middle -- like put all the Air BnB proceeds toward extra payments on the mortgage?

waltworks

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Thanks for the feedback, guys.

To clarify: we will not qualify for any sort of mortgage, so I have no particular concerns about what lenders think of our savings/investments/etc.

Keeping cash on hand is likewise useless, since we are basically locked into paying cash for a new house (and selling our current one to do it, since we're talking about million dollar houses here). There will be no "downpayment" involved, as we can't finance any meaningful portion of the purchase.

I'm looking at this as a guaranteed 3.75% return, as an alternative to just sticking  money in a savings account or CD. Now, if we were planning to stay in the house long term, that would be pretty crappy, since we could do better in the market. But given the situation (house HAS to be sold to move, move will probably happen relatively soon) the potential volatility of the market is unappealing.

BTW, the AirBnB was too much hassle, so our apartment is now rented long term. It's a nice easy way to net $15k a year, which will be a bummer to give up if we do end up moving. C'est la vie.

-W
« Last Edit: May 06, 2018, 10:43:01 AM by waltworks »

lhamo

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Does putting a sale contingency into an offer basically mean your offer will not be accepted then?  Here in the hot Seattle market I think generally all-cash, quick close offers are preferred, but not every house will get those.  And the market is so hot that if you list your own place at a reasonable price, you can usually get an offer within a week (often for much more than asking).  So then it is just a  matter of working out the closing dates so that everyone can meet their obligations. 

But it sounds like what you are describing is a situation where you will have to sell to get the cash in hand, rent while waiting for the perfect house to come on the market, and then snap it up with your cash.  If that is the case, I would probably just focus on finding the rental now and getting the house sold. 

Dicey

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I read on this forum years ago that you can have "X" amount of dividends or withdrawals transferred to your checking account on a monthly basis and the lender considers it income. The OP used that "income" to qualify for a new mortgage. Anybody else remember more details?

Until we get more details, my two cents are that cash is king. In your situation, I'd keep it in your pocket, not in your lender's.

waltworks

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Well, whether the sales contingency makes an offer we make less attractive or not, that's the reality of the situation.

Essentially, the house *will* be sold. It might be in 2 months, or it might be (on the outside) in 6 years. If I had to guess I'd say a year or two.

Not 10 years, not 30 years, maximum of 6 years.

Given that, the temptation here (for me) is to think of the mortgage as a very, very safe (albeit nonliquid) short term investment that returns ~3.75% (we don't itemize so there's no particular tax benefit). That's pretty attractive in today's environment.

-W