Have you ever wondered if you should you get a 30 or 15 year mortgage? Do you every wonder what people with really good personal financial habits do? It might not be a bad idea to know if the credit crisis is finally lifted and lenders unclog their financial arteries and start lending again. Let’s look at what three different authors from three of my favorite personal finance books have to say about the subject:
Author 1 – Thomas J. Stanley The Millionaire Mind
After creating the Casablanca of personal finance books, The Millionaire Next Door, Dr. Stanley expands on his masterpiece by delving even further into the habits of millionaires. He says this about their mortgage habits:
- In order to get a good deal on the home we purchase, we never pay the initial asking price for any home and are willing to walk away from any deal at any time.
- Most of us have a mortgage, but 40 percent have no mortgage at all.
- What is the median outstanding balance for those in our millionaire group? It is just under $100,000, or about 7% of the current market values of our home. (I love this part.) We are not, as some people refer to them, credit types.
Author 2 – David Bach, The Automatic Millionaire
David’s book is brilliant at putting your personal finances on auto-pilot. In regard to the mortgage, he says:
The secret to being an Automatic Millionaire is keeping it simple… Get a 30 year mortgage and then use my secret system.
What is his secret system?
Using a biweekly payment plan to pay down your mortgage, and doing it all automatically.
David goes on to explain the how’s and why’s of a bi-weekly payment plan, and gives you excellent resources for setting yours up. Does it work? The proof is, as they say, in the pudding. He illustrates how using his system you can save $119,000 on an fixed 8%, 30 year $250,000 mortgage. Not to mention you own the home free and clear after only 22 years.
Author 3 – Dave Ramsey, The Total Money Makeover
Anyone who has heard me talk, knows that I love Dave Ramsey. He is what I describe to my clients as a debt killer. Better than anyone I know, he systematically shows you how to get rid of all your debt. Here’s what he has to say about mortgages:
The final hurdle before you turn the corner for the last few miles is to become completely debt-free. NO PAYMENTS. How would it feel to have no payments?
He goes on to dispel mortgage myths such as:
- Myth: It is wise to keep my home mortgage to get the tax deduction. Truth: Tax Deductions are no bargain. In his example of making a $900 payment, of which $830 is deductible he states: I will live debt free and not make a $10,000 trade for $3,000 (tax savings from deductions).
- Myth: Take out a 30 yr mortgage and promise yourself to pay it like a fifteen year, so if something goes wrong you have wiggle room. Truth: Something will go wrong.
Dave illustrates how you can save $85,680 on a $110,000 7% mortgage by switching from 30 to 15 years. Imagine how much you’ll save if you use a biweekly mortgage payment on the 15 year mortgage. By my calculations you’ll have it paid off in 13 years and save another $10,300 on interest.
In conclusion, when approaching mortgages, if you want to think and act like a millionaire you might consider negotiating a good deal. If it isn’t available, walk away. Don’t become one of those “credit types”. When you get your, say $250,000 mortgage, make it a 15 year fixed rate mortgage with biweekly payments. If you do, you will have gone from a 30 year mortgage with total interest (not including principle) payments of $263,520 and 30 years of debt, to debt free in 13 years with a total interest payments of $154,828. You’ve saved $108,691 and, more importantly, 17 years worth of stress. Happy Debt/Stress Free Living!