If you've been trying to figure out how to become a millionaire (and who hasn’t?), you may be surprised to find that how you buy your home could determine whether you achieve the million dollar mark. As Business Insiderrecently reported, an author who surveyed 10,000 American millionaires discovered that the way you buy your home may be one of the biggest factors in becoming rich.
Author Chris Hogan partnered with a research team from Dave Ramsey to study 10,000 American millionaires for seven months. As he revealed in his book, "Everyday Millionaires: How Ordinary People Built Extraordinary Wealth — and How You Can Too," the author discovered that opting for a 15-year mortgage and paying off your house early is one of the easiest ways to get rich. He makes a compelling case that the 30-year mortgage is the reason most people don’t become millionaires.
The millionaire difference
Many factors contribute to becoming rich of course, such as income level, discipline, and sticking to a financial plan, but one of the biggest may be the way you buy your home. Mortgages are the largest debt that most American homeowners have, so choosing a smart repayment schedule has a large impact on your ability to amass wealth. 90% of homeowners in the U.S. choose a 30-year mortgage when purchasing their home, according to Freddie Mac.
In contrast, Hogan reports that the average millionaire paid off their house in 11 years, and 67% live in homes with paid-off mortgages. By paying off their mortgage early, these homeowners eliminated their biggest debt, and the entire value of their home counted toward their net worth. In fact, one third of the average millionaire’s net wealth came from their primary residence.
Benefits of a 15 year vs 30 year mortgage: what’s the difference?
Because 30-year mortgages offer lower payments than 15-year loans, homeowners may feel like they are getting a better deal. In reality, homeowners end up paying tens of thousands of dollars more over the life of the loan. Hogan calculated the difference between a 15-year vs a 30-year mortgage of $225,000 with a 4% interest rate. If you chose the 30-year loan, you would pay $590 less a month, but would end up paying about $87,000 more in interest. If you choose a 15-year loan, you can put the money you saved toward your net worth or invest it. Nerdwallet’s mortgage amortization calculator shows that this principle holds true for different loan amounts.
Credit: Freddie Mac
How to pay off your mortgage early like a millionaire
Ready to strategize like a millionaire and pay off your loan in less than 15 years? Mortgages are expected to continue rising over the coming year, so if you are considering buying a house, making smart choices about your loan will have an even greater impact on your future wealth. Some tips that will help you pay off your loan early:
- Choose a home you can easily afford
Don’t max out your budget by buying the biggest house you can qualify for. Hogan found that the average millionaire lives in a ZIP code where home values are below the national average of $205,000.
- Choose a modest neighborhood
When you live in a more affluent neighborhood, you are likely to mirror your neighbors’ higher spending habits. This makes it less likely you will pay your loan early. More than half of millionaires live in neighborhoods where the average household income is $75,000 or less.
- Pay extra each month
Consider Hogan's Purchase Price Paydown method, where you use the first three numbers of the purchase price to make an extra monthly payment. For a mortgage of $250,000, the extra payment would be $250. That cuts a little more than two years off a 15-year mortgage; if you double it to $500, you will pay off your 15-year loan four years faster.
Whether you are trying to become a millionaire or just want to budget more effectively, we will work with you to create a financial plan that will help you reach your goals. Reach out to skilled financial planner Matt Logan at www.mattloganinc.comor call 336-540-9700.
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