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I had the pleasure of reading David Bach's new book, Debt Free for Life. I've read a few of his books and I enjoyed his easy to follow advice on building your finances.
Bach's new book has some updated information on finishing rich by focusing on paying down debt. Rather than review the whole book (too much to cover!) I wanted to review one of the chapters – Mortgage Debt: How to Protect Your Home and Pay Off Your Mortgage Early.
15 Year Vs 30 Fixed Mortgage – Which Works for You?
One concern of people who hear about 15 year mortgages is how much more expensive the payments can be. However, they may mistakenly believe that the payments would be double -that's not the case.
Here's an example straight from David's book that demonstrates how affordable a 15 year mortgage can be.
Mortgage Amount: $300,000 at 6% interest rate
- 15 Year Monthly Payments – $2,532
- 30 Year Monthly Payments – $1,799
As you can see the mortgage payments are higher with 15 years compared to the 30 years ($733), but there is a big reward for signing up for it. The pay off with the 15 year loan, you save $192,000! That is significant savings that you can use for other financial goals.
Why Bach's Mortgage Payment Plan Works
Amortization is a method that lenders use to allocate payments of the life of the mortage that takes into account the principle and the interest. For a fixed rate mortgage the payment amount remains constant over the life of the loan.
For mortgages, in the beginning of your loan most of the money go towards paying interest. As the mortgages draw to a close, the payments increasingly towards the principle owed.
That’s why if you’re able to accelerate your mortgage payments with extra money going towards principle, you can cut years off your mortgage and save thousands of dollars by avoiding extra interest.
Paying Your Mortgage Off Early
What if you have a 30 year mortgage? Are you doomed to pay a ton of interest over the life of the loan? No! Whether you have a 30 year or 15 year mortgage, you can pay it off sooner and save a huge amount of money.
Setting Up a Payment Plan
David sets up a very good case for implementing a payment plan that is doable and relatively painless. If you have 5-15 minutes, you can call your lender and set it up.
David's suggestion of splitting your mortgage payments in half and sending in biweekly payments. It sounds too easy, but by following this plan you'll shave years off your mortgage and save tens of thousands (or even hundreds of thousands) of dollars.
Why We're Paying Our Mortgage Early
As many of you know, my husband and I are working towards paying off our own mortgage early. I mentioned before that keeping a mortgage just for the interest deduction on your taxes is crazy. You’re just sending over more money to your lender to reduce your interest rate by a fraction.
The numbers don’t add up. Bypaying our mortgage earlier than the 30 years scheduled, we’re going to save tens of thousands of dollars in interest.
Our Payment Plan
When deciding on how we were going to execute this accelerated plan, our main focus was creating something sustainable and had some impact with the mortgage. Right now we’re currently sending in an extra $175/month. We've automated the extra payments to go out on the 15th of the month.
How Others Are Achieving Their Dreams
Other people have come forward and have shared their own tips on how they're accomplishing their mortgage goals.
First Gen American has worked hard with her mortgage and figuring out a payment plan that works for her:
- Always pay a little extra every month, even if it’s just rounding up to $100.
- Put all windfalls towards mortgage (tax returns, health spending reimbursements, bonus’s, side income, proceeds from selling stuff, etc)
- Buy a house based on one income.
Generally I felt if my checking account balance was growing too big, then I needed to throw some extra at the mortgage before I figured out a more interesting use for the money.
Some others are very aggressive like the bloggers behind Death to the Mortgage:
My wife and I hope to pay off our mortgage in the very near future. We originally took out a 15-year loan, then after a year and a half we decided to aggressively attack it. We reorganized our financial lives to funnel as much extra money toward the balance as possible. After a year of our project, we refinanced to a 10-year loan.
Two years later, we are on the verge of paying it off. If we can get rid of the mortgage this year, we will have had it for 5 years. We’re very much looking forward to eliminating that recurring expense and using the free cash flow to build up some income-generating assets.
Different takes and speeds, but the idea is the same – reducing their mortgage on an accelerated schedule.
Thoughts on David Bach's Mortgage Plans
I really enjoyed reading not only David's advice on mortgages, but I found his book to be a useful resource for people needing to get out of debt. If you're curious to learn more about Bach, there's a wonderful interview at Financial Samurai.
Now, I'd love to hear your thoughts about paying your mortgage quicker. How about you? If you’re a home owner, what kind of mortgage did you get and why?