Big Upside with Shorter Term Mortgages
By opting for a shorter term mortgage, you’ll have bigger monthly payments. But the huge upside is that with a plan and some discipline, you can build equity and become mortgage free much faster.
See This Illustration
Consider a person who borrowed $300,000 at 3% for 30 years. The principal and interest payment would be $1,264.81 a month, 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 only be $69,310. The homeowner had to make higher payments, but will have significantly more equity.
Lower Interest Rates
15-year mortgages usually have a lower interest rate than 30-year loans and at the time this article was written, that difference 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.
Total Impact
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.