Wednesday, August 4, 2021

Planning Home Purchases and Payoffs

The most recent real estate market has been white-hot, and I can't say that I'm surprised.  The pandemic has brought our values into focus, and it seems that the most self-reflective among us have realized that there are certain portions of our lives that are simply out of alignment with our values.  This shows up in many areas of our money story, but most certainly in our housing.  My partner and I both wear many hats; among which is "teacher."  We also live in a tiny one-bedroom apartment in northern Manhattan.  Turning that space into not one, but two fully functioning remote classrooms complete with living space has proven a challenge that I'm proud to say has worked out just fine.  During this time, my writing has increased in volume and frequency, and I have launched my coaching business.  The truth is that I couldn't be happier, with one exception.  My space.

I feel that it is important to practice gratitude for the things that we have in our lives, and with that, I thank our little apartment for the manner in which it has supported our lives for so many years.  Simultaneously, I recognize that despite our rearranging and decluttering, we simply need more space.  Even with the inevitable return to the classroom, I am doing entirely too much work from home to manage within the walls of our tiny apartment for much longer.  Fortunately, this realization descended upon us both while we were looking at real estate to purchase a home in the city.  I am a huge advocate of paying a mortgage off early and becoming 100% debt-free as quickly as possible. Because that's my leaning, I had it in my mind to focus our search on another one-bedroom, a nicer one and one with more space certainly, but a one-bedroom nonetheless.  I had it in my mind that a one-bedroom would be in the best interest of our wallet primarily because the purchase price would be significantly lower than buying a two-bedroom in the city.  I wanted to buy a one-bedroom and put it on a 15-year fixed-rate mortgage.  Again, becoming mortgage-free as quickly as possible is a huge priority to me because having fewer payments in my life will maximize my freedom in ways all the "stuff" in the world could never make up for.  Our time is precious and the more payments in our lives, the more our time goes up for auction.  

Unfortunately, as we toured one-bedroom after one-bedroom, we both kept having the same reaction.  This unit is beautiful, but where would I do my work?  A corner of the bedroom?  Do I want to work three feet from where I sleep if I can help it?  I need to be able to close a door and do my work.  I can't really do what I need to do in a common space honestly. If I settled for a space that doesn't support my work, will it be an obstacle in the growth of my business?  It certainly doesn't make sense to intentionally create barriers for myself.  Also, my need for workspace cannot be an excuse to spend beyond our means.

Evaluating the Cost

Our home is oftentimes the single, largest line item in our monthly budget.  Eliminating this expense makes retiring significantly more feasible.  The quicker that expense disappears the sooner we can place retirement on the table!  Whether we technically retire early or not, I want maximum choices.  So, I care very much about not "getting in over my head" where mortgage payments are concerned.  In the 50/30/20 Budget, fixed expenses should make up no more than 50% of your monthly income.  The category generally contains items like rent or mortgage payments, insurance payments, the water bill, anything that is a necessity where the price is more or less fixed.  Since housing isn't the only item in that category, the payment can't be so high that there isn't room for your other necessities.  So, it's important to evaluate whether the monthly installment fits within the parameters of your budget.  When we saw the two-bedroom unit of our dreams, this was one of the first things we did.  We were pleasantly surprised to discover that we could fit the payments into the fixed expense portion of our budget fairly easily; however, this was on a 30- year fixed-rate mortgage.

I would never be willing to spend 30 years paying off a mortgage.  This is for a myriad of reasons. First, 30 years of interest sounds insane to me, and if you use an online calculator to see what that amounts to, you'll probably be shocked, and quite frankly feel a little ill.  Moreover, we don't want to plan to be paying a mortgage in our 70's.  That feels like the direct opposite of freedom to me.  It feels like shackles.  One major pitfall, I notice with a lot of people when they think about this is to think it's pretty far off and that they'll "deal with it later."  Unfortunately, sometimes later never comes, and I really can't play that game.  I feel the most secure when I'm proactive, and where money is concerned, feeling good about the action and secure about the result really counts.  

Our next step was to pop on to one of those amortization calculators and start doing a little information gathering.  I plugged in the information about what my payments would be on a 30-year fixed and then started to play around with the amount "extra" I could apply to the principal each month.  It's pretty easy to play around with these calculators, but to be honest, I had some particular numbers in my mind.  I really wanted to see what it would take to pay off the mortgage in 15 years or less.  I was definitely combatting my own limiting beliefs where that was concerned. To be honest, I wasn't sure if we could do it. The problem is that I was making this judgment call without having actually looked at the numbers. When I looked at the online calculator, I realized that actually, we could pay it off in closer to 10!

One thing that's important to consider when plotting out your ability to pay a mortgage more quickly than the loan term requires is whether the additional monthly payments are actually sustainable.  This is an honest conversation that we must have with ourselves because just like the old "we'll do it later" goes, it's entirely too easy to over-commit and under-deliver.  Look at your monthly budget.  One-time payments to the principal of your home are wonderful, but can you sustainably make the additional payment every, single month?  Can you do so without sacrificing your quality of life?  I don't want to spend a decade making myself crazy about this.  I want to devise a plan to pay off my home significantly early, determine the additional monthly payment amount, set it, and forget it.  Don't get me wrong, we'll probably throw a little extra at it here and there, but I still want to feel really great about planning vacations or making purchases.  I want to feel as though I can see a clear path to working a bit less than I do right now.  These are all things that I value, and I need to make sure that my financial plan allows with my values.  

What's beautiful about my story is that I really do see a clear path to paying off the mortgage in just over 10 years without sacrificing any of the things I value.  If you are buying a new home, consider by when you'd like to have it paid off when you determine how much you can buy.  In doing so, you can help set your own parameters around what makes you feel powerful with your financial plan.  If you already own your home, do a quick check-in with yourself about your current trajectory.  Are you on track to pay it off within your desired time frame?  Are there adjustments you want to make?  What does that look like?  By addressing this now, you can make absolutely sure that your money is supporting you in designing the life you truly want to be living.

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