FIRE and Residence Shopping for: Can You Retire Early With A Mortgage?

FIRE and home buying can go hand in hand

If you are following the FIRE (financial independence, early retirement) method and planning to retire earlier than your colleagues, you may be asking yourself: can I buy a home with a mortgage?

A mortgage is a huge debt – the largest that most people take on in their lifetime.

FIRE advocates paying off debts as soon as possible and saving most of your income. So it seems impossible to follow these mandates and buy a house.

In fact, the experts say that it is possible if you follow some important rules. Here is what to do.

Check Your Mortgage Eligibility (October 12, 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 and start as early as possible in your career.

That way, you can retire at a relatively young age – possibly even your 30s or early 40s.

Of course, it's not an easy goal.

Retiring early means cutting your expenses and living frugally while increasing your income as much as possible. Serious FIRE followers even work with several jobs if necessary.

The FIRE method also provides for existing debts to be paid off as quickly as possible.

This includes revolving debt from high yield credit cards, student loans, car loans, personal loans, and other debts.

Buying a home can be part of your early retirement plan

Once your accumulated savings are 25 to 30 times your annual cost of living (typically $ 1 million or more), you can work less or stop working altogether.

However, you cannot transfer these savings to any account.

You need to use that money to work for you by investing in stock markets and real estate – vehicles that are likely to generate higher returns over many years.

Real estate can be an important part of your investment portfolio, especially if you want passive income from renting out real estate that you own.

But buying a home or other property usually creates a lot of debt. How can you reconcile this purchase with the FIRE method?

How to get FIRE with a mortgage

Financing a home with a mortgage loan creates debt.

However, it is possible to buy real estate and follow FIRE if you choose the right house in the right place with the right mortgage.

Choose a shorter term

“You have to live in an inexpensive place. And you have to try to repay your house in 10-15 years, ”says Caleb Liu, owner of HouseSimplySold.

“That means you have to make expedited payments on the principal on your 30 year mortgage. Or it means taking out a 15 year mortgage or refinancing one. "

Invest your savings instead of paying with cash

Brian Davis, Director of Education at SparkRental, suggests a different strategy.

"Say you saved $ 200,000 in cash," says Davis.

“Instead of spending all of that money buying a home, take out a 30 year mortgage loan at today's interest rate of 3.5%. This will cost you (approximately) $ 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 are making (approximately) $ 1,700 a month – a $ 800 surplus, after you've paid your mortgage. "

In both scenarios, rent is better than rent, which in many markets costs more than buying and owning a home.

And remember, renting doesn't get any equity or tax breaks like owning a home.

Check your home purchase eligibility (October 12, 2020).

Stop running into debt before buying a home

If you are serious about "financial independence, early retirement" it may mean waiting a little longer to buy a home.

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

"With the FIRE method, you have to pay off your debt starting with the highest interest obligation," said Keith Baker, mortgage banking program coordinator and faculty at North Lake College.

Scott Bates, financial expert at, agrees.

“Being out of debt before applying for a mortgage can save you a really large down payment. This will most likely result in faster loan approval. "

"Plus," he says, "you have more equity in the property and less to repay it to begin with."

Lower debt means lower mortgage interest

Having less debt when you apply for a mortgage can also make your home loan cheaper.

“Heavy debt can lower your creditworthiness. A lower credit score increases the credit risk for the lender, ”explains Bates.

"In this case, you get a slightly higher interest rate that costs you more on interest payments. And to lower those costs, you may be charged points, which makes your closing costs more expensive."

"Every 40 point decrease in your FICO score increases your mortgage rate by 0.25% to 0.30%," says Liu.

Check your new plan (October 12, 2020)

Concrete Steps You Can Take Towards FIRE and Home Buying

Would you like to own a house now and achieve your FIRE goals across the board? It can be done, but you have to make sacrifices.

"Many people who earn less than $ 50,000 a year find it difficult to save 50% to 75% on their takeaway salary," warns Baker.

According to Bates, the FIRE method works best for disciplined singles and couples.

Starting a family, divorcing, suffering from costly health problems, or enduring a recession or long-term bear market could make reaching FIRE extremely difficult.

Liu suggests the following tips:

Put every dollar you can save into a worthy investment vehicle. Check out stocks, bonds, mutual funds, and exchange traded funds with a good track recordAlso discover real estate investments such as rental properties. Aim for an annual return of at least 8%, which is better than prepaying your mortgage at 3.5% to 4%Maximum use of IRA, 401 (k) or other pension funds You are allowed to contribute to your employer's contributions to the pension planConsider cheaper real estate. Buy a smaller house in a cheaper locationIncrease your earnings. Are you seeking a promotion, a raise, or find a higher paying job elsewhere. Record a side gig or two if you can

And as a general rule of thumb, try to cut your spending as much as possible on everyday decisions like where to eat and what to drive.

With low mortgage rates, you can pay off your home sooner

One important thing to note is that mortgage rates are currently exceptionally low.

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

When interest rates are low, you can opt for a shorter mortgage with a term of 15 or 20 years and still get manageable payments.

Or, you can opt for a 30 year, low interest, lower paying mortgage and just pay a little more whenever you can.

This method is more flexible than opting for a shorter-term mortgage and gives you some leeway during difficult times.

To get an accurate estimate of your mortgage rate and payment, speak to 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.

Check your new plan (October 12, 2020)

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