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Larger Payment, Shorter Term, Bigger Savings



Some people consider a house payment as basic as monthly utilities but with a plan and some discipline, you can be mortgage free.

Consider a person borrowed $300,000 at 3% for 30 years, the principal and interest payment would be $1,264.81 and at the end of 12 years, the unpaid balance on the mortgage would be $210,900.

If that same person had financed the home on a 15-year term at 2.5%, the payments would have been $2,000 but the unpaid balance at the end of 12 years would be $69,310.  The homeowner will have a larger equity but they have also had to make higher payments.

15-year mortgages usually have a lower interest rate than the 30-year loans and at the time this article was written, the difference in a 30-year loan was about 0.5%.  A 15-year loan gives the lender their money back in half the time.  If rates go up during the interim, they will be able to loan it at the higher rate sooner.  For that reason, they are usually willing to offer a slightly lower rate on the shorter term.

Having a lower rate means paying less interest but another remarkable thing happens, lower interest rate loans amortize faster than higher rate loans.

 

30-year

15-year

$300,000 mortgage for 30 years

3%

2.5%

Monthly payment

$1,264.81

$2,000

Unpaid balance at end of 12 years

$210,900

$69,310

Increased equity

 

$141,590

Additional monthly payment

 

$735.56

Additional total payments for 12 years

 

$105,920

Savings

 

$35,670

This recognized wealth building technique with higher payments, saves interest and retires the mortgage sooner.  The shorter-term mortgage requires a commitment to make the higher payments each month rather than giving the borrower flexibility to spend or invest the difference each month for as long as the loan is in place.

To make you own calculations, go to the 30yr vs. 15yr Comparison.

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