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FIRE and home buying: Can you retire early with a mortgage?

Erik J. Martin
The Mortgage Reports contributor

FIRE and homebuying can go hand in hand

If you follow the FIRE method (financial independence, retire early) 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 most people take on in their lives.

FIRE advocates paying off debt as quickly as possible and saving most of your income. So it might seem impossible to follow these mandates and buy a home.

But in fact, the experts say it’s possible if you follow a few key rules. Here’s what to do.

Verify your mortgage eligibility (Oct 24th, 2020)

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How the FIRE method works

The basic idea behind 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 — possibly even in your 30s or early 40s.

Of course, it’s not an easy goal.

Retiring early involves cutting your expenses and living frugally, while also raising your income as much as possible. Serious FIRE followers will even work multiple jobs if necessary.

The FIRE method also calls for paying off 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 ‘retire early’ plan

Once your accumulated savings equate to 25 to 30 times your annual living expenses (commonly $1 million or more), you can work less or stop working altogether.

But you don’t put these savings into just any account.

You need to put this money to work for you by investing in the stock market and real estate — vehicles that will likely yield a higher rate of return over many years.

Real estate can be an important part of your investment portfolio, especially if you plan to earn passive income from renting out properties you own.

But buying a home or other property typically creates a lot of debt. So how do you square that purchase with the FIRE methodology?

How to achieve FIRE with a mortgage

Financing a home with a mortgage loan will create debt.

But it’s possible to buy property and follow FIRE if you choose the right home in the right location with the right mortgage.

Choose a shorter loan term

“You need to live in a low-cost location. And you need to try to pay off your home in 10 to 15 years,” says Caleb Liu, owner of HouseSimplySold.

“That means making accelerated payments toward the principal of your 30-year mortgage. Or it means taking out a 15-year mortgage or refinancing to one.”

Invest your savings instead of paying with cash

Brian Davis, director of education for SparkRental, suggests another strategy.

“Say you’ve saved $200,000 in cash,” says Davis.

“Instead of using all that money to buy a home, take out a 30-year mortgage loan at today’s 3.5% interest rate. This will cost you [about] $900 in monthly principal and interest payments.

“Then, take the $200,000 you’ve saved and invest it, ideally for a 10% return based on current market performance. You’ll earn [about] $1,700 a month — an $800 surplus after you’ve paid your mortgage.”

Either scenario beats renting, which costs more in many markets than it does to buy and own a home.

And remember that renting won’t earn any equity or tax breaks like owning a home can.

Verify your home buying eligibility (Oct 24th, 2020)

Get out of debt before buying a home

If you’re serious about “financial independence, retire early,” it might mean waiting a little longer to buy a home.

Before you buy a home or attempt to prepay your mortgage, focus on getting rid of your other outstanding debts.

“The FIRE method involves paying off your debts, starting with the highest interest rate obligations first,” says Keith Baker, Mortgage Banking Program coordinator and faculty at North Lake College.

Scott Bates, finance expert at MoneyandBills.com, agrees.

“If you are debt-free before applying for a mortgage, it allows you to save up a really big down payment. This will most likely result in a faster loan approval.”

“Plus,” he says, “you’ll have more equity in the property from the start and less to pay back.”

Lower debt means a lower mortgage rate

Carrying less debt when applying for a mortgage could make your home loan less expensive, too.

“Your credit score can be lowered by having large amounts of debt. A lower credit score will make you a higher credit risk to 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 lower these costs, 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.

Verify your new rate (Oct 24th, 2020)

Tangible steps you can take toward FIRE and homebuying

Want to own a home now and reach your FIRE goals down the line? It’s doable, but you’ll have to make sacrifices.

“Many folks who make less than $50,000 a year will find it hard to save 50% to 75% of their take-home pay,” cautions Baker.

Bates says the FIRE method works best for disciplined singles and couples.

Raising a family, getting a divorce, suffering from costly health problems, or enduring a recession or long-term bear market could make it extremely hard to achieve FIRE.

Liu suggests the following tips:

  • Put every spare dollar you can save into a worthy investment vehicle. Look into stocks, bonds, mutual funds, and exchange-traded funds with a good track record
  • Explore real estate investments like rental properties, too. Aim to achieve at least 8% annual returns, which is better than paying off your 3.5%-4% mortgage early
  • Max out on any IRA, 401(k), or other retirement fund you’re allowed to contribute to, as well as any matching retirement fund contributions your employer offers
  • Consider cheaper real estate. Buy a smaller home in a more affordable location
  • Amp up your earnings. Aim for a promotion or raise, or look for a higher-paying job elsewhere. Take on a side gig or two, if you can

And as a general rule of thumb, try to decrease your expenses as much as possible in daily decisions like where you eat and what you drive.

Low mortgage rates let you pay off your home sooner

One important thing to keep in mind is that mortgage rates are exceptionally low right now.

That makes it much easier to buy a home and get out of debt early.

When rates are low, it’s possible to opt for a shorter, 15- or 20-year mortgage and still have manageable payments.

Or, you can opt for a low-rate 30-year mortgage with smaller payments, and just pay a little extra whenever you’re able.

This method is a more flexible than opting for a shorter-term mortgage and gives you some wiggle room if times are ever tough.

To get an exact estimate of your mortgage rate and payment, chat with a mortgage lender about your options.

This is the best way to get a clear picture of your budget and decide whether buying a home is the right move for you.

Verify your new rate (Oct 24th, 2020)

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