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Don’t Let an Oppressive Mortgage Prolong Your Career

Picture of hands in handcuffs. My spouse and I talk about buying a more expensive home. But I won't let an oppressive mortgage inhibit my chances of early retirement.

A former manager was into office gift-giving. 

Most of the team was over 50. As a joke, she gave everyone a pocket guide to texting acronyms.

The “older folks” were still learning about terms like LOL, TL;DR, LMFAO, OMG, and WTF.

This was around 2014 before we had our third child. 

Flipping through the pages, I found a personal finance acronym I never heard of, SITCOM — single income, two children, oppressive mortgage. 

scan of texting acronyms page.
Amazon Link

Ouch. That was us. 

Our household became a single-income family in 2013. The mortgage wasn’t oppressive, per se, but I felt a significant weight on my shoulders when Mrs. RBD stopped working.

The weight prompted me to start this blog and build more income streams.

But it was nothing like 2006.

That year, I bought a 1BR condo. The very next day, I was suffocating.

I went from paying $750 in rent to a $2300+ housing payment overnight. 

It took me more than a decade to clean up that mistake

Taking on an oversized mortgage in your 20s or 30s is tough, but at least you have time to build your income and pay it off before retirement. 

Upsizing a mortgage later in life runs the risk of prolonging a career. 

The Big Three

Maintaining control of the big three expenses is key to early retirement. They are:

  • Housing
  • Transportation
  • Health Insurance

Where you live and what you spend on housing impact your savings rate (monthly income minus expenses).

The savings rate is a key number for early retirees. The higher your savings rate (as a percentage of take-home pay), the sooner you can retire.

Therefore, those few stages in life when we buy a home carry significant long-term consequences.

If the mortgage payment takes up a large percentage of take-home pay, there’s less to spend on life’s necessities, reducing savings and prolonging your career. 

Car payments do the same thing. 

The average American car payment was between about $400 (used) and $550 (new) in 2020.

Owning a car without debt or not driving are simple ways to get ahead. 

Health insurance is necessary. But there are a range of pricing options, especially if still employed.

If you buy, let’s say, two homes and ten cars throughout your life, that’s 12 critically important life moments where you can choose to give yourself a financial advantage. 

Car buying mistakes are fixable. Housing purchase mistakes are harder to reverse. 

Too often, some of us learn how significant the home purchase decision was after closing. 

Real estate agents and mortgage brokers won’t encourage you to spend less. They’re paid more when you exceed the budget. 

That leaves you and a mortgage spreadsheet as the only barriers to overspending on the house.

First-Time Buyer Housing Affordability Rules

There are a few housing affordability rules of thumb out there.

Dave Ramsey says that your payment should be no more than 25% of your family take-home pay using a 15-year fixed mortgage.

That’s quite conservative and can be unrealistic in some urban areas. 

Mortgage lenders use something called the 28/36 rule. It says to have a mortgage payment (including escrow, taxes, insurance, etc.) of no more than 28% of gross monthly income and spend no more than 36% on total debts. 

43% total debt is another important threshold I found. That’s too high. 

Here are some reasonable guidelines for first-time homebuyers (let’s say, under 40-years-old):

  • No high-interest debt — If you have credit card debt, pay that off before buying a home. 
  • Aim to save 20% for a down payment — Prove you’re a worthy borrower and avoid higher interest rates and private mortgage insurance. 
  • Mortgage payment (all-inclusive) no more than 33% of take-home pay (after 401(k)/403(b) contributions) using a 30-year mortgage.

The best rule of thumb for you depends. You may value a nicer home or premium location over early retirement.

These guidelines may not get you into your dream home upon your first purchase. I get that.

It may be difficult to buy the home you want when you want it. But being more conservative with your first purchase might open opportunities.

  • The first home could be a stepping stone, introducing you to homeownership, helping to envision your ideal home.
  • The lower payment allows you to increase your savings rate, bumping up your retirement date.
  • The lower payment lets you save for your ideal home.
  • The first home could eventually become a rental when you move. 

You may get comfortable in your less expensive house. If you like it there, that’s a financial win. If it’s not right, there are reasonable options. 

Mid-Career Housing Upgrades

It seems common that some families or couples upgrade their home when one earner gets a big promotion or raise. 

One of our former neighbors moved a mile away to a “more uppity neighborhood,” as the woman on the Nextdoor social media platform called it.  

They came back for a block party and said the new street didn’t have the same community feel. 

I want to think that their new household income enabled them to afford the more prominent, contemporary home with ease. 

But I wonder — did spending twice as much on a different house tack time onto their working years?

I’ll never know their financial situation.

But it makes me more aware of the risk that housing can become an obstacle to financial freedom.

Our Housing Story

When Mrs. RBD moved into my 1 BR condo, the savings helped her to pay off her car and student loans within a few months.

Soon after, our combined incomes empowered up to save a 20% down payment for a house in the suburbs. 

We hurried to buy.

Pre-SITCOM, HGTV got the best of us. 

We could have waited and saved more or bought a smaller starter home and upgraded a few years later, in hindsight. But here we are.

Our house has its annoyances.

  • The backyard is sloped, and there are drainage issues.
  • We don’t have a garage or shed, so we keep yard tools and bikes in our basement.
  • The previous owner painted our unfinished basement and laundry room lavender (too much square footage to bother repainting).
  • We have a narrow galley kitchen; the freezer door causes traffic jams when open.
  • The bathrooms have no windows. 

By no means is it the dream house of my childhood. 

But by and large, the RBD household is almost perfectly suited for our family.

We have five people, and there are five bedrooms, four of which are on the same floor.

Each of our kids has a room, and we’re nearby when the boogie monster visits.

The fifth bedroom is my office and accommodates a blowup mattress for guests.

The neighborhood is full of kids the same ages as ours. 

A five-bedroom house may sound big, but it’s an unflashy 1960’s split-level. It’s kind of shaped like the Brady Bunch house, but no fabulous architectural interior. 

Though well-suited for us now, it’s probably not a forever home. 

Our ideal home may not be bigger, but it would be smarter — a modern layout, a flatter backyard, more privacy, and a garage.

Some annoyances can be fixed or upgraded. But others, like the backyard and garage, cannot without significant expense. 

Our ideal house (in the same area) would probably cost $150,000 to $200,000 more than our current home value. Meaning we either need to save up the cash or take on a larger mortgage. 

I’m 45-years-old. My goal is to retire within ten years.

Adding $200,000 to our mortgage balance is out of the question

I don’t want an oppressive mortgage to prolong my career. 

The Mortgage Dilemma

My preference is to live in a paid-off house when I retire. That would require aggressive extra mortgage payments starting today to be mortgage-free by age 55.  

We refinanced to a 20-year 2.75% mortgage in September 2020, which takes me to age 65. 

With such a low rate, aggressive early payments don’t make a lot of sense — though paying it down would be a 2.75% risk-free return, much better than bonds and high yield savings accounts.

I’ve struggled with this topic for many years, so you may see conflicting thoughts if you explore my archives

I’m 100% OK with paying off a mortgage early, regardless of the interest rate and mathematical arguments.

If you regret it paying off debt, you can always reborrow. 

However, rates may be higher in five years (a familiar refrain for the past decade, so take it with a grain of salt). 

Most people who are mortgage-free don’t seem to regret it

On the other hand, if I invest or save excess cash flow instead of paying down the mortgage, that gives me capital growth, investment income, and flexibility.

Extra cash on hand could provide the flexibility to leave my career sooner. Or I could save up the month and pay off the mortgage in a lump sum. 

More likely, I’ll maintain a healthy opportunity fund and invest most excess cash flow into income-producing assets.

Reality is setting in — I may carry a mortgage into retirement, whether we buy a different house or stay here.

I don’t want the mortgage to be a deterrent to retirement. If it remains small, we’ll have enough savings and investment income to cover the payment. 

Options to Avoid a Career-Extending Housing Mistake

Yes, we would like a more expensive house. 

But no, I’m not willing to prolong my career to have it. 

So what options remain?

Stay and Do Nothing

We’ll likely stay in this home until the kids are out of elementary school. There are so many kids here that it’s an ideal environment for our children. Once they’re all in junior high, we may start looking for a different home as our needs change.

Stay and Remodel

My wife has an eagle eye for kitchen remodels. That would cost a lot, but it’s cheaper than moving. Our cabinets can be rearranged, saving us that considerable expense. But walls would fall.

We could build a garage, but we’re planning to install a large shed to store our bikes and yard tools. That will create more space to finish our basement.

Earn More and Move

I could get a big raise, making it easier to afford a different home. But it would have to be major. And moving after a big raise would make me more reliant on my full-time job. 

I made this mistake back in 2006. I bought my first property after receiving a $22,000 raise, thinking that made me a qualified homebuyer. It didn’t.

Instead, I went from being a young single guy thriving in an inexpensive group house to being one paycheck away from financial trouble. 

The more desirable outcome now would be to grow my side business to give us more financial flexibility.  

Increase Passive Income

Building more passive income streams would help, but it’s unlikely that stock dividends will grow enough to warrant upgrading to a different home. Nice thought, though. I’d probably sell assets before increasing them to be sufficient to cover the mortgage. 

Build Cash Savings and Move

The most likely outcome is we save the extra $200,000 to move to a different home sometime in the next decade.

Then sell this home and transfer the equity, thereby buying the home with an equal or less mortgage balance and a ten or 15-year mortgage. 

This scenario would require scaling back on investing and building a cash stockpile. It’s doable, but it would take a significant commitment.

Since we’re comfortable where we are, I’m not ready to make that change in our financial habits until we’re more certain of what we want. 

Rent

We could sell the house and rent something else. Or rent our house, then find a rental to live in. 

Always an option, but unlikely for us at this time. 

Bonus Idea – Pretend You Already have a Higher Mortgage

I friend of mine texted after reading this article. Here’s what he’s doing:

I lately adopted a strategy whereby I make monthly mortgage payments based on the hypothetical more expensive house I want to buy in 3-5 years. I’ll build up equity AND make the higher payment seem routine and within budget (and prove to myself I can afford it). In my mind, I’m already paying for a higher mortgage and won’t feel the pain when it happens!

Conclusion

Reading this post is like sitting in my living room, listening to the same conversation I’ve had with Mrs. RBD dozens of times over the past eight years. 

The thought of moving to a different home is appealing on the surface. A different home would eliminate some annoyances but create new ones. And it probably wouldn’t increase our happiness over the long-term. 

Leaving this neighborhood seems unwise while the kids are young. It’s unlikely we’d be so lucky if we moved. 

So if and when the time is right, we’ll execute a plan to purchase a different home without an oppressive mortgage or sacrificing my retirement goal. 

That seems reasonable. But five years from now, I may end up republishing these same words, only changing a few numbers.

Photo via Pixabay

 

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9 Comments

  1. To pay down early or not….yes…a tricky one for sure. I think anticipating future cash flow requirements relative to expected future income carries a lot of weight in my decision making. Especially over the last 10year period, it’s hard not to calculate how much paying down has ‘cost’ me in the market. That said, I feel like my tax advantaged accounts expose me to enough market risk/reward there. I’m content to mentally let those retirement accounts do the heavy lifting of growth/compounding…while I’m steadily paying down the mortgage and maintaining what I consider an adequate cash buffer (probably too much cash).

    Ray LeVitre has an excellent yet simple article on ‘buckets’ for different investment/life time horizons…and risk tolerance for each…I think regarding 1-3, 4-10, and 10+ year buckets (individually and collectively) makes sense…and makes decisions in each zone reconcilable for what that zone/life stage is aiming to prepare for.

    At 39 (and single)…I’m content to let my tax advantaged retirement accounts (SIMPLE and ROTH) do the heavy lifting and face the volatility and risk of market returns (mutual funds) there…and yet perfectly content to pay down my mortgage (at the 15yr pace despite being on a 30 over investing taxably/looking for a rental property) and forego market returns/risk there….and still not feel terrible about holding enough cash to walk away and be good for a few years if I wanted to/needed to. To what extent preparing for the future has cost me in quality of life over the past 15-20years is hard to quantify but I have no regrets on my frugality/prioritizing flexibility in the future. Now that I’m closer to paying off the mortgage, I contemplate paying it off in the next year or two (vs. the steady 3-4 more year pace I’ve been on) and DO question the wisdom of accelerating further. There’s no right or wrong…but I take the casino/gambling logic of last to have to make a decision has the advantage…stay on the moderate pace and decide when you get there. Impatience in finances is rarely helpful…again, it’s good to keep the future in mind while staring at shorter term financial goals…and also helpful to craft a plan soberly and work the plan over time despite market ebbs and flows…tweaks are possible and necessary…but to life stage changes/horizon changes…not reactionary decisions to current market happenings.

    That said, I’m not rich…but live comfortably and am encouraged about the trajectory of options emerging as I’m closer to paying down my mortgage. I still don’t have enough wealth not to work…but that’s not the goal at this point…I hope to be in a position to do more rewarding/less paying work and/or working from home in some capacity. This is the first year I’ve used money to buy more time away from work vs paying it towards the future me. That feels good and adds some balance at this point in my life. I think understanding your life seasons and how you’d like to be prepared for each and adjusting accordingly as seasons emerge on the horizon helps address how to approach opportunity cost decisions like this one.

    To summarize: I don’t know that you’ll regret either though I do feel like there is a timing element of cash flow/earnings/life stage that is hard to appreciate and nail down that informs a suitable approach for each situation.

    1. Thanks for sharing your situation. You make a good point about letting your tax-advantaged accounts do the heavy lifting. If someone puts $1500 per month into a 401k, throwing an extra $200 at the mortgage isn’t a big divergence. Early mortgage payments are a way to diversify what you do with excess cash flow. As of now, I’m not paying extra on ours, but writing this blog post made me rethink it (again), and I may go back there. The early payments I made before the refinance helped us refi to even better terms. A 10-year paydown period is possible, and probably a worthwhile plan.

  2. I love and hope that you’re patient with Mrs RDB. My husband rolls his eyes and goes, not that conversation again. I wonder if it matters to us as we spend so much time in and around our home and managing the needs of our family. I’d go for a kitchen refurb, manage the costs obviously, and it could add value to your home.
    We have just sold our home as our repayments were at the high end you state above. Somehow when the bank and the broker said you can afford it, we felt we could too. With Covid and potential enforced redundancies, it no longer made sense. So here we are renting a cute cottage, feeling more at peace with our circumstances, and we can now save $60K pa. We are taking our time to get back into the market. Last thought, could you stay in the neighbourhood and rent, and keep the house as an investment now?

    1. Congratulations for selling your home and moving somewhere less expensive. That must have been a perplexing decision for a long time. Saving $60k per year is a big deal. Enjoy that!

      Mrs. RBD and I are mostly on the same page with what we want. The main difference, is she would start a kitchen rehab tomorrow if I was onboard. Our kitchen is not old or outdated. But the layout is not ideal for how much space there is. We do have very high quality cabinets, so it would be a matter of painting and rearranging those, then some significant plumbing changes and moving appliances. It’s not that old, so I feel it can easily wait. And I’d rather pay cash instead of borrow. If we did the kitchen, my wife would probably want to stay much longer. Me too, I guess.

  3. From an older perspective: stay put while kids are in school if they’re near or past the halfway point; DIY creative fixes to make your lifestyle there more streamlined and workable; AND save at highest rate while making an extra principal payment or two annually. Kids (and their huge friends)grow fast and a bigger house is only useful for that window of time. You’ll find yourself longing for a charming Little jewel box that takes almost nothing to rehab +far less cost maintenance as your kids are home less while you and wife enjoy fun And the financial freedom you gave yourself.
    i.e.:
    Through divine grace, our house in Ca sold in 2 days for 10% over asking when we had followed this same plan for 7 years. Last kid in comm college/fire academy. We’d built up enough savings in the last, most $$productive years of working to pay off vehicles, + use equity for a cheaper home with rental guest house in another state. Hubs has modest pension. Health coverage on less income through ACA. We’ve semi-retired until SS kicks in. It is WONDERFUL. All glory to God, RBD. Be conservative!

    1. Thanks for that perspective, DLo. Yeah, the kid situation really makes the decision to stay very easy at this point. We can save more and watch the value grow while the mortgage payment gets cheaper every year (due to inflation). It will be exciting to move into a forever home as well-qualified buyers in a higher price range. The options nearby are good. Ideally, we could keep this house and rent it, and move into something different. But that would take a lot more savings.

  4. Our first house, which we still live in 40 years later, cost about one years gross income when we bought it. Over the years we added on, remodeled and modernized nine different times, with cash. It’s been paid off for longer than I can remember. It’s value trailed my income increases so that the year I retired it represented about six months of gross pay in total value. We could give it away and it would not impact our net worth appreciably. It’s a four bedroom four bathroom two story house on a two acre lot. We like it quite a bit. We were lucky to make San Francisco wages in rural Arkansas and only worked for one company at this one location.

    1. Wow, that’s awesome to hear you’ve used cash to upgrade the home. SF wages in Arkansas – hearing that makes me want to move somewhere cheaper. I guess it’s probably more common to own a home outright in less expensive areas.

      I was going to mention a coworker in this post who’s been in his home for 30+ years. Low maintenance was his main reason for staying in his townhome. But inexpensive/paid-for is a big factor, keeps the stress away. He seems to love his career, so retirement doesn’t seem like a priority like it is for me. We are comfortable here, but I’m not the type that likes to stay in one place for too long! The idea of having no mortgage would bring peace of mind and liberation, which may be reason enough for me to turn back on the early payment spigot.

  5. Great idea about pretending you already have a high mortgage!!