Self-made millionaire David Bach spoke with CNBC earlier this year about the link between home ownership and personal wealth: “Buying a home is the escalator to wealth in America,” he said.
Bach knows what he’s talking about. He’s a co-founder of AE Wealth Management and has written nine consecutive New York Times bestsellers. His book, The Automatic Millionaire, spent 31 weeks on the New York Times bestseller list. He is one of the only business authors in history to have four books simultaneously on the New York Times, Wall Street Journal, BusinessWeek and USA Today bestseller lists. He’s also a regular guest on all of the major TV networks in the US.
The secret to retiring early, according to Bach? Buying a home and paying off the mortgage as soon as possible.
“I can tell you, having been a financial advisor at Morgan Stanley, my clients who retired at 50 years old, the secret was: They had paid their mortgage off early,” Bach says.
Bach offered several ways that homeowners can pay off a 30-year mortgage in less than 30 years.
1) Add 10% to every monthly payment.
“If you were paying $1,000 a month, now you’re going to make $1,100 payments every month,” he says. “Inform the bank that you are doing this and that you want the extra $100 a month to be applied to the principal (not the interest). If you keep this up, you’ll wind up paying off your 30-year mortgage in about 25 years. Increase your monthly payment by 20 percent, and you’ll have that mortgage retired in about 22 years.”
2) Make bi-weekly mortgage payment.
Rather than one monthly payment, work with your bank to set up a system where you pay half the mortgage amount due every two weeks. Over the course of a full year, you’ll make 26 payments, which is the same as 13 monthly payments, instead of the normal 12. You’re making the equivalent of an extra monthly payment every year.
3) Make an extra payment every year.
If you’re not able to setup the bi-weekly payment plan with your bank, just make the extra monthly payment once every year.
4) Convert to a 15-year mortgage.
This is more difficult, but it can be a big money-saver. Depending on your mortgage balance and interest rate, you could end up with a monthly payment that’s several hundred dollars more than your current 30-year mortgage. That’s not something everyone can afford, but if you can, the long-term savings will be substantial. In Bach’s example, someone with a $250,000 mortgage at 4.5 percent interest would pay about $1900 per month instead of about $1265 per month … but they’ll save $112,000 by paying off the mortgage early!
Bach is making two key points here: First, buy a home — it’s the “escalator” to personal wealth. And second, once you buy a home, do what you can to pay off the mortgage early and reap the benefits of saving a lot of money.