Mortgage Question

How to avoid signing your life over to a mortgage
Hristo Botev
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Mortgage Question

Post by Hristo Botev »

Help me think through this, good people of ERE. We've got about $160K left to pay on a $350K home, on a 15-year mortgage, with about 13 years to go, at 3.375%. The most recent iterations of our FIRE plan had involved aggressively paying down the mortgage, after getting ourselves to about a 20% cash position, so that we'd be mortgage free in a few years--the thinking was that this wasn't so much an "investment" as it was a way to get our monthly expenditures down to get us to the FI crossover point quicker.

HOWEVER, we don't really plan on being in this house for more than another 6 years, at most, which is when our youngest will finish up at his parochial school and matriculate to one of the Catholic high schools, none of which are located anywhere close to where our house is. And we could be out in as little as 3 years, when our oldest moves on the high school. At that point, if not earlier, we're likely to move on to an apartment closer to the high school, so that our kids aren't spending a bunch of time driving to/from school (and school activities) on some very dangerous highways/interstates.

We'd sort of thought we'd rent out our townhouse when we do that, for some side income. But honestly, our property taxes are so high here (we spend more than 1 JAFI just in taxes and insurance), and then you throw in the HOA, there's really no reason to hold on to this house once our kids have graduated from the across-the-street school.

SO, with that windy intro, is it a bad idea to refi to a 30-year while interest rates remain low, dropping our P/I in half, and perhaps even cashing out some of the home equity to put towards some more productive investments? I don't know if inflation is really just around the corner, as so many of the financial infotainers I've been listening to on YouTube and podcasts are saying, but even without inflation, I'm wondering whether perhaps I've moved past the point of needing to rely on home equity for forced savings. And given that this house isn't really our long-term family homestead, but just a temporary home chosen for the current convenience of its location, does it make sense to get our monthly payments lower with a 30-year term?

FWIW, our home equity currently represents about 23% of our total net worth.

Would appreciate any guidance, before I do something reckless.

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Alphaville
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Re: Mortgage Question

Post by Alphaville »

i can't offer any guidance, but i can offer a link to an exhilarating post and discussion you might already know:

https://jlcollinsnh.com/2013/05/29/why- ... nvestment/

bostonimproper
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Re: Mortgage Question

Post by bostonimproper »

I think cash-out refi makes sense. I would just check that interest you’re saving > the cost to refinance.
Last edited by bostonimproper on Wed Feb 10, 2021 8:58 am, edited 2 times in total.

Qazwer
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Re: Mortgage Question

Post by Qazwer »

Trade off is between closing costs and time to repay. If you can get a no closing cost refi for lower than current interest rates, then why not? You can then close it out when you sell. It is a math problem if you have to pay some closing costs in comparison to how long you will live in the house. You can solve that.
In terms of using extra money to invest, that lines up with questions as to your goals and willingness and ability to take risk. What would you invest in? What are the ranges of expected outcomes? Etc etc

Scott 2
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Re: Mortgage Question

Post by Scott 2 »

The math problem here is pretty straight forward. I'm guessing you got that covered. I bet the expected difference in return on option A vs. option B is relatively small. Probably a couple grand per year, but with some added hassle and risk.

Is there a chance you don't work during the window where you'd have this new mortgage? If so, would you be trying to hit a target (low) income for ACA purposes or taking advantage of tax free space for roth conversions? The mortgage forcing a higher minimum spend could be a hidden cost. But, you could always sell the investments and pay the mortgage then.

For me personally - I'm not all that confident in a positive investment return over the next 3-6 years. I'd want the experience of owning my home entirely, to know if I care. (I do, I like it. But, I also feel more comfortable spending.) And, I prefer to simplify my financial when I can. Given all that, I'd probably pass on the cash out or extending to a 30 year term. My savings rate would outstrip the clever mortgage gains anyway. I'd still look into a refinance with no origination fees, see what I could get.

Riggerjack
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Re: Mortgage Question

Post by Riggerjack »

The math is simple, and there are refi calculators to do it for you, and add as many permutations as you like.

The risk calculation is much different.

You can pay off your mortgage, and reduce your spend. This feels safe. But how will you feel if the value of your home drops? (This is where I went, BTW. And I am OK with this risk.) How will you feel if inflation kicks in?

Or, you could cash out your equity, and move it into a higher performing asset. How will you feel if that asset loses value? How will you feel if inflation kicks in?

For me, this is a question around expectations of the future, and personal (and family) feelings of risk. And there is no calculator to work that out for you.

Frita
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Re: Mortgage Question

Post by Frita »

Just to echo other posts, consider which worst-case scenario you could live with. This is based on moving with my spouse 12 times. In the short-term, it is harder to predict and manage risks. (At one point, I thought a company move was the answer. Nope, it’s all dependent on the market.)

Are there any other options you haven’t considered? It seems you like the housing/parish community. What do others with children do once their kids are in high school? Would there be any community-sourced workarounds like carpooling, etc.? I as simply because a good-fit community can be hard to find or replicate. Would that be worth giving up for location convenience to school/activities? Are there any other school options? Would the parish consider adding high school?

Hristo Botev
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Re: Mortgage Question

Post by Hristo Botev »

These are all super helpful responses; thank you all.

@Frita: Fantastic questions. My thinking is that assuming you're right and we find that it makes sense to stay put until both our kids finish high school and head off to college (if they do go to college; I'm certainly not pushing them in that direction); at that point we'd still have a couple years left on the current 15-year mortgage if we didn't pay it off early, and so we're really just talking about how much equity we'd have when we sell the house at that point (I don't really want to be a landlord). And as for sticking with my current plan to aggressively pay down the mortgage, the combined property taxes and HOA are SO HIGH, even relative to other towns in our metro area, that the house would NEVER feel like it's paid off, because we'll be paying $1,000+/mo. indefinitely to other lien holders (city/county and HOA) even after the bank is paid off. So why not just find a good balance of a lower mortgage payment and an equity cash-out, as we won't be sticking around this town as empty nesters.

So, from a purely financial perspective it doesn't make sense to pay off early or even to stick with the current 15-year mortgage. And from a peace of mind standpoint it's really neutral, b/c we're not staying here. If anything I'll sleep much better knowing that: (a) I've got a locked-in 30-year "rental" rate, if I want it, no matter what happens with inflation; (b) I don't have a 1/4 of our NW wrapped up in what I suspect is an overvalued home; and (c) if the SHTF, it's the bank's problem.

Hristo Botev
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Re: Mortgage Question

Post by Hristo Botev »

Riggerjack wrote:
Wed Feb 10, 2021 10:54 am
For me, this is a question around expectations of the future, and personal (and family) feelings of risk. And there is no calculator to work that out for you.
Am I remembering correctly that you live in a more rural setting?

I think what my current decision point boils down to is whether I want to place a bet on urban vs rural living. The plan had been both/and--i.e., yes to JMG/Charles Hugh Smith's thinking that you're safer and more likely to survive and thrive living non-ostentatiously in a densely-populated town surrounded by neighbors and community networks with whom you've established ties. But also yes to having a place we can escape to, whether it's "escape" in the sense that the streets are on fire (again); or "escape" as in simply just wanting some occasional solitude in nature, even if it's pretty much a given that I'm never going to be running anything more than what @Alphaville would call a hobby farm.

I think the plan is still both/and, but rather than focus on first solidifying the JMG/CHS plan by paying off the mortgage on the in-town homestead, I lock in a lower monthly payment for a much longer term, while also cashing in a bit of equity, which I can use to help solidify the rural escape plan.

ETA: This is all clearly driven by emotion; I just want to make sure that it's not a really stupid financial move, that there's something on the financial/math side of things that I'm overlooking. And it sounds like there's not; my reservation is more along the lines of realizing that I've got to rewire my brain a bit, b/c funny enough the JLCollins blogpost @Alphaville posted upstream was the ONE blogpost of his that I thought was BS years ago when I first stumbled upon MMM and then JLCollins (I mean, to this day I'm invested in VTSAX b/c of Collins; though that thinking is now starting to change). And now I'm realizing there's some truth to it.

Riggerjack
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Re: Mortgage Question

Post by Riggerjack »

I'm on ten wooded acres, on an island in the Puget sound.

The nearest grocery store is a few miles away. Gas station and med clinic, the same. I have 3 grocery stores within about 15 minutes by car. The ferry to the mainland takes 20 minutes, and dumps me deep within the Seattle sprawl.

I live on a blue island in a blue state.

Is that rural? It feels like it, and I think so. But other people are certain that rural means flat farms as far as the eye can see, MAGA hats and an absurdly high ratio of churches to bookstores.

We don't have much of that. But I can get there, if I needed to...

So am I rural? You decide.

But as to the rest of your post, why is a refi necessary to get the rural getaway? Or more to the point, why are you binding one to the other?

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Alphaville
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Re: Mortgage Question

Post by Alphaville »

Hristo Botev wrote:
Wed Feb 10, 2021 2:02 pm
I think what my current decision point boils down to is whether I want to place a bet on urban vs rural living.
to quote the old el paso girl: why not both?

e.g., we own our rural homestead free and clear, and we rent an apartment in a part of our city where one doesn't need a car.

i'd buy an apartment where we live now, but i'm not sure if we want to stay here or go elsewhere, so we wait...

as for rural buys: i don't know about your state, but in mine you can get a nice chunk of land in the middle of nowhere for something like $250/acre, with minimal taxes.

eg [removed once shown]

i don't read that article as necessarily saying "don't own a house" but rather as "your house is a place to live, not an investment." therefore, the core of the advice is just to not tie up a lot of money to one's place of residence.

so, connecting old el paso to jl collins: you can make multiple bets if they're small bets.
Hristo Botev wrote:
Wed Feb 10, 2021 2:02 pm
ETA: This is all clearly driven by emotion; I just want to make sure that it's not a really stupid financial move, that there's something on the financial/math side of things that I'm overlooking.
when you cash out make sure to diversify carefully because stocks seem to be overvalued at the moment. and if you think real estate has a future, then reits might be the way to go. im not a financial planner or investment advisor, so all i'm really trying to say is take your time when deciding where to park the money.
Last edited by Alphaville on Wed Feb 10, 2021 4:16 pm, edited 1 time in total.

Hristo Botev
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Re: Mortgage Question

Post by Hristo Botev »

Riggerjack wrote:
Wed Feb 10, 2021 2:59 pm
But other people are certain that rural means flat farms as far as the eye can see, MAGA hats and an absurdly high ratio of churches to bookstores.
I mean, they have books in the churches (it's just a severely limited selection).
Riggerjack wrote:
Wed Feb 10, 2021 2:59 pm
But as to the rest of your post, why is a refi necessary to get the rural getaway? Or more to the point, why are you binding one to the other?
It's not, really. That said, the cash-out would be used in part to buy land and an airstream to put on it. And I get that these are toys. But, I'm also having a hard time thinking I want to put more money into stocks than are already there. And so if not in the stock market, where? I don't like that I've got so much equity in a house that I'm not planning on staying in long term, when the long term plan really is go rural and mobile full time once the kids graduate; and ideally we'll ease into the full time rural/mobile over time, beginning, like, now, so that the kids will have the experience of both traveling/camping and also having land that they can hunt, fish, and camp on.

Anyway, I'm all over the place, I know. That's why I'm not making any rash decisions. But even if we refi and cash out a bit and it sits in savings for a year or so, it still doesn't strike me as any sort of big financial misstep; and I'd probably sleep a bit easier at night knowing that I don't have a 1/4 of my NW tied up in my primary home which we probably won't be in for more than 5 years anyway. And, honestly, if I had to guess this will be our last mortgage.

ETA: Part of this also is thinking about how we're going to get our spending down to 1 JAFI levels once we're empty nesters, and that's just not going to happen if we stay in the house we're in because of property taxes and HOA. But that could very easily happen if we're living in an Airstream on rural land, or if we eventually build a house on that land, or if we're living in an Airstream on the road or somewhere else.

Hristo Botev
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Re: Mortgage Question

Post by Hristo Botev »

Alphaville wrote:
Wed Feb 10, 2021 3:07 pm
to quote the old el paso girl: why not both?

e.g., we own our rural homestead free and clear, and we rent an apartment in a part of our city where one doesn't need a car.
I think this is exactly the plan. Rural homestead (with an airstream at first and then later a cabin; or hell, we've got enough friends with campers now that we can just build a campsite for airstreams and turn it into a revenue center (https://tcpconline.com/)). But also hold on to our townhome for as long as we want to, locking in a low "rent" in the form of a spread out 30-year fixed while rates are low and property values are high, and before inflation takes hold.

Scott 2
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Re: Mortgage Question

Post by Scott 2 »

It seems like you already know it's time for a cash out refinance to a 30 year term. The question is how to allocate your capital?

Have you lived rurally before? I'd want to try it before making a firm commitment. I've seen too many people online who dream of their country escape, but don't enjoy it in practice

Hristo Botev
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Re: Mortgage Question

Post by Hristo Botev »

@S2: You're absolutely right about the rural thing. I grew up in small towns; but they were towns with people around. But it'd be a decade before we'd consider going all-in; rather, for quite a while it'd basically just be a "vacation house" (weekends, holidays, and summers) and a hunting lodge--and a place to practice some ERE skills development. But I suspect we'd keep our toes in both worlds (city and rural) for quite some time, perhaps even indefinitely--but we don't need our current house to do that.

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Alphaville
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Re: Mortgage Question

Post by Alphaville »

Scott 2 wrote:
Wed Feb 10, 2021 3:39 pm
Have you lived rurally before? I'd want to try it before making a firm commitment. I've seen too many people online who dream of their country escape, but don't enjoy it in practice
like me. i still enjoy the rest & relaxation and the seasonal retreats, but it's not a place where i want to work or live permanently.

my wife, who grew up extremely rural, prefers the city also, but enjoys the getaways even more than me.

we tried but could never really prosper there. maybe we'll try again when we're retired.

Hristo Botev
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Re: Mortgage Question

Post by Hristo Botev »

When I taught TEFL/ESL, it seemed like every textbook I used had some variation of: country or city, which one do you prefer? FWIW, what I've learned is that I like the extremes--very urban and very rural. What I DON'T like is the in between suburb/exurb thing. So I crave wilderness when I spend too much time in the city, and weekend hikes/backpacking sort of scratches that itch, but not completely. And when I spend too much time in the wilderness, I miss being around people. So I tend to think I need both, but not the middle ground.

Most of the places we're looking at are very short drives to (small) town centers, with enough restaurant and retail and community to make me happy (basically I just need a hardware store, a grocery store, and a Catholic church). So that would likely be all the people interaction I'd need, and when we get antsy we can just head out in the airstream.

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Alphaville
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Re: Mortgage Question

Post by Alphaville »

Hristo Botev wrote:
Wed Feb 10, 2021 5:01 pm
FWIW, what I've learned is that I like the extremes--very urban and very rural. What I DON'T like is the in between suburb/exurb thing.
precisely. the city is great. the burbs are shit. :D

when living in the boonies i loved the super quiet and i didn't mind getting on my pickup to resupply once a week or so. loved also the experiments and the fact that we could build anything we wanted there. cat tower? chicken coop? greenhouse made of recycled windows? no problem.

but having to go every day everywhere in a car living among a bunch of cookie cutter houses with square nimby neighbors no thanks.

i think with sufficient money we could have made it in the boonies. without having to work, and with the ability to travel on a whim, and make some pricey upgrades to the infrastructure, we could have just stayed there perpetually. problem was, it's a terrible place to have a job and/or make money.

Hristo Botev
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Re: Mortgage Question

Post by Hristo Botev »

Alphaville wrote:
Wed Feb 10, 2021 5:23 pm
problem was, it's a terrible place to have a job and/or make money.
That's why it's our retirement plan! Problem is, between now and then is 10 more years with the kids living at home, and at this point we're not going to pull them out of their school and our community here to uproot them to the country and homeschooling or whatever. BUT, we also want them to be able to go get lost in the woods with their buddies and nothing but a .22 rifle; and, they tend to frown on that sort of thing in the city and in the suburbs, not to mention public forest land.

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Alphaville
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Re: Mortgage Question

Post by Alphaville »

frown? really? everybody packs guns in my state. especially during hunting season? i don't think yours is any different...

eg https://www.fs.usda.gov/visit/know-befo ... o/shooting

but anyway yeah there are some nice properties here adjacent to national and state parks where you can get out on your backyard and keep walking indefinitely...

project triangle is fast/cheap/good. if you want cheap and good, 10 years is a nice horizon.

i'd budget a portion of the cashout to look for a piece of land. this is where you need to be slow and deliberate and not rush it or you could get stuck in a malarial swamp. i think you bought the brad lancaster books already yeah?

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