FIRE and buying a home can go hand in hand
If you follow the FIRE method (financial independence, take early retirement) and plan to retire earlier than your peers, you might be wondering: can I buy a house with a mortgage?
A mortgage is a huge debt – the biggest debt most people take on in their life.
FIRE advocates paying off debt as quickly as possible and saving most of your income. So it may seem impossible to follow these mandates and to buy a house.
But in fact, experts say it’s possible if you follow a few key rules. Here’s what to do.
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How the FIRE method works
The basic idea of FIRE is simple: save between 50% and 75% of your income, starting as early as possible in your career.
That way, you can retire at a relatively young age – maybe even in your 30s or early 40s.
Of course, this is not an easy goal.
Retiring early means cutting expenses and living modestly, while increasing your income as much as possible. Serious FIRE enthusiasts will even work multiple jobs if necessary.
The FIRE method also calls for payment existing debt as soon as possible.
This includes revolving debt from high interest credit cards, student loans, auto loans, personal loans, and other debt.
Buying a home can be part of your ‘early retirement’ plan
Once your accumulated savings are 25 to 30 times your annual living expenses (typically $ 1 million or more), you can work less or stop working.
But you don’t put those savings in just any account.
You need to put that money to work for you by investing in the stock market and real estate – vehicles that will likely produce a higher rate of return for many years to come.
Real estate can be an important part of your investment portfolio, especially if you plan to earn passive income by renting out properties that you own.
But buying a home or other property usually creates a lot of debt. So how do you reconcile this purchase with the FIRE methodology?
How to make FIRE with a mortgage
Financing a house with a mortgage will create debt.
But it is possible to buy a property and follow FIRE if you choose the right house in the right place with the mortgage right.
Choose a shorter loan term
“You have to live in a low cost place. And you have to try to pay off your house in 10 to 15 years, ”says Caleb liu, owner of HouseSimplySold.
Invest your savings instead of paying in cash
Brian davis, Education Director of SparkRental, suggests another strategy.
“Let’s say you saved $ 200,000 in cash,” Davis says.
“Instead of using all that money to buy a house, take out a 30-year mortgage at the current 3.5% interest rate. It will cost you [about] $ 900 in monthly principal and interest payments.
“Then take the $ 200,000 you saved and invest it, ideally for a 10% return based on current market performance. You will win [about] $ 1,700 per month – an excess of $ 800 after you have paid off your mortgage. “
Either scenario beats rental, which costs more in many markets than to buy and own a house.
And remember, renting won’t bring in any equity or tax relief like owning a home.
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Get out of debt before buying a home
If you’re serious about “financial independence, retire early” it may mean waiting a little longer to buy a home.
Before buying a home or trying to prepay your mortgage, focus on eliminating your other outstanding debt.
“The FIRE method involves paying off your debts, starting with the bonds with the highest interest rates,” says Keith baker, Mortgage Program and Faculty Coordinator at North Lake College.
Scott Bates, financial expert at MoneyandBills.com, agrees.
“If you don’t have debt before you apply for a mortgage, it saves you a really big down payment. This will most likely result in faster loan approval. ”
“Plus,” he says, “you’ll have more equity in the property upfront and less to repay.”
Lower debt means lower mortgage rate
Having less debt when applying for a mortgage could also make your home loan cheaper.
“Your credit score can be reduced by having large amounts of debt. A lower credit score will put you at higher credit risk for the lender, ”Bates explains.
“They’ll give you a slightly higher interest rate in this case, which will cost you more in interest payments. And to keep those costs down, they might charge you points, which will make your closing costs more expensive. “
“Every 40 point drop in your FICO score results in a 0.25% to 0.30% increase in your mortgage rate,” says Liu.
Check your new rate (May 4, 2021)
Concrete Steps You Can Take Toward FIRE and Buying a Home
Want to own a home now and achieve your FIRE goals down the line? It is doable, but you will have to make sacrifices.
“A lot of people who earn less than $ 50,000 a year will struggle to save 50 to 75% of their take-home pay,” Baker warns.
Bates says the FIRE method works best for singles and disciplined couples.
Raising a family, getting a divorce, suffering from costly health problems, or enduring a long-term recession or bear market can make it extremely difficult to achieve FIRE.
Liu suggests the following tips:
- Put every dollar you can save into a worthy investment vehicle. Look for stocks, bonds, mutual funds, and exchange traded funds with a good track record
- Also explore real estate investments like rental properties. Aim to achieve an annual return of at least 8%, which is better than paying off your 3.5% to 4% mortgage early
- Max on any IRA, 401 (k) or other retirement fund you are allowed to contribute, as well as the corresponding pension fund contributions offered by your employer
- Think about cheaper real estate. Buy a smaller house in a more affordable location
- Increase your income. Aim for a promotion or raise, or look for a better paying job elsewhere. Take a side gig or two, if you can
And as a general rule of thumb, try to cut spending as much as possible on day-to-day decisions like where to eat and what to drive.
Low mortgage rates allow you to pay off your home faster
An important thing to keep in mind is that mortgage rates are exceptionally high. low right now.
This greatly facilitates the purchase of a home and get out of debt early.
When rates are low, it is possible to opt for a shorter 15 or 20 year mortgage while still keeping payments manageable.
You can also go for a low rate 30 year mortgage with smaller payments and pay a little more whenever you can.
This method is more flexible than going for a short-term mortgage and gives you leeway if times are tough.
To get an accurate estimate of your mortgage rate and payment, talk to a mortgage lender about your options.
This is the best way to get a clear idea of your budget and decide if buying a home is right for you.
Check your new rate (May 4, 2021)