Wealth vs Income (and How I Can’t Afford Our Mortgage)

Wealth vs income—what’s more important for your success? Once you have ”enough” in your pursuit of FIRE, what are the trade offs of losing your high income?

There’s something very strange about most folks’ typical pursuit of financial independence and early retirement. A paradox of wealth vs income. We pursue an ever increasing amount of income to reach FIRE as soon as is possible (or, more ideally, as soon as possible—sustainably). And once we reach that pinnacle of success, the income isn’t very important anymore. But what do we lose (and gain) by shifting from focusing on income vs wealth?

High Income vs. Supportive Wealth

I’m writing to you from a room filled (mostly socially distanced) with folks that earn quite a bit of money. A golden beer in a tall flute sits in front of me. I just finished off a heaping plate of highly described and very organic food that was graciously served to me.

Across from me is an “Exhale” spa where you can get a brief massage which sits across from a bank of private showers and daybeds with designer-clad travelers sprawled across them.

And it’s all complimentary for the well-heeled.

Jenni and I are delayed in Dallas, waiting on our next flight to Flagstaff. We’ve made this American Express Centurion Lounge at DFW airport our home for the next handful of hours.

An old Reddit post pointed out some research (no longer accessible) that suggested the average American Express Platinum cardholder earned $741K/year. Averages aren’t terribly useful for this sort of a thing (you know, Bill Gates enters a bar and on average—everyone there is a multi-millionaire).

But, you get the point. It’s a bunch of wealthy people trying to avoid the “rabble” in the rest of the airport, quite literally sitting above them and looking out.

DFW’s Centurion Lounge overlooking the terminal below.​
DFW’s Centurion Lounge overlooking the terminal below.

And we’re here with them.

But how does that make sense? I’m resting here in a shirt, as much as I love it, with literal holes in the shoulder and cuff.

I can’t even afford our mortgage! Wait, what?

Can I afford to refinance our mortgage?

Well, at least, that’s what the bank seems to think—that the mortgage payment at our place is more than I can afford.

You might recall I wrote a post about my experience beginning a refinance on our little urban paradise, recently.

After weeks of back and forth and initial approval, the underwriting team requested (for the second time) a slew of documents from my business. Namely, an 1120-S. That’s the IRS filing that details revenue and expenses for an S Corporation in the US.

I don’t make much money.

You might have noticed I haven’t really done much work for quite some time (see: monthly budget updates). For years, now.

And like any good entrepreneur, I’ve managed to keep profits relatively low through business spending and deductions. My business revenue last year was still over $100K but profits hardly broke $15K.

All in all, not bad considering I work somewhere around 20-30 hours/month on average.

The mortgage underwriter wasn’t terribly impressed with that level of additional income. Of course, what they really wanted to see was W2 income.

And as you might know from our monthly money reports, I pay myself somewhere around $1.7K/month net as an employee. Even adding back 401(k) contributions only gets my W2 income up to around $35K/year.

Adding business profits in, we get to around $50K/year.

That’s way more than enough money for me when you consider that our total household expenses has been around $40-50K/year for years (see: annual FIRE budget). And that’s for two of us! After tax, on the high side, I only need to personally come up with around $20-25K/year to support my lifestyle.

So, what’s the problem?

Well, two things:

  • Lenders concern themselves with something called a debt-to-income or DTI ratio
  • The deed and mortgage is in my name (it’s not practical to include Jenni’s income when applying for a loan)

But I don’t have any debt!

And so far as debt—aside from a few grand in credit card spending that is paid off every month—I don’t have any.

Except that house and mortgage.

And, apparently the HOA payment. That’ll be important later.

Our current mortgage payment is about $837/month. That’s our interest plus principal.

Property taxes and home insurance add another $365/month or so.

That HOA fee? $350.

That brings the total monthly home payment up to $1,550 or so.

As a side note and summary from my initial refinancing article…Refinancing to a fresh 30-year mortgage at a 2.74% rate would bring the monthly payment down from $837 to about $600.

Debt-to-income

Once you consider that my monthly paycheck amount is just over $1,700, you can see how a $1,550/month housing payment might be cause for alarm.

Even if you add in that extra $15K/year in business profits, consider including dividend income (which, though significant, is largely in tax-advantaged accounts), I’d still struggle to show a DTI of less than 50% in practical terms.

I went back-and-forth with the underwriter, having them consider 401(k) contribution value, capital gains, dividends, and other little sources of income like our eBay and local sales income.

But, ultimately, they want to see free cash flow that can support the mortgage payment with some safety room.

In our final conversation, the underwriter suggested that after including all potential income sources it was the HOA payment that broke the DTI ratio’s back. They couldn’t proceed.

And that was that.

When Income is More Important Than Wealth

I showed enough wealth and assets to the underwriter to pay the entire mortgage balance several times over. I’m writing to you from a fancy airport lounge I was granted access by having an elite credit card (notably costing $700/year). And we spend our time traveling around the world as much as possible, backed by a FIRE number ratio that would show our safe withdrawal rate will be around 2%.

But, I can’t afford our mortgage. The refinance project comes to an end. At least, for now.

When it comes to income vs. wealth: apparently income wins.

It’s funny to think, just a few years ago, on our course to becoming millionaires, I remember turning a tax return in with a top line income over half a million bucks.

I remember moving into our place back in 2013 in late March. I wrote a check for the 20% down payment, then wrote an even bigger check a few weeks later for income taxes.

But today? We qualify for income-based health insurance subsidies. I received all the federal stimulus checks during the pandemic that were income-tested. And I can’t afford to refinance our house.

When it comes to wealth vs income—it seems income wins in the world most of us are trying to escape. Where a cycle of debt pushes demand for more income and shiny things fuel the repetition. A world where banks rule, marketing hypnotizes us into wanting more, and keeping up with the Joneses’ status tells us your paycheck matters more than your safe withdrawal rate.

Creating wealth bought me freedom from that very world, but apparently, it couldn’t buy me a mortgage refinance.

Financial independence isn’t always what you expect it to be, but it’s an adventure unto itself filled with learning and evolution.


Epilogue

Some of you might be wondering: why not just add Jenni to the mortgage so that we can qualify for the refinance, together?

A little napkin math suggests that’d work.

But, there’s a few reasons that’s probably not smart.

First, it might surprise some of our longer term readers, but we’re not married. As long as we’ve been together, we’re not legally—financially—bound.

Second, Jenni isn’t on the deed to the mortgage which I mentioned in this piece off-handedly. When we moved to our place in 2013, we were in very different financial positions. Jenni was still pretty deeply in student loan debt. I had a healthy income. Atop that, we’d only cohabitated, in our most recent reunification, since 2012.

We were pretty set on putting Jenni on the mortgage when we initially talked about refinancing last year. It made sense to ensure better mortgage terms and also as part of unifying our finances and assets more. But, it turns out, there’s no easy—or more specifically—inexpensive way to do that.

Putting her on the mortgage would require putting her on the deed. And since we’re not married or related, a portion of the home’s value would flow through to her as income which would mean one heck of a gift tax bill for her.

We’re still toying with some options here—perhaps a bit more complex—so there’s hope for a future refinance solution, but for now, I thought you might enjoy this “behind-the-scenes” on why we’ve ended up here with our refinance.

Time to fly!—

Flagstaff, here we come!​ Photo from DFW airport of American Airlines planes on the runway.
Flagstaff, here we come!

Have you been rejected for a refinance before? What happened? What are your thoughts on income vs. wealth—what’s more important to you? Let me know in the comments!

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By Chris

Chris began his financial independence pursuit in 2007 as he learned basic personal finance from Get Rich Slowly as an aspiring web designer and novice investor. After several missteps, he learned the secrets of financial independence and began his pursuit of freedom.

He reached financial independence in 2018 with $1.2M and two businesses. He began the process of transitioning to early retirement in 2020.

Learn more: Meet Chris.

13 replies on “Wealth vs Income (and How I Can’t Afford Our Mortgage)”

“ But today? We qualify for income-based health insurance subsidies. I received all the federal stimulus checks during the pandemic that were income-tested.”

Out of curiosity, do you feel fine accepting health care subsidies and stimulus checks despite having over $1 million?

I’m not sure you are who the money was intended for.

Derek, thanks for a great question! I’ve thought a great deal about that, especially back when the stimulus checks were coming.

A lot of what we’re doing here on TicTocLife is trying to identify purpose and, well, life, beyond the typical cycle of work, retirement, and death. As part of that, we put a year of our expenses into charitable giving throughout the last year or so. Ultimately, that’s where my personal stimulus money ended up since I didn’t suddenly spend more anyway.

That said, it might sound good, but money is fungible. It’s easy to argue that’s where the money went just as it is to say it went to the mortgage or Internet bill or trip expenses. Each dollar is equal to any other, after all.

The question I had in my head related to this is…”when DOES that money actually go to those charitable causes?” Would it only “count” if all the money we made beyond our expenses PLUS stimulus went to donations? No investments, no savings for the year?

I don’t know. It’s a difficult question I’m grappling with, and still will.

Ultimately I “need” very little and could give a lot away, live life as an ascetic fairly happily. Surely then folks more deserving than me would make more with what I have than I have done so, yes?

One thing to consider is that the stimulus checks and health care subsidies (of the future) are automatic. I didn’t do anything to get the stimulus check. And the health care subsidy will be auto applied to the monthly fee—it’s just a lower bill. Kind of like with your taxes, you could always pay the Feds more I suppose. Deductions, credits, etc. all auto apply as long as you fill out the forms with correct info.

Am I receiving those benefits unfairly? After all, I could afford to pay more taxes. And I do believe government can do good!

I don’t know, Derek. It’s something to chew on. I don’t know where the “line” is. Ultimately, I’m not going to suddenly start spending more. So any additional unexpected funds (stimulus etc) will flow through to charitable causes as my life escapes me and death catches up. I think that’s a pretty fair bargain.

Cheers for the thoughtful question!

Hey Chris. Your story is one of my feared “what if’s” that I think about when considering whether I should quit or not. Earlier in the year, when I was truly working month-to-month and not sure if my job would continue, I was mostly concerned about applying for a mortgage. We would probably be OK just going with my wife’s situation, but she’s got a bunch of student debt and has changed jobs twice in the last year, so I was a little worried how she would look in the lender’s eyes. I think it’s kind of absurd how banks don’t take into account the value of your assets (or they don’t take it into account ENOUGH). It’s also interesting how complicated not being married becomes. Every day that passes, it’s more and more evident to me how screwy our country is regarding tax codes and bizarre red tape. Sorry to hear that you couldn’t get your rate down!

What if’s! Ah!! Not those—I wrote a whole post on them! 🙂

Yeah, it’s tough. But really, it’d take a couple years before “break even” would occur considering closing costs. And it’d be nice to have a lower monthly payment, but hey, in the end it doesn’t really make that much of a difference. At least for us, the rate wasn’t a huge difference. Now I can see being more upset if our current rate was say 5%+ (3.625% currently), but I’d been more prepared if more was on the line. Meh, onto the next thing in life.

Sounds like you two will have some hoops to jump through, but, you’ll come out the other end working through it together. That’s the most important part. Cheers!

Tim, I suspect I could find some luck with a different lender. Perhaps a slightly higher rate, too.

At some point I have to question whether it’s worth the effort 🙂 Perhaps something to revisit.

PS: Still owe you some follow up!

Mortgage lenders don’t use logic in my experience. It doesn’t make sense to reject something that puts you in a better financial position.

I think that income only wins in a couple of cases and this is one. Having a low income (when paired with wealth) has a lot of advantages.

Hey hey Lazy Man! Thanks for coming by, love your tales.

And you’re right. It doesn’t make much sense. Not like we’re moving out 🙂 Indeed, low income helps us qualify for different deductions, lower tax rates, and keeps us focused on a life with a little more minimalism and adventure!

Hi Chris. I’m sorry to hear that the refinance didn’t go as planned. That’s something we’ve been thinking about for when Mr. RFL quits his W-2 job in a few years. We want to move (probably back East), but realize that means either buying a home the year before he quits or having to pay cash when we get there. Fortunately, we’ll be able to do something, but I still think it’s crazy how little the banks care about wealth and liquid assets.

I’m not sure what fees your looking at and can’t recall your loan balance, but an almost 1% reduction would be nice if you have a long time left on the loan. Have you looked at getting refinanced for a smaller amount than your current loan balance? You’d have to use liquid assets to pay it down to that amount. I doubt the banks would ever suggest it, but it might not be that much you have to pay down to get it approved. Then you get the lower rate and will have an even lower payment going forward. That said, if the $$ of savings wont be huge over the term then probably not worth the effort. Good luck!

Yeah, it makes sense to plan for big credit-based purchases like a mortgage ahead of early retirement.

There’s about $150K left on the loan with about 22 years on it. I’d assume that, indeed, I could pay the loan down to whatever balance they’d loan but as you suggested—probably not worth locking away the money and more headache.

Thanks for the suggestions, though. I suspect I’ll come back to this in the future.

Any time you choose to be different there will be consequences and in this case not having income does make you a higher risk to the banks. They can’t get at your other assets easily so they know you could walk away if house prices crash leaving them with a big write off. They have regulators and shareholders they have to satisfy. But I also get that it seems very unfair for a millionaire to be considered a bad risk. Its obvious you are great with money and there should be some way they can see that. In my case, I have zero wage income, but if I decide to buy another house I’ll just pay cash. I can’t stand borrowing money even at very low interest rates.

I would consider DeFi lending if you believe in crypto. You have 150k mortgage. 2M assets. With Celsius, you can give BTC as collateral and borrow LTV 20% with 1% interest rate.

Hey thanks Bryan! I’m not a big crypto fanatic but do like the tech side of blockchain. I’ll have to look into it. I was going to look into interactive brokers loans too. Cheers!

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