Tuesday, December 6, 2011

Expense: the mortgage

To become financially independent we need to save up a ton of money. And for that we need to lower our expenses. My number one expense — the great big mortgage-sized elephant in the room, if you will — is my mortgage.

I wanted to own a house before I got started down this path toward financial independence. Renting never rung true for me, felt too much like "throwing [my] money away" (though it isn't really). Couple that with low interest rates, low housing values, building equity, and the mortgage interest deduction, and surely you can see why I was interested. My girlfriend and I closed seven months ago, in early May. We're paying a bit less than twice as much, in the same neighborhood, for three times the space. I think it's a great tradeoff (or else why would I have done it?), but it will seriously affect my ability to build a 'stash.

Let's get down to numbers:
  • Total Principal & Interest: $2170
  • Property Tax / Escrow: $630
  • PMI (included in escrow): $150
  • Principal (this month): $520
  • Interest (this month): $1650
  • Total mortgage expense per month: $2800
Of course the amount going to principal and interest changes every month, and I rounded the numbers to keep things simple. The house is worth around $450k and we put 10% down, which means we're dealing with PMI. Sucks, but I'd make the trade-off again if I had to.

Now, in the context of Mustachianism, keeping expenses low, saving money, etc. etc., splurging on a super awesome house isn't the best thing to do. This is kind of a moot point since Mustachianism wasn't on the radar when we were buying the place, and I'm absolutely not interested in trading down. So this expense is going to stay more-or-less intact until it gets paid off.

The long-term plan is to pay the mortgage off early and thus reduce our expenses to a relative trickle. How early? I don't know, but I'm definitely going to set a stretch goal for it. Ballpark, I can shave around 15 years off by making an additional $1k/month payment. Totally feasible once I get my student loans paid off. But I'm getting ahead of myself.

What we can do in the medium-term is eliminate our PMI payment. Personally I find PMI (Private Mortgage Insurance, to the uninitiated) repugnant — not so much because it's this extra fee tacked on, but because that's not how loans should work. If you don't like that I'm a higher credit risk, charge me a higher interest rate. If you want to take out insurance on your loan, then you pay for it. But you make me pay for it? Not cool, guy. Anyway.

If we don't make any extra payments, the PMI will go away by itself in 2017. I'd like to shave a few years off that number. I'm going to be a little conservative since I'll be dispatching my student loans first. Then I want to tighten this goal up a bit since I think we can do better.

GOAL: Eliminate PMI in 3 years, by 2015

Not too shabby. Now, eliminating PMI entails getting our Loan-to-Value ratio at or below 80%. That means either decreasing the loan amount (making extra mortgage payments) or increasing the house value. Increasing the house value is actually a big option here. First, and less interestingly, I'm counting on the housing market being at least a tiny bit better in 3-5 years. But that aside, the house we bought is sort of a fixer-upper for its neighborhood. The guy who owned it before us owned a number of properties and held them as rentals. Didn't take great care of them. Little things like not keeping up the exterior paint; leaving the exterior light broken and dangling while the house was on the market; spraying the walls, trim, and ceiling of the entire house with the same drab beige color; saying he'd be willing to go make concessions on the sale price before we made an offer, to account for the above (and more), and then going back on it. Honestly he was a pretty big tool. Our HOA president has horror stories of dealing with him, how he was two years late on his HOA dues, how he forgot to turn off the water to the exterior faucets in the winter, on not one but two of his houses in this neighborhood, and had the pipes burst. And then the HOA president had call up the water company to get things sorted out. In the end a reason we got this house for the low low price we did was because the dude was going bankrupt. Turns out he overextended himself and he had to liquidate his entire holding of over a dozen properties. Score one for karma. But I digress.

So another reason we could buy this house cheaper than others in the neighborhood is because very little has been upgraded. The roof is original and should be replaced in the next year or two. Kitchen is original, and honestly it's fine, but all the other houses I've seen for sale have stainless steel appliances and granite counter tops. (At this point I feel obliged to say something about how living in a high-spending neighborhood can turn you into a high spender yourself. What they say is true, and my only hope is constant vigilance.) The central air unit is original and could go at any time but otherwise doesn't need to be replaced. Carpets are builder grade and worn out, so I want to replace them eventually. We replaced the first floor carpet with hard wood before we moved in, thanks to a very generous gift from my girlfriend's dad. I think that's it for the big stuff. There's a lot of little stuff too, some landscaping, painting, window treatments, etc. All in all there's plenty that we can work on that will increase the value of the house. I'm not nearly as handy as Mr. Money Mustache, but I need to learn. It's the only way not to break the bank with all this pending home improvement work.

That's a good enough window into my housing situation for now. More to come on expense reductions later.


  1. I bought a house with the exGF a couple of years ago. Getting rid of the mortgage as soon as possible is the biggest financial goal at the moment. I am making small overpayments at the moment, but I am looking forward to throwing big chunks of cash at it and see the amount I owe drop rapidly. I have a spreadsheet showing the payments and interest etc stretching out to 2020, so I can see how things are affected by paying a small overpayment this month and how that a changes the longterm picture. I hope to be free and clear in 10 years max.

  2. I'm glad I found this blog - I'm a mustachian in training too and I'll definitely be checking back a lot.

  3. Glad to hear it! I'm looking forward to your feedback.