Larger Payment, Shorter Term, Bigger Savings

Having a lower rate on a shorter term mortgage means paying less interest. But lower rate loans also amortize faster!

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 more equity but they have also had to make higher payments.

15-year mortgages usually have a lower interest rate than 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 a 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-year15-year
$300,000 mortgage for 30 years3%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 your own calculations, go to the 30yr vs. 15yr Comparison.

McKee Smith, REALTOR®, has been helping people like you sell and buy homes in the DFW area for many years. He is very knowledgeable about the housing market in Dallas and Fort Worth. Remember – McKee has the keys to selling your home!

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