Parenthood has taught us a lot in a short period of time. One of the most important and obvious lessons we’ve learned since becoming parents last year is that things change…and they change quickly.
When we look at pictures of our son from the day he was born, to 3 months, and so on, he looks completely different than he does now. With that said, in December 2017, when we wrote that we would “look” for a house in 2018 but not make the jump to actually buying, it was because back then Baby r&R wasn’t crawling. Now, he sprint scoots from one end of the living room to the other in seconds! All of this has led us to revisit our plan and purchase a new home earlier than we expected.
So what impact does that have on our plan? Well, for starters we were planning on using a bulk of our monthly surplus to payoff our rental property by mid-yearish. We’ve now decided to re-allocate that money to save towards a down payment for our new home.
You might be asking yourself…”Why in the hell would they payoff one mortgage only to go get another one?” The answer is well…’cause we can. But here are a few key reasons to justify our decision.
1. We live in 1,426 sq. ft.
If this were New York, this would be considered massive. If this were Texas, it would be a garage for the family trucks. For us, it’s doable but hella tight when you add a little one. The issue is less about the physical space him and his stuff occupies and more about the inability to truly disconnect and recharge at home; something we desperately need. In other words, this was an emotional decision aka #firstworldproblems
2. Our new mortgage will be [partially] subsidized by our tenants.
Early estimates of our new mortgage plus HOA is over 3X our old [now paid off] mortgage. At first glance, it’s safe to assume that there is no way we’d be able to save as much as we have in the past with a mortgage that big. But when you factor in the rental income that will contribute to the note, it tells a very different story. Here’s the breakdown-
In summary, today, we have no primary mortgage and have a net cash flow of $439 from our rental. When we move into the new home, (currently under construction), while our mortgage will be in the $3K ballpark, what comes out of our pocket will be closer to $1,500 once you factor in the income from the other rental. Furthermore, when we pay-off the other rental property [# 1], our net mortgage payment will drop to $1,199 monthly since our cash flow from the rental increases. Even better, if rent continues to increase like it has over the last three years, we’re confident that even more of our mortgage will be paid by our tenants.
THIS is the benefit to owning investment properties, especially when owned free and clear. For us, we get to double our square footage and increase our quality of life by moving into a brand new home. Considering our “old” mortgage + HOA was $934, the difference between what will come out of pocket then vs. now is negligible.
3. We borrowed way less than we COULD have
A common rule of thumb is that banks will lend you up to 3X your salary for a mortgage. That’s bat$hit crazy but hey…lots of people do it even though it puts A LOT of pressure on their monthly cash flow considering 1/3 or more of their bills are allocated to a mortgage note. We don’t want that kind of pressure so we borrowed less; about 2X our combined salary. This means, we will live in a smaller home than we could “afford” if we’d taken the typical route. But it also means that there is less of an impact on our savings and we can continue investing at a super high rate.
4. We got an affordable mortgage
By now, you know we’re non-traditional so we figured it would be silly for us to take the common route to getting a mortgage. Though there was an incentive for going with the builders preferred lenders [a measly $5K] we opted for the online bank SoFi based out of San Francisco. The process has been great easy so far!
We were pre-qualified in minutes and able to secure our official pre-approval letter in a matter of days. The support team has been easy to work with, friendly and very responsive which is more than I can say for other loan officers and banks Mr. r&R has worked with in the past.
The big benefit is that SoFi doesn’t charge loan origination fees or PMI (Private Mortgage Insurance) on their mortgages. Since we were only putting 10% down, this was a HUGE benefit for us and made our decision a relatively easy one. Typically PMI is added to mortgage notes so lenders can protect themselves against borrowers that don’t meet the requirements for a loan. The cost can range anywhere from 1% [of the loan] or higher which translates to money thrown away month after month and fatter pockets for banks.
Loan origination fees are fees paid directly to the loan officer/company. You can think of it as their commission for closing the loan with you. The fees vary lender by lender from flat rates to percentages between 1% up to 6% of the loan. Again, considering we didn’t pay any of these, the choice to roll with SoFi was a pretty simple one. We estimate it will save us hundreds of dollars month to month over the life of the loan.
SoFi also does personal loans, student loan consolidations and home re-financing so, if you can meet their criteria, just know that they get the full stamp of approval from r&R.