Tag Archives: Real Estate

Pop your own housing bubble

June 4, 2013 7:42 am , 33 Comments ,

Is it time to downsize?

It feels like a million years ago now, but the massive real estate crash of 2008 was only a few years ago. I saw the collapse up close and personal. Well before the crash, my wife and I bought a fairly large fixer, planning to move in once the bulk of the work was complete. Part-way through, we decided we hated the place and decided to complete the work and sell it. It’s what I call our inadvertent house flip.

Once we put it on the market, we had one (ONE!) interested buyer. No one else had really even given it a serious sniff. The housing market was cooling, but a total meltdown was yet to occur. But I could tell a bomb was about to go off. I just didn’t know how big the bomb was. My heart was racing nearly every day. Even as our buyers got squirrely, we did everything they asked, even suddenly replacing the furnace just days before closing. And we survived! With our asses intact. We didn’t lose any money but didn’t really make any either. All we lost in the end was a year of very hard work. We felt like winners as we watched the house’s Zillow rating drop by $200,000. That was late 2007. I think it was close to a year later that the stock market collapsed and all hell broke loose.

So that’s how I found myself sitting pretty when the big crash finally hit. I still owned a lot of real estate with rapidly declining value, but I had equity in everything and was cashflow-positive on the investment side. Plus I was working at a stable healthcare company. While the company was experiencing a brutal income drop as workers lost their insurance, it was getting through just fine. In fact, the crash may have helped that organization shake itself out of its complacency and begin running a much more lean operation.

Fear and debt

During that time, I talked to many of my coworkers about their finances. And they were SCARED. Scared shitless. One friend had decided to let the bank take his condo back after they announced massive assessments and he realized the value was never coming back. But most folks, many in their 40s and 50s, just had that blank stare of someone who is beyond panic. I had just two words of advice for them: Shed. Debt. These were good people, nurses and techs, who would wipe up your bodily fluids without thinking twice and give you a hug on your way out. Better people than I’ll ever be. They’d worked long, hard careers, but most of them had very little financial security.

That was when I realized just how much debt people were actually carrying. It was stressful for me just talking to them. Massive house payments, car payments, credit cards, school loans and on and on and on. I had just one good friend who was on track to having her house completely paid off and wasn’t even that worried after her husband was laid off. Good for her!

That’s not to imply that I wasn’t freaked out, though. I had three mortgages I was responsible for. Would have been four if I hadn’t unloaded that other home! I had to drop the rent price a few times and had a few periods of vacancies, but really it was not that big of a deal looking back. But, still, I was pretty spooked by the whole thing. That’s why I was so anxious to get mortgage-free as soon as possible and to reach financial independence as soon as possible.

Instead of reinvesting the cash from that home sale like we should have, (DAMNIT!) my wife and I decided to finally buy the house we really wanted, leaving my starter home behind. We also bought way too much house. Too much room, a nicer view than we really should justify given our financial goals and more yard than I can maintain.

That’s not to say we don’t love it. We love our neighbors. The house is wonderful. Our neighborhood cannot be beat. But it was probably well into 2010 before we realized how much this house is holding us back. So as we sit here in our beautiful cage contemplating our pretirement, we’re rethinking things. Hopefully many of you are as well. That fear that so many of us felt was driven by our over-inflated lifestyles. The good news is that we now have a chance to restructure things so we never feel that fear ever again.

Time to pop your own housing bubble?

It occurs to me that that the real estate market has largely recovered (at least here in Seattle), that it may be the right time for quite a few people to make strategic adjustments to their housing situations. Pop your own housing bubble, if you will.

Now on one hand, real estate appreciation could mean we’re in the perfect situation. Just ride up with the market, sell at the right time and be loaded! And that might be where we end up. Our neighborhood could very likely appreciate by 10% a year for the next few years. Don’t scoff, it’s true. Right now, houses are selling on their first day in my neighborhood and prices are rising rapidly.

On the other hand, depending on when a person purchased their home, they may already have significant equity but prices in general are still somewhat deflated, particularly if they were to move to another area. But more importantly, by downsizing, a family could move from being saddled with too much mortgage and back-breaking maintenance to a debt-free lifestyle with a fast-track plan to pretirement!

As always with real estate, whether this is possible for you depends on your situation.

Let’s say a family owes $400,000 on a house valued at $600,000 and are still paying on their original loan. They could dump the giant house, buy a still-very-nice $400,000 home and be paying on a mortgage of just $200,000. And with the low interest rates of today, they could enjoy an additional boost in their savings. And using my patented mortgage payoff acceleration plan, they could be mortgage-free in just a few years! Or they could rent awhile and put all of their equity toward their pretirement funds. That invested money could even generate enough income to pay a good chunk of their rent if they were so inclined. If the house can be rented to cover the mortgage or close to it, you could still pop your bubble by renting our your house and moving yourself to a cheaper place.

Can someone without a ton of equity also pop their housing bubble? Of course! Renting a fancy apartment way bigger than you need? Move! Only have a tiny bit of equity but know you bought too much house? Works for you too! You might want to wait a bit for the market to run up a bit more, but as soon as the timing looks right, sell it off and downsize!

The bottom line is that if you’re a normal American, you are living with way more than you NEED. By downsizing now, while you can, you may be able to greatly accelerate your pretirement. It’s time for a difficult conversation with yourself (and your spouse): How much do you REALLY love your house? I figure that by buying such a luxurious home cost us at least an extra TWO YEARS of working.

What will we do? I don’t know. We’re talking about it now. We’ll be here at least another year or so and then we’ll make the decision. We may rent a cheaper place for a time and pocket the difference (our current house could rent for quite a bit). We may even keep living here awhile. And, who knows, maybe we’ll change our minds and decide to take the hit and just live out our days here. It may be a cage, but it’s a damn nice one.

In the meantime, we’re getting this place ready to sell or rent. Even if we decide to stay here at least we’ll have all these projects done!

What about you? Are you thinking about popping your own housing bubble? 

Posted in: Pretirement How To , 33 Comments , Tagged: , , , ,

Save money with a tool library

May 28, 2013 5:21 am , 18 Comments ,

All the tools, none of the price

The tool library workshop space

The tool library workshop space

As I mentioned previously, my wife and I clearly bought too much house when we moved into our current home. We paid $625,000 in 2008 in a collapsing market, thinking we totally scored. Unfortunately we didn’t wait quite long enough as home prices continued to decline, putting our potential sales price well below our purchase amount. (We’re about back to even now, not including commissions, interest and work we’ve done to it.)

This mid-century classic home is built like a tank and is the first home I’ve owned with completely straight and plumb walls. It has a warm, cozy feeling throughout and has a classic layout that makes most areas of the home quite usable. It has a lovely view of the Puget Sound and beautiful Vashon Island.

But, as always with real estate, there have been a few issues. The upstairs and downstairs bathrooms were both shot. The kitchen had been remodeled in the 80s or 90s and was poorly done. We’ve replaced all the windows and switched the giant, dirty oil furnace for a new, natural gas model. We almost immediately remodeled the upstairs bathroom and rushed to redo the kitchen last year before Pretired Baby showed on the scene.

As we became more serious about getting to our full pretirement as soon as possible, however, we made some abrupt spending cuts and looked with some dismay at the money we’d put into this house. If we had bought a totally adequate $400,000 home and put the difference into our pretirement accounts, we’d be just about there. Whoops! It’s a lesson I hope anyone thinking about buying a home can learn from me and avoid their own mistake.

So we developed a strategy to get out of our situation and still reach our pretirement objectives. Without diverting to a whole post on our house situation, we decided we need to make some prudent updates to this house to position it for eventual resell at a higher price (hopefully in an appreciating market as well). One of the tactics we came up with is to update our open and awkward basement layout to add two more bedrooms (will function as a storage room and an office for us) and to update the completely disgusting downstairs bathroom. That should let us sell for $20,000 to $30,000 more. Note that we may even downsize into a rental for a few years before we sell as part of a grander plan we have cooking.

Break out the tools

Tools

Tools

Thirteen years ago when I bought my first home, I didn’t even own a hammer. I always wondered how old men always seemed to know how to fix stuff on houses. Now I know. After owning half a dozen pieces of property over the years, I have acquired a massive collection of tools. My operating plan for tools has been this: Don’t buy any tool until you absolutely need it. When you need the tool, buy the best quality tool that will fit your needs and repeat as needed.

Projects take much longer and are more dangerous if you don’t use the proper equipment and as much as possible I’ve tried to avoid buying cheap, junk tools because they fail too quickly. Those tools (**cough** HarborFreight **cough**) are basically disposable, which is usually more expensive in the long run. There are a few exceptions to that rule, particularly related to tools that I am pretty sure I’ll never need again. And while renting tools can be a great option, it’s very often cheaper to buy these days, depending on how many hours you’ll need it.

Enter the Tool Library

More tools

More tools

Today, though, I have another option. I had the opportunity to help, in a very minor way, launch a local “Tool Library” in our community a couple years back. It was a project put together by Sustainable West Seattle, a thriving nonprofit where I served on the board of directors for a few years.

The concept is simple: Instead of every person in the neighborhood storing, say, a pressure washer in their garage for 364 days per year, these tools are centralized and checked out as needed. There are other benefits, too. The group loans tools out en masse to community groups doing work in the area. For example, this this recent project where a garden was created to help a local food bank. (Now hopefully the food bank will be able to offer more fresh food in addition to the more processed fare so often donated.) In addition, tools are available to the community in times of natural disaster, with shovels, axes and saws available as needed.

Nowadays there are even classes to learn how to take on various projects and there is a rentable workshop space with some larger tools.

It came with extra nails -- sweet!

It came with extra nails — sweet!

The tools came from donations and from some purchases using start-up funds received via some government grants and private donations. Many of the initial purchases were rounded up during the massive community-wide garage sale that occurs here every year. Many of those were picked up for just a dollar or two with many more just being given freely as people learned about the concept.

Since I already had such a massive tool collection and haven’t been doing as many home projects lately, I haven’t really needed to borrow anything since we started the tool library. But since we decided to kick off our basement project, I did my first check-out last week.

Everything you need to attach wood to concrete

Everything you need to attach wood to concrete

At first I had forgotten it was even there! Needing to attach my walls to the concrete floor of my basement, I had gone in search of a powder-actuated tool. This tool fires a nail into concrete with what is basically a .22 bullet shell. I first checked with family (lots of construction folks in my family) to see if anyone had one I could borrow. No, it’d been loaned out to another family member and was now lost. Next I checked the prices over at Home Depot. Wow, $559 for the Hilti DX 36. Looks sweet! Old me might have just went down and bought that baby on the spot. Or more likely one of the cheaper versions since I won’t need it much after these walls are up. Like this one for $22. Plus I’d need to buy nails and shells. There was nothing decent on Craigslist.

But then I remembered: I have a tool library right here in my neighborhood! I even helped with the launch! I checked the inventory and sure enough, there it was, a Remington Powder Actuated Tool just like I needed. For the low, low cost of FREE. When I got it home I found it even had leftover shells and nails in the kit. Score!

It was busy at the Tool Library while I was there. Someone was loading their car with a load of rakes and shovels to attack a spring project while another person was returning a small rototiller. A couple folks were using the rentable shop space.

Now I know some of you are thinking: “Well I don’t need a Tool Library because I never need tools. I don’t even own a house!”

The embedded nail

The embedded nail

Sorry, but we’ve got you covered, too! In addition to having tools available for community projects, the definition of “tool” has been expanded as well. Available are canning tools, a cider press and even books. Wait, books at a library? Mind=blown! There has even been talk of having some loaner dishes available for banquet events and even some sound system equipment or projectors for meetings. We’ll see what happens as it grows.

There really is something for everyone. Do you ride a bike? Check out the bike repair tools! Need to move something heavy? Or just concerned about Zombies? We’ve got you covered. It’s a pretty cool concept. Check around. You may have one in your community as they’ve been sprouting up in recent years. If not, why not help start one? Our team has put together a sweet starter kit to help you get going.

So how did my powder actuated tool loan work out? Awesome! I started by framing in the walls, getting them all dialed in just the way I want. After YouTubing how to use the tool (these donated tools often have no instructions with them), I was ready to go. You insert the nail into the barrel end. Then a cartridge (the “bullet”) is placed in the upper section. You press down hard where you want the nail to go and whap with the hammer. It pops like a gun going off and your nail is safely embedded into the concrete. A few more and the wall is totally solid. The basement is looking awesome so far. I just have a few more walls to go and I’ll be well on my way to a home that’s ready to rent, sell or just enjoy!

Anyone else have a tool library in their community? If there was one available, would you use it? 

Posted in: Saving money , 18 Comments , Tagged: , , ,

How much should you spend on your house?

April 30, 2013 8:41 am , 36 Comments ,

Don’t feel pressured to buy the biggest house possible

How much should you spend on your house?

How much should you spend on your house?

Those who know me know I’m a big believer in real estate. I’ve bought and sold tons of real estate over the years, including single family houses, rental property and I even wound up doing a sort of flip once (wasn’t planned that way, but that’s what it turned into).

At this point, I’ve pretty much seen everything from sewer backups, lunatic renters, mold, leaky pipes, you name it. So I feel qualified to spray my opinion all over the internet about most real estate topics.

The latest thing that’s gotten under my craw is the nonstop drive by the real estate and lending institutions to push buyers into purchasing as much house as they can possibly afford. The most visible way we see this is in online calculators helpfully offering advice on how much home the user can afford.

These calculators all have one thing in common: the first thing they ask you for is your yearly salary. They then typically will use a simple computation to determine your debt-to-income ratio. That’s usually somewhere around 35%. In their defense, that is largely how the lending industry will look at things. And unless you have something weird on your credit report or a relatively high amount of consumer debt, you’ll probably get that loan.

But look at the calculator on CNN Money, for example. I put in a fairly typical upper income salary of $100,000 each for a couple with 20% down with no consumer debt (if you have ANY consumer debt, you should be getting rid of that right now instead of reading this). Using that input, it tells me I can buy a house of over a million dollars!

Mmmm, milliiiiiooooon doooolllllaaaaaaaaaaaaaar hoooouuuusssssseeeee… (Drool, drool, drool.) My head is filled with visions of waterfront homes, decks with hot tubs, space far from my neighbors, condos with sweeping views of harbors, kitchens with islands and built-in wine coolers, separate rooms for every possible human activity. It’s almost irresistible!

Almost.

My problem with this way of looking at house shopping, is that it’s asking the wrong question. The question isn’t “How much house can I AFFORD?’ The right question is “How much house do I NEED?”. And, really, no one “needs” a million-dollar house. It's a Trap!

It’s easy to get starry-eyed about real estate. I’ve done it myself. I did buy too much house when I moved into my current home. (Not because I was buying as much as I could, however. According to these calculators, I could have afforded much, much more. I was just confused about what I really needed, a good topic for a later post.) Beautiful real estate is one of the most engaging forms of art. I could spend ALL DAY just looking at pictures on Houzz. And like any consumerist temptation, I feel the pull to make my house look like those lovely models.

That’s when I have to work hard to slap myself back to reality. Because there is no bigger hole to flush your pretirement money down than the real estate hole. I could have shaved several working years off my career had I not bought so aggressively. That’s true for so many people. Let’s say you purchased a $600,000 home when a $400,000 home would have sufficed (which is what I did). That would be an extra $100,000 each toward your pretirement funds. That could be a third of what you each needed! In addition, there is more house to maintain. A larger house will have a larger roof, more bathrooms, more windows, more expensive furnace, etc. Plus higher insurance and property taxes. More yard to mow, bigger electric bills, the list goes on.

But we haven’t even talked about the biggest problem: your gigantic mortgage. If you really bought that $1,000,000 home that CNN Money was saying you could buy, you’d be paying a mortgage of nearly $4,000/month before tax and insurance! Now if you’re both making $100,000/year, that may not sound too bad, really. It’s, by definition, around 35% of your monthly income. You have plenty of money leftover each month. You could even afford a car payment if you wanted. What’s the big deal?

Here’s the big deal: Unless you have a way to talk to Future You 25 years from now, you don’t know how much you’re going to hate your job by then. And if you really love your job at that point, but haven’t purchased an unnecessarily expensive home, you’ll be able to buy that million dollar home then with cash! You’ll be much better off buying the cheapest house that will work for you instead of the most house you can get.

Pretirement is about gaining your own freedom. As quickly as possible, you want to build up your investment fund so your monthly bills are covered. This doesn’t happen overnight, but it WILL happen if you can resist the urge to bury yourself in debt.

With all that in mind, here are my rules for buying personal real estate. This only applies to the home you’ll live in, I’ll have different rules for investment property.

  • Buy quality, not a project
    We’ve all heard the old saying about buying the worst house in the best neighborhood. And, that saying is actually true! However, don’t let that convince you to buy any project houses. First time homeowners have no idea how much these projects will cost and once you’ve begun there is no turning back. The best way to make money in real estate is to not spend any money on property AT ALL and let the market appreciate for you. And, first time homeowners ALWAYS over-improve their first homes. I did it, you’ll do it. We all do it. By buying something that’s already in good shape, you’ll usually come out way ahead.
  • If something bothers you about the house, don’t overlook it
    My wife and I once bought a house that had more than 20 steps from the street to the front door. It was an old tudor with tons of charm and we lost our heads (it was a major project house). We overlooked the steps as long as we could and finally realized it was such an unchangeable feature that we knew we had to get out. We barely escaped the real estate collapse, closing the deal right before all hell broke loose. Had we not been able to sell, we would have been stuck living with those horrible stairs. Do yourself a favor: If something bugs you, keep looking, you’ll thank yourself later.
  • Buy what you need — don’t believe the “more is more” crowd
    With real estate, it’s very easy to move up the cost ladder by inching your way a little at a time. “Well, this one is only $5,000 more, I guess we could come up a little.” If you do that more than a few times, you’re soon in expensive home territory. It’s OK to adjust your budget to match reality, but make sure you’re clear about what you really need. If you’ve decided a three-bedroom is right for you, why are you being tempted by a four-bedroom for $10,000 more?
  • If you can’t afford the 10-year loan payment, you’re buying too much house
    The best way (right now — this could change with an increase in interest rates) to determine how much house to buy is to use a 10-year loan as a guideline. Take a look at your expected monthly bills. Add in a bit extra for breathing room. Now, can you afford the payment if you do a 10-year loan? Congrats, you’ve just found your budget! It may not make sense for everyone to structure their loan as a 10-year loan, but as a guideline to figure out your maximum budget it makes a lot of sense.
  • Buy it because you love it, not as an investment
    Real estate can be a great investment and a very lucrative one. But it can also be a harsh mistress. Make sure it’s the right home for you before pulling the trigger. Focusing too much on the investment side can leave you stuck somewhere you don’t want to be.
  • Make sure it fits your practical needs, not just emotional needs
    Now that you love it, also make sure it fits all your objective criteria. Layout, number of bedrooms and bathrooms, privacy, proximity to work and school. These are all critical and must not be overlooked just because the home has loads of style.
  • Don’t “drive until you buy”
    These days the highest priced real estate is largely found in city centers. Moving in concentric circles outward the prices drop as distance from work increases. Home buyers often will simply explore outward from the city center until they find what they can afford. This is often called the “drive until you buy” strategy. They then live miserable lives in their cars, driving to work, errands and soccer games, frantically five minutes late to everything. Instead, either buy less house (hey, earlier generations had even more kids than families today so it’s possible, right?) or rent right in town.
  • Always put at least 20% down
    Fortunately it’s harder to get a loan without a decent down payment these days. That keeps a lot of people who aren’t ready to buy off the market. But there are still a lot of purchases happening with 10% or less down. If you don’t have the 20% yet, just hang in there. It’ll be worth it in lower payments, built-in equity and no mortgage insurance.
  • Don’t rush it
    Don’t be tricked into buying, thinking you have to get in before it’s too late. It’s never too late. Stick to your strategy and don’t be rushed by anyone. There’s always another house and another great time to buy.
  • There is no shame in renting
    Renting has its annoyances but it has a lot of upsides, too. You can keep maximum dollars flowing to your pretirement fund, you don’t have to fix anything and you can move whenever you want. If anyone gives you crap for renting, just chuckle to yourself, knowing you’ll be completely pretired while they’re still schlepping to work every day.

I’ll add in any others that occur to me, but following those guidelines should keep you on a healthy path to pretirement. Once you’re well under way, you can check out my tips for paying off your mortgage early and really speed the process along.

What are your best tips for keeping real estate costs under control as you pursue pretirement?

Posted in: The system , 36 Comments , Tagged: , , ,

How to get rid of your mortgage

April 11, 2013 6:08 am , 22 Comments ,

Paying off your mortgage early isn’t as hopeless as it seems

How to get rid of your mortgage

Image courtesy Stuart Miles via FreeDigitalPhotos.net

Let’s face it: 30 years is a long, long time. As Americans, we have almost come to view our mortgage as a never-ending bill, occasionally it goes up, sometimes you can get it to go down, but always, always there.

I know people who bought property for $5,000 in the 1970s and today owe $200,000! How does this happen?

It’s important to realize this “death contract”, as the word means in France, hasn’t been around all that long in its current form. In the United States, it was only in the 1930s that mortgages became the way houses were purchased. Now this had two results: It brought more homes within reach to more people and it drove up housing prices. (In much the same way car prices shot upwards once car loan became popular.) This also meant that banks had a reliable stream of income (secured by the property, of course!), which also meant that they had an incentive to keep you in debt to them. Thus, your old pals the HELOC and the cash-out refinance.

And, we know the rest of that piece of history, where the brain-dead American consumer racked themselves up a pile of credit card debt and when that bucket got too full, they used their home as an ATM and started again at zero (not counting the new additional real estate debt).

Now, because you’re a clever person and you want to pretire, you’re not going to play those games*. You’ll want to get rid of your mortgage** as soon as possible to lighten your overhead and bring you that much closer to pretirement. I am not going to waste your time with the common, tiny gimmicks like making an extra payment to principle each year.  And you already know you can sell or default, so I’m not getting into that, either. You have the rest of the internet to read if you want to pick around the edges or take a shortcut. I’m talking about obliterating your mortgage, faster than you ever thought possible. It’s not easy, but it is doable in many cases.

A couple notes. There may be more than one approach that will work well. Also note that the amount you owe, your interest rate, your income and other factors may limit your ability to try these ideas. I share what I know hoping at least a few folks may be able to speed up their timeline and get their freedom back.

In effect, what we’re going to do is refi to a short-term loan, save like a crazy person and then when enough time has gone, simply pay off that sucker. To make it a little more tangible, I’ll use an example: John and Jane Johnson recently purchased their house for $300,000 and put 20% down. They have a 4% interest rate. They owe  $240,000. Their P&I is $1,146. Tax and insurance is an extra $300/month so their payment is $1,446. We’ll say both make $50,000/year so jointly they bring home something like $70,000 after taxes ($5,800/month or so in take-home).

They’re depressed: 30 YEARS!! That seems like forever!

But they take a look at some ideas and decide to rework their lives. What if they…

  • Refinanced into a 10-year loan at 3%
  • Cut their ongoing household bills down to $2,000/month (shouldn’t be that much higher anyway)
  • Cut their “fun” spending back severely to ensure they could keep up with the new payment
  • And, maybe because they’re ambitious, they’re even able to scrimp and save just a bit on the side as the years go by

Let’s see what happens:

  • New payment: $2,617 (including the same tax and insurance)
  • Monthly bills (utilities, etc.): $2,000/month
  • Fun: Next to nothing, but cooking at home and enjoying friends and family can’t be a bad thing, right?
  • Loan gone in 10 YEARS!

But wait, I’m not done yet!!

So after all of that, they still have a $1,200 cushion each month for surprises or the occasional splurge. And they’ll be saving over $130,000 in interest and will be able to bank all money after the 10-year loan is paid off to put toward their pretirement fund. (Monthly income of $5,833 – $2,000 in bills – $2,617 house payment.) But let’s pull up a handy-dandy amortization calculator and see if we can get tricky!

Let’s assume our lovely couple is also able to save around $600 per month on average over the course of their loan. Now I know they’re running a little tight here at the beginning, but remember, we’re talking about many years. We can safely assume they’ll be getting a raise or bonus here or there and Jane is pretty smart and will likely change jobs a few times and end up getting that promotion. So, remember, we’re just talking about on average saving up that money over the years. (This also means not sneaking in and spending it, which is what most of us will do.)

So let’s do the math. In, say, eight years, they’ll have saved up $57,000 — enough to pay off their remaining balance! Plus, because they were smart enough to invest the money, their savings will even be a little higher! But, we’ll say their investments were quite modest so maybe they have around $60,000 at the end of those eight years — done! In fact with a slightly stronger investment or a little more saved, they could easily do it in seven years! Wow!!

We went from an endless 30-year life sentence of an expense and turned it into a trivial 7-8 year sprint.

But I have to stress a couple things:

  1. This isn’t easy. Maintaining strict discipline over many years is something very few people can pull off. Automated transfers and putting money somewhere where it’s a little bit hard to reach can help.
  2. This really only works for most people now when interest rates are this low. A much higher interest rate will make the payment too high to be workable.

But, Nick, the banks will never grant me a loan that devours that much of my monthly income. Thanks for nothing! 

This is actually a legitimate concern. Banks have really tightened up their requirements and, frankly, are being quite absurd in some cases. It is possible you won’t be able to get this type of loan. (Although you should try!)

If this happens, here’s Plan B:

Keeping all other variables the same, we’ll keep the original 30-year loan. The amount that would have been going toward our 10-year payment and our side-savings, we’ll simply save on our own. So the existing payment of $1,446 will still be paid and we’ll also save around $1,200 on the side. The outgoing money is basically the exact same. In eight years, we’ll have saved $115,000 and investment growth will be at least $126,000 (really should be much more, but just being very conservative here to make the point). You can play with different timeframes and do this refi earlier or later depending on your situation. Or just keep building up your pretirement fund and eventually use that money to pay your mortgage for you. That might be a good post for another day.

Now, at this point, if interest rates are still low, you’ll do a refi (you’ll be able to get that loan, no problem) and pay down your balance. So effectively you’ll take out a new loan for $100,000. What I would do in that case is take out a 30-year loan (now with tiny payment) and simply park it and work on building up my pretirement fund.

However, if our couple really wanted to get rid of that mortgage, they could keep on saving aggressively and take out a 4-year loan instead. By continuing to save on the side at the same rate, they would be done a year early (11 years total) and be mortgage free.

Boom — powering down your mortgage in just a few years! What could be better? 

 

*Meaning the credit card problem. A HELOC is actually a really important tool for homeowners and early retirees.

**There are legitimate reasons to retain a mortgage, particularly in a low interest rate environment. But that’s a discussion for another day.

UPDATE: If you’re considering this approach to quickly getting rid of your mortgage, be sure to check out my post on how to recast your mortgage. You can save a bundle without doing an expensive refinance.

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