Best way to budget for mortgage payment?

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Kriegsspiel
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Re: Best way to budget for mortgage payment?

Post by Kriegsspiel » Mon Apr 08, 2019 7:17 am

jason wrote:
Sun Apr 07, 2019 11:11 pm
I still don't get why a mortgage payment would be treated like a regular expense line item in a retirement budget. The main difference between making a mortgage payment and paying for a vacation is that if you spend $10K on a vacation, that money is gone forever. You will never get a single penny of it back, ever. But if you spend money by making mortgage payments, you will likely get a lot of that money back eventually, if you sell the house down the road. So, isn't making mortgage payments more like putting money into a piggy bank or into a forced savings account than a regular expense?
Yes. Some of it is like a piggy bank (principal), some of it is like rent (interest, taxes, insurance, maintenance, HOA).
If so, how do I incorporate the value/equity in my house into my withdrawal rate calculations?
You don't. Go back to the piggy bank analogy. Putting money in a piggy bank isn't the same as investing in productive assets like stocks, bonds, rental properties, etc. It's wealth that belongs to you, but you can't withdraw a % of it each year; you have to break it open to get at it. Now, you could also break it open and glue it back together and start refilling it again (cash-out refi/HELOC), but you could have just put that money into other assets that don't have the large transaction costs real estate does, and that don't require you to make payments on them or else you become homeless.

Like MangoMan said, you still have ongoing costs that are "gone," just like any other expense that isn't savings. In the good scenario, these expenses (combined with the lost opportunity cost of your home equity) are less than what it would cost you to just rent a place.
My plan is that if the PP does very well, then I can likely just live in my house long term. If the PP does very poorly and my assets are shrinking too fast, then I can sell the house, likely at a profit, and then downsize.
I would plan to be able to live in your house or downsize independent of what your portfolio does. IE, once your house is paid off, are you going to be able to cover your expenses with a safe (perpetual?) withdrawal rate from your investments?
You there, Ephialtes. May you live forever.
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jason
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Re: Best way to budget for mortgage payment?

Post by jason » Wed Apr 10, 2019 11:48 am

Kriegsspiel wrote:
Mon Apr 08, 2019 7:17 am
jason wrote:
Sun Apr 07, 2019 11:11 pm
I still don't get why a mortgage payment would be treated like a regular expense line item in a retirement budget. The main difference between making a mortgage payment and paying for a vacation is that if you spend $10K on a vacation, that money is gone forever. You will never get a single penny of it back, ever. But if you spend money by making mortgage payments, you will likely get a lot of that money back eventually, if you sell the house down the road. So, isn't making mortgage payments more like putting money into a piggy bank or into a forced savings account than a regular expense?
Yes. Some of it is like a piggy bank (principal), some of it is like rent (interest, taxes, insurance, maintenance, HOA).
If so, how do I incorporate the value/equity in my house into my withdrawal rate calculations?
You don't. Go back to the piggy bank analogy. Putting money in a piggy bank isn't the same as investing in productive assets like stocks, bonds, rental properties, etc. It's wealth that belongs to you, but you can't withdraw a % of it each year; you have to break it open to get at it. Now, you could also break it open and glue it back together and start refilling it again (cash-out refi/HELOC), but you could have just put that money into other assets that don't have the large transaction costs real estate does, and that don't require you to make payments on them or else you become homeless.

Like MangoMan said, you still have ongoing costs that are "gone," just like any other expense that isn't savings. In the good scenario, these expenses (combined with the lost opportunity cost of your home equity) are less than what it would cost you to just rent a place.
My plan is that if the PP does very well, then I can likely just live in my house long term. If the PP does very poorly and my assets are shrinking too fast, then I can sell the house, likely at a profit, and then downsize.
I would plan to be able to live in your house or downsize independent of what your portfolio does. IE, once your house is paid off, are you going to be able to cover your expenses with a safe (perpetual?) withdrawal rate from your investments?
It there a way to run a Monte Carlo simulation to determine the CAGR of owning a house based on historical averages for real estate increases and inflation? For example, if I'm paying $3,000 per month in mortgage, taxes, and insurance each month, I'd like to figure out approximately how much of that I would get back (in real dollars) if I sold my house down the road, assuming average performance. And a Monte Carlo simulation normally would show a range of best case and worst case scenarios. I understand that I really can't count on average performance actually happening, and that real estate could crash, but I'm just wondering about the range of expectations based on historical performance.
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Xan
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Re: Best way to budget for mortgage payment?

Post by Xan » Wed Apr 10, 2019 11:56 am

A single house isn't an ideal candidate for Monte Carlo. It would be like trying to do Monte Carlo with a single stock. I'm sure you could come up with something... But no Monte Carlo is going to have much of a clue what the floor or ceiling are for your residence.

Jason, I PM'd you a while ago; could you update your email address in the forum so that I quit getting bounces when it tries to email you?
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ochotona
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Re: Best way to budget for mortgage payment?

Post by ochotona » Wed Apr 10, 2019 12:52 pm

Xan wrote:
Wed Apr 10, 2019 11:56 am
A single house isn't an ideal candidate for Monte Carlo. It would be like trying to do Monte Carlo with a single stock. I'm sure you could come up with something... But no Monte Carlo is going to have much of a clue what the floor or ceiling are for your residence.
Totally agree. How will the simulator know about your inclination to paint it, redecorate it, fix the AC, fix the foundation, or chase out the Crips and Bloods?

Maybe study iShares Residential Real Estate ETF | REZ, but that would be apartments I think.
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