The big benefit of shorter term mortgage loans

November 22, 2011 – The fixed rate 30-year mortgage loan is the most popular choice for financing a new home. But if you can afford slightly higher payments, you may be surprised by how much money you can save if you shortened the mortgage term.

Fifteen-year loans, for example, generally carry a lower interest rate than 30-year mortgages. They let you build equity faster (the portion of your home that you own without debt), and they also lower the amount of interest paid over the loan term.

Look at this comparison for the same loan amount. For illustration, the loan amount assumes that a 20% down payment has been made:

30-Yr. Fixed              

Loan Amount – $100,000
3 Points Paid – $3,000
Interest Rate  – 7%
APR  – 7.05%
Monthly Payments – $684.95
Number of Payments – 360
Total paid – $264,582.00

15 Yr. Fixed

Loan Amount –  $100,000
3 Points Paid – $3,000
Interest Rate  – 6.625%
APR –   6.69%
Monthly Payments –  $889.92
Monthly Payments – 180
Total Paid  –    $160,185.60

As you can see from the example, paying a few hundred dollars more a month to pay off the loan in 15 years rather than 30 saves $104,396.40. If the payment on a 15-year loan is too high, most mortgage companies allow borrowers to select terms of 25, 20, 15, or any increment of five years. Eliminating even five years off a 30-year mortgage will add up to substantial savings.

Of course, if you worry about consistently affording the higher payments of a term less than 30 years, you can achieve similar savings by choosing a 30-year loan and making an additional principal payment each month or during the months when you have extra money. Be sure to verify with the lender that the type of loan you choose does not require a prepayment penalty if you pay off early through these extra monthly payments, and that the extra payment is applied toward the principal balance.

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One thought on “The big benefit of shorter term mortgage loans

  1. Pingback: What would be a decent interest rate on a 30 yr mortgage loan for 200K, with 200k down payment? « Mortgage Rates Co.

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