Mortgage Payment Expense

[Katsmeow]

I am trying to decide whether to recast my mortgage to reduce the amount of the monthly payment. This is a new mortgage. I have significant equity in the house (large down payment) but now have available some money where I could make a large principal reduction (probably between $50,000 and $100,000). This is a retirement house that we do not plan to sell except in the most dire circumstance.


I am considering various factors to determine what to do.

This question deals with using Firecalc to help my evaluation. Typically when I run Firecalc I run it using all of my expenses in the spending category.

However, it has struck me that the roughly $17k that we will be spending each year on our current mortgage is not an expense that should be inflation adjusted. This is a fixed rate mortgage. Each year the monthly mortgage payment should become a smaller percentage of our overall expenses.

So I ran Firecalc and deducted the mortgage payments from my annual expense number. Then I put in off chart spending -- not inflation adjusted -- equal to the annual cost of the mortgage. I set the amount of annual spending to the exact amount to result in 100%.

Then I removed the off chart spending number and added the mortgage cost to the the annual spending number and ran Firecalc as normal. This basically results in the mortgage spending being inflation adjusted. Doing this the success rate fell to about 93%.

Based upon this it would seem that it would be more valid to run Firecalc with mortgage costs included as off chart spending if you have a fixed rate mortgage.

But -- is this correct or is there something I am missing?

Edit: I did what I should have done and looked at some old threads and found that this has been discussed. The consensus seems to be that including the mortgage as off chart spending is more accurate if you have a fixed rate mortgage.

 

[pb4uski]

Yes, fixed off chart spending starting immediately offset by a pension of equal amount starting when the mortgage ends.

By including your mortgage payment in spending it never ends and is inflated each year... which is inconsistent with how the mortgage payment outflows work.

Or alternatively, omit your mortgage payments from your spending and reduce your assets by your mortgage balance... as if you paid it off just before retiring... this shortcut works better when you don't have many years of mortgage payments left or your mortgage isn't that significant in relation to your assets.

 

[Katsmeow]

Yes, fixed off chart spending starting immediately offset by a pension of equal amount starting when the mortgage ends.

Or alternatively, omit your mortgage payments from your spending and reduce your assets by your mortgage balance... as if you paid it off just before retiring... this shortcut works better when you don't have many years of mortgage payments left.

Since it is a 30 year mortgage that just started, I am not going to show mortgage ending. I am 64 and DH is 70.

 

[pb4uski]

I guess that works particularly well if your time horizon for the analysis is 30 years! [emoji4]