Tag Archives: Freedom

The best mortgage term: 10 years

Want the best mortgage term? Think beyond the 30-year fixed

The best mortgage term: the 10-year fixed rate loan!

The best mortgage term: the 10-year fixed rate loan!

What were you doing 30 years ago?

Me, I was about to start my sophomore year in high school. I was thinking a lot about getting my driver’s license and staring at a lot of boobies. I had begun what would become a lifelong obsession with destroying my hearing, blasting Duran Duran, Men At Work and Loverboy through my orange-padded Walkman headset. All-in-all great times!

In other words, it was a lifetime ago. A lifetime.

Now think back to what you were doing 10 years ago. For me, I was working. My boss who thought highly of me got fired in a tussle with a hated adversary. That adversary became my new boss and he transferred all his hate to me. I was thus left fighting to save my job, even though from any objective measurement, I was doing great in my role. (No wonder I hate corporate America so much!) It was also the year I bought two fourplexes and I spent nearly every weekend for a year working on them.

The thing is, though, that doesn’t seem that long ago. Yeah, a lot has changed since then, but I still remember those days clearly.

Not long ago, when I wrote about how to get rid of your mortgage, I mentioned offhand that part of the strategy was a 10-year mortgage. I also mentioned in How much should you spend on your house that the payment on a 10-year loan should be the measure for how much house you should buy.

I realized I never completely explained my thinking around 10-year mortgages so I wanted to spend some time fleshing out my thoughts on that.

The 30-year term was created after the Great Depression in the 1930s to stabilize the real estate market. Now homes were accessible to a much larger market than ever before. As easy credit has a way of doing (we’re now seeing it with tuition costs), the rapid increase in the number of buyers created an increase in housing prices.

Thus, as time went on, the 30-year mortgage became less of an option and more of a necessity — particularly during periods of high interest rates. Now the 30-year mortgage is the standard loan in America. Nearly everyone with a house has one. Rather than simply believing it is the best mortgage term, many people assume there is no other option.

For people seeking pretirement, however, there is another option and it’s the best mortgage term: the 10-year loan.

Here’s why I say it’s the way to go right now while interest rates are still low:

It’ll help keep you honest about what you can afford

When I give the advice to not buy a house if you can’t afford the 10-year payment, I’m not necessarily recommending that you take out a 10-year loan — it’s just a way of determining the right loan amount for your budget. However in most cases I DO recommend it, because it prevents that money from cleverly turning into electronics and furniture. These many, many things that you’re going to want but don’t really need will be out of reach — and that’s a good thing. You may really want that nice, new couch for your living room, but you’re effectively buying that couch on credit if you’re only able to “afford” it because your house payment is artificially low.

The payment might not be as high as you think

Check out the difference in the payment amounts for two sample loans, one at $250,000 and the other at $450,000:

Loan AmountRate for 30 year fixedPayment on 30 year fixedRate for 10 year fixedPayment on 10 year fixedDifference in monthly payment
$250,0003.99%$1,192.102.75%$2,385.28$1,193.18
$450,0003.99%$2,145.783.25%$4,397.36$2,251.58

Now, I’m not pretending that the extra money you’ll be paying each month is not an insignificant amount of money. On the smaller loan example, you’d be out an additional $1,100 per month. That will sting. It’ll sting badly. On the higher-priced loan, you’ll be well over $2,000 more each month.

Here’s why I say that’s OK. While it certainly is a chunk of change, let’s remember that in most cases, we’re spreading this across two people. So on the smaller loan, we’re talking about $500 each. That should be doable. If it’s not doable, we have to say you’re buying too much house and send you back to my first point.

You’ll actually see results

Sure you’ll gain equity with a 30-year loan as well. Eventually. Nearly every first time home buyer is stunned that just a few pennies from their giant mortgage payment actually go toward principal. For YEARS you’ll watch your principal sit there, barely changing at all. If you sell in too short a time period and you haven’t seen any market appreciation, the theoretical equity that you’ve been earning by reliably making your mortgage payment each month will have been more than wiped out by realtor commissions, property taxes and home maintenance.

When you go with the best mortgage term — the 10 year fixed loan — it’s the opposite. We have a 10-year loan on my current house (AND I live mortgage-free — guess I should explain that one of these days). It’s incredible watching the principal balance drop in big heavy steps. In fact, I’m finding it rather hard to put into words how breathtaking I find it to be each month. Even in the first month our principal began dropping by $1,700 per month. Every year it’s another $20,000 gone. Compare that to a 30-year loan where on a loan of our size you’d see a drop of just a few hundred a month. Take a look for yourself with an online amortization table.

Low interest rates make it possible

My favorite reason to pursue a 10-year loan is that you can. The low interest rates we see currently make a massive difference on your total payment size, all else being equal. That means you can put your house purchase on the accelerated plan, something that was largely impossible for middle class buyers until recently.

You can lower your debt load

Back when I was carrying five mortgages at once, it really sucked doing loan applications. Sure, credit was unbelievably easy to get. I once had a loan officer looking at my list of five mortgages and ask me “So do you want to run this through as a no-doc loan?” Meaning they wouldn’t need to verify my income, they’d just approve the mortgage based on my credit score. WTF?

That was still easier than in the days following the great economic collapse. When the list of loans popped up  on my credit report, it would take about 45 minutes to walk them through each one, explain the rental situation for each and explain how I managed to make all my payments on time. While it’s still pretty tough for me to get a home loan, it’s getting easier. As I’ve been shedding properties (and related debt) in recent years, the ice has been melting. My overall debt looks much more reasonable and I don’t get the shocked questions about the eye popping numbers on my credit report.

It gives you options

Even if you have a few years left on your 10-year loan, your disciplined focus on getting rid of debt and building up equity creates new opportunities for you. You’ll be able to consider buying investment property or just pay off your house completely. You can take out an affordable home equity loan and start a business or pay for your kids’ education. You name it. But even more fun, if you start out on a 10-year loan path and save up a little on the side, you could pay off your mortgage in as little as seven years! Now that’s an option.

It’s less risky

The biggest push-back against a 10-year loan is usually fear of a cashflow crunch should hard times arrive. The classic scenario is one or both members of the couple lose their job. The house payment is too large to be made on one salary and the house of cards collapses and you lose the house and the kids are out on the street.

Is it really a concern? Of course it is. But you’re not going to run into this situation because you’re reading Pretired.org and are going to take some measures to keep yourself safe. If we look a little deeper we can see that it’s actually less risky to go with the 10-year over the 30 year loan. You wouldn’t be buying a house if your employment wasn’t reasonably stable anyway. But how far into the future can you see? You might feel reasonably safe for the next 7-8 years but what about the next 20-25 years? It’s a lot harder to predict a couple decades out, right?

Also, because you’ll be building up your net worth instead of buying a bunch of crap, you’ll have a larger margin of safety. If things go south on you, you’ll have equity available and controlled housing costs so you’ll have more security than your highly leveraged neighbors.

Which brings me to final reason you’re safer with a shorter-term loan: Your emergency fund. Now, in the first couple years things could be tight and you need to be careful. Bad things can happen. I’d say keeping 6-12 months of emergency cash handy is pretty important in the early years. In later years, however, you can open a line of credit to access your newly-built equity, which will serve as your emergency fund.

Your housing costs will be controlled

One of the important steps toward reaching pretirement is bringing your housing costs under control. Whether it’s as a renter or homeowner, you need to ensure housing costs don’t rise suddenly on you in later years, eating up your cashflow and sending you back to work. Getting rid of your biggest expense gives you a lot of power over your monthly finances.

You could be mortgage-free

Hey, need I say more? The American Dream used to be “owning” a house (even though the bank really owned it). These days, the American Dream is about getting rid of your mortgage as early as possible in life. That mortgage payment is what keeps us chained to our desks. You dream of doing something else, anything else, but the career brought you to this place and you’d have to make much less if you changed careers. Getting rid of your mortgage is what makes this possible. And the 10-year loan is the best path to getting there.

What do you think? Have I convinced you the 10-year fixed loan is the best mortgage term?

Image courtesy of Renjith Krishnan via FreeDigitalPhotos.net.

The Pretired.org six month blogoversary

6monthIt was a dark evening in March when I stared long and hard at the blinking cursor in the new Pretired.org dashboard before writing these words:

Many terms have been tossed about: “early retirement”, “pre-retirement”, “semi-retired”, “working part-time”, etc. None have really captured the exact meaning as well as “pretired” has.

If retirement is doing nothing, then pretirement is doing what you want to do.

Now, nearly at 50 posts, two Liebster nominations, a new Facebook page and Twitter account, nearly 700 comments and rapidly rising site traffic, I have to stand back in awe. Not so much of the body of work I’ve produced, but of all of you. The emails, comments and even your clicks keep me motivated to keep explaining my perspective on financial freedom.

The search engine terms people use to find the site tell the story of who is reading. These people are aching to be free of their corporate prisons, they’re looking for ways to pay off their mortgages quickly, they’re realizing they bought too much house and they’re figuring out how much house they should buy. In general, they just want to be free and spend more time with their families.

In other words, they’re just like me.

I am not an expert investor and I didn’t figure this out early enough to reach financial freedom in my 30s. I always knew I wanted my investments to cover my expenses so I could be free. Now I want to show the world not just HOW to do it, but to show how possible it is. For most people, pretirement is impossible because they believe it’s impossible. I love watching people do the math for themselves and suddenly undergo an abrupt mindset shift.

Finding the right path to pretirement is a challenge, but understanding HOW to get there was the big missing piece for me when I was still working full time.

And I’m still learning. I’ve made just about every mistake in the book and I’m making more each day. But I’m getting just a little bit smarter every day. This site has been part of that learning process. It’s made me think a bit more deeply about what I’m doing and it’s helped add discipline to my personal life as well.

I’m hoping to build the site that I wish I’d been able to read 20 years ago. Maybe I’ll suddenly get bored and stop blogging. But probably not right away. I still have a lot I want to say and a lot to learn so I’m not going anywhere any time soon.

Thanks for sticking around.

Pretirement story: Making the move to Mexico

Today I am delighted to share the first guest post on Pretired.org. It’s a wonderful pretirement story from my good friend, Rebecca Smith Hurd. Rebecca and I are old college buddies who share a craving for exploration and adventure. While I left my fancy corporate job to take care of Pretired Baby, Rebecca decided to bail on her corporate job to move to Mexico. There she found a new life, language, culture, husband and founded All About Puebla, the leading English-language resource on Mexico’s fourth largest city. I hope you enjoy her story! 

Why I Outsourced Myself to Mexico

By Rebecca Smith Hurd

Rebecca and her husband, Pablo

Rebecca and her husband, Pablo

What happens when you realize that your dream job is no longer as dreamy as you’d like it to be? You quit. Or at least that’s what I did back in March 2006, when, after 20 years in journalism, I resigned my post (and gave up a six-figure salary) as an editor of an award-winning national magazine. My departure did not make headlines, but it altered the course of my career—and my life—for good.

At the time, I didn’t think of myself as pretired. After working for two decades in the U.S. media business, I was just plain tiredtired of stressing over deadlines, tired of lying awake at night fretting about possible errors, tired of saying “no” to friends and family because I had professional obligations, and tired of having to, er, strap on a pair to get taken seriously. I needed a break, stat!

So, I took one. I went skiing, ran a 10K, camped out at Coachella, and rafted the whitewaters at the bottom of the Grand Canyon. I spent two months using my 37-year-old body instead of my brain, as one colleague observed, and it was fantastic. But it wasn’t enough.

Shortly thereafter, I started freelancing to pay the bills while I figured out what came next. To drum up clients, I printed business cards with the title “word nerd” (because it rhymes with “Hurd” and pretty much sums up my skill set), and I emailed former colleagues. Whenever I didn’t have to go to someone’s office, I worked at my coffee table in my pajamas. I took random afternoons off to run errands or hang out with friends. I drank wine on Tuesday nights. I was, as the saying goes, the boss of me.

But I was also still paying nearly $2,000 per month in San Francisco rent, plus other standard living expenses, which meant I was working as much as ever, occasionally on the weekends. Sigh. This wasn’t the break I needed. Could I afford to take a sabbatical? I couldn’t just do nothing for six months, could I?

Puebla's picturesque Cathedral, located on the city's the main square

Puebla’s picturesque Cathedral, located on the city’s the main square

As the year drew to a close, I flew to Spain to visit a friend—and found the answers. My aha moment came as I was sitting in a bar in Madrid, chatting with him and two other Europeans. Each of them spoke several languages and, as the conversation flowed, it dawned on me that they were using English exclusively for my benefit. You know, me, the stereotypical American who, despite calling herself a “word nerd,” had mastered only one language. So humbling.

I returned to the States in mid-January, determined to become bilingual. I would take that sabbatical and study Spanish! I researched language programs in various countries—and ultimately came up with a plan to spend the last six months of the year in Mexico. I enrolled in the intensive summer program at the Monterey Institute for International Study in California, followed by 16 weeks of immersive study at the Spanish Institute of Puebla. Why these schools? Because they were serious, affordable*, and highly recommended by former students. Beyond that, friends of the family kindly agreed to put me up for free near Monterey, which sealed the deal. That June, I gave up my apartment, put my belongings in storage, and hit the road.

Many of my friends and relatives thought I was taking a huge risk. But they were nonetheless supportive; a few even commended me for being “brave.” Personally, I thought the move made perfect sense: I’d not only get the break from routine that I sorely needed, but also learn a new skill that would make me more marketable as a word nerd. I’d return to San Francisco with a second language on my resume, ready to land my next full-time job. ¡Andale! Sounds entirely practical, right?

A plateful of mole poblano, perhaps Mexico's most iconic dish, which was invented by nuns in Puebla

A plateful of mole poblano, perhaps Mexico’s most iconic dish, which was invented by nuns in Puebla

Except that things didn’t turn out as I’d planned. While spending four months in Mexico’s fourth-largest city, I fell in love with the place and a Poblano. I reached out to a few colleagues in the U.S. to see whether they had any freelance jobs I could do 100% remotely. They did! And so began my pretirement.

Six years later, I’m still in Puebla. I’ve effectively outsourced myself. My husband and I could relocate to the States, but financially we’re better off here. My freelance clients—all of whom are in the U.S.—don’t care where I am, as long as I meet their expectations. I’ve also been able to take on new projects, including minor translations, because I speak English and Spanish. My language investment is paying off.

Lucy the cat asleep on my desk in Rebecca's home office, a near daily occurrence

Lucy the cat asleep on my desk in Rebecca’s home office, a near daily occurrence

What’s more, because my overhead is 30 percent of what it was in San Francisco, I can charge competitive rates (in dollars) and work fewer hours (about 35 per week) than I could otherwise. Of course, I could do more, and I’ve had a few lean months along the way. But the work-life balance is worth it. I now have enough time, flexibility, and mental space to focus on personal projects, such as running a local travel website, putting out a monthly expat newsletter, and writing posts like this one, for my college buddy Pretired Nick.

Best of all, my job is dreamy again, and I’m rarely tired anymore.

*The cost of the 2007 program in Puebla, which included all instruction plus room and board was $100 per month less than my rent in San Francisco.

 

Thanks for sharing, Rebecca! It’s so inspiring to hear about someone deciding to give up the big salary for a better life! Anyone else considered moving overseas to bring their pretirement dreams closer? Or considering a move to Mexico? Tell us about it in the comments! And be sure to visit All About Puebla to learn about Rebecca’s fascinating city. 

What’s your minimum monthly requirement?

ID-10095094

Mea Culpa! 

This piece was originally published on Tuesday morning. In a rush to publish before I headed up to beautiful Vancouver, BC for a mid-week getaway, I inadvertently posted what amounted to a very rough draft. I wrote the piece in the middle of the night the day before we left town, planning to go over it in detail in the morning, include correct numbers from my assumption spreadsheet and then head out of town. Well, of course, I failed to do that. Thank you to those of you who wrote pointing out my errors and thanks to those of you who politely overlooked the errors and took away the overall point. I took the unprecedented step of taking this down until I could get home to my computer and carefully correct things. Publishing this before it was ready was not fair to you, my readers, and it won’t happen again. Thanks for understanding! 

I’ve never really tried to live within a budget. That has probably been a mistake.

Budgets can be powerful and great for setting yourself on a path to financial success. But I usually had enough money for whatever I needed. And if I didn’t, I typically would just wait. And being somewhat frugal by nature, I never really needed to restrict myself to a given number.

However what I have done is keep close track of what really is going OUT the door. (Which is different than setting budget goals and restricting myself to them.) This sometimes depressing look at my finances helps me rein in runaway bills and think about new ways to drive costs down.

Keeping close track of your actual spending is particularly critical if you’re pursuing pretirement. If we view pretirement as the point when our passive income becomes large enough to cover our monthly bills, knowing that number becomes all-important. And, even more importantly, the lower we can get this number to go, the sooner we can be free.

Take two hypothetical couples: (as I often do, let’s assume both have no housing costs and both have the same income for this example)

  • Couple 1: Monthly bills = $3,000 (a couple car payments, high utilities and commuting costs, cable TV, expensive vacations and some spending money)
  • Couple 2: Monthly bills = $1,800 (relatively frugal living but still a nice middle-class lifestyle)

Couple 1 would need a fund of more than $1 million to support their lifestyle. Couple 2 will need around $600,000 for theirs. Worse, Couple 1 probably can’t even build up enough to pretire because most of their income is likely being spent. But if we assume both couples can save a nice, round $1,000/month or $12,000/year (remember, this is pretirement, not “retirement”), the differences are vast.

Our frugal couple that only needs to reach $600,000 would be pretired in 25 years from the point when they started building their pretirement fund. Our spendy couple, Couple 1, would need to work 10 extra years beyond that to reach their $1 million goal. (I’m assuming a reasonable 5% taxable yield from their pretirement funds in both cases.)

But more realistically, because Couple 2 is frugal, they should be able to build their fund much more quickly. Let’s say the $1,200 difference between the two couples is put into the pretirement fund. Both are still saving the original $1,000/month. So Couple 1 is just saving $1,000/month and Couple 2 is building their pretirement fund with $2,200 each month. Couple 2 will now reach pretirement in around 15 years.

For our spendy couple, that’s an additional 18 YEARS OF WORKING!

Hold on a second while I add some additional exclamation points to ensure this point gets across:
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

So since none of us want to be forced to work an extra 18 years or more, let’s agree that driving down ongoing monthly expenses is critical to reaching your pretirement goals. But how low can we get that monthly nut to go?

This is where every person or couple is different. Our expenses may differ from person-to-person and even during various stages of life, and especially in different regions geographically. But we can agree that there are some common spending leaks that should be eliminated immediately. And if we eliminate the mindless spending from our monthly outgo, how much is left that HAS to be paid?

In discussing this topic recently with a few friends and in reading some other blogs, nearly every household said the same thing: the monthly “core” bills total to around $2,000/month. Some a little less, some a little more, but every time it comes up, it’s around $2,000. Isn’t that odd?

I was rather shocked there was so little variance so I went back and double-checked my own numbers. Here are my core monthly expenses:

  • Groceries/Eating out: $350
  • Utilities (water/sewer/garbage) $101
  • Electricity: $78
  • Gas (heating and stove): $66
  • Internet and TV: $63
  • Cell phones: $129
  • Car insurance: $256
  • Life insurance: $88
  • Property tax house: $440
  • Homeowners insurance house: $46
  • TOTAL: $1,618

I’m not counting a few things here, which is a little misleading. Any social spending is not included, such as going out to breakfast with a friend, like I did last week. Also certain expenses and random spending money aren’t included like haircuts, my wife’s commuting costs (I don’t have an office I have to go to, except down the hall), or our small splurge at the Farmer’s Market on Sunday. So maybe we average around $1,800 or so most months. Like I said, “around” $2,000/month. But can we drive it even farther down?

The $1,600 above corresponds roughly to our current “pretirement” goal (or $800 for my both my wife and I). Now, obviously(?), we’re not going to stop building our pretirement fund once those levels are reached. Rather, it’s a difference in mindset. We want to know we’re free. And in this case, we’re just talking about the minimum. We know we’ll need a little more safety cushion and we haven’t even talked about inflation and costs related to raising our son. And, because this is lunatic America, we have to think about health insurance (but not today since my wife is still working full-time).

So how low can we get our monthly bills if we really pushed it? Without moving from our home, we feel we can get down to $1,500 for our basic bills. That’s dropping the fancy cell phone plan (already underway) and lowering our car insurance (we have three vehicles currently — long story) and using our utilities more efficiently. But the much larger savings come if we downsize to a smaller home and can pay less property tax. Or if we were to move and rent, we’d probably be cashflow-positive so we could potentially be even a couple hundred lower.

But even with those savings, and knowing we’d want to have some spending and cushion money, our realistic minimum monthly requirement is still “around” the magical $2,000. Once we hit our goal of bringing in a passive $1,600/month, we’ll declare ourselves “pretired” but we’ll keep building at least until we have a solid $2,000 rolling in.

I’d be very interested to know if readers are finding themselves close to the same number. Are you over or above $2,000/month? What is your minimum monthly requirement?

Image courtesy of Stuart Miles / FreeDigitalPhotos.net
Related Posts Plugin for WordPress, Blogger...