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15 Year Mortgages Are 30 Year Mortgage With Extra Payments!

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A reader once asked: What’s the difference between getting a 15 year fixed mortgage and getting a 30 year fixed mortgage and then paying extra onto the principal?

My answer is: nothing. Let’s do the math…

The two loans are:

  • 15 year fixed loan for $300,000 at 5.0%, vs,
  • 30 year fixed loan for $300,000 at 5.0%.

Here’s how the stats compare (based on Dinkytown calculators):

Loan Terms Monthly Payment Total Interest Total Paid
15 Year Fixed $2,372.38 $127,028.69 $427,028.69
30 Year Fixed $1,610.46 $279,769.69 $579,769.69
Difference $761.92 -$152,741.00 -$152,741.00


The above table should come as no surprise. The 30 year fixed mortgage has lower payments because it’s over 30 years but comes with the additional cost because of interest. Now, what if you were to take the difference in the monthly payment, $761.92, and apply it to each additional payment on the 30 year fixed mortgage? You would get the following:

Loan Terms Monthly Payment Total Interest Total Paid
15 Year Fixed $2,372.38 $127,028.69 $427,028.69
30 Year Fixed+ $2,372.38 $127,028.69 $427,028.69
Difference $0 $0 $0


That’s right, there’s no difference whatsoever (this makes sense though!).

{ 38 comments, please add your thoughts now! }

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38 Responses to “15 Year Mortgages Are 30 Year Mortgage With Extra Payments!”

  1. Kyle says:

    One of the other things that people tend to ignore is the way that home equity fits into an overall investment portfolio. I would argue that having home equity is like owning a bond or other stable investment asset. The return you’re getting from it is roughly equal to the rate on the mortgage. So if you have an extra $200,000 in home equity, it is “earning” 5% by reducing the amount of interest you have to pay. The nice thing is that return is risk-free, and can give you piece of mind, especially if you ever get to the point of having it paid off.

    Paying down a mortgage aggressively makes sense if you already have some significant investments in other markets that you would expect to earn a higher return (i.e. the stock market). If your home equity makes up about 20-30% or less of your net worth, then paying additional equity by having a shorter term mortgage makes sense. If your home equity is 50% or more of your net worth, then you might be better off with the lower payment and investing the additional capital in an S&P 500 index fund, a Russell 3000 index fund, and/or a broad-based international index fund.

    In this way, you are building a balanced portfolio between home equity and market-based investments.

    Waffler, I would think long and hard before I paid a bunch of money in refinancing fees to willingly take a 1% higher interest rate. A 15 year fixed at 4.375% is a great deal. Also, you said the net assets were about the same in 360 months. That assumes that you stay in the house for 30 more years. I suspect that if you only stay in the house for 10 or 15 more years, staying in the 15 year mortgage makes a lot more sense. And you may be fairly confident that you’re in the house for the long haul, but a lot can happen over that period of time. Good luck with your decision.

  2. SCM says:

    I am so impressed about the knowledge you all have about this topic! I am in the medical field so that means..I am not good at this at all. Anyway, I need help from you! I contacted a mortgage company and today they gave me a rate of 5.125% for 15 yr-loan. I currently have a rate of 5.75% (30 yrs), (and I have 25 more yrs left). I have a possibility of buying a different house in maybe 2 yrs. So based on your discussions above, I have made some analysis that it’s not worth to refinance IF I feel I will not stay in this house for long term, is my analysis correct? What is your advice. Thank you all for your help!

  3. Steve says:

    My current loan of 200,000 is at 6.25 for 30. I was goingto refinance to a 20 year at 5.25. I was also thinking about tying in a HELOC of 30,000. My house is valued at 375,000. Any advice? Should I just pay more for 20 years, or remortgage?
    Thanks

  4. artist says:

    Some thoughts not mentioned:

    You *might* earn a higher yield in the markets by investing, rather than paying down your loan on shorter terms (15 yr).

    However, 1. you will pay taxes on your market returns…

    and

    2. When you sell your house the profits (up to fed limits, 250k or 500k) are NOT taxed.

    and…

    3. you will be mortgage free in 15 vs 30yrs. Talk about “freeing up cash”.

    Dumb…dumb…dumb?

    • jim says:

      1. Yes, you might; or you might have lost 40% as the market did in 2008.
      2. This is the same for 15 or 30 years and you have to buy another house to take advantage of this.
      3. Also true, but the 30 year gives you flexibility.

    • de says:

      i’m with artist.
      also

      how many ppl actually pay off their 30 yr in 15?

      almost everyone (other than foreclosure) pay of their 15 yr in 15. and i’m willing to bet the foreclosure rates on 15 years aren’t much higher because these people’s life goals are to be debt free. its not your house you can’t afford its all those damn credit cards….

      i’m willing to bet “professionals” who encourage 30 yrs are making a profit off of it.

      such as…
      the real easte agent who can get you to buy a more expensive house if you take a 30 yr. what is in it for them for you to pay of your home quicker.

  5. Ozzy says:

    I have a 103,200 loan on a 30-yr 6.5% fixed, my current balance is 101,300. I pay 660/mo. Is it wise (as an investor, not someone worried about emergencies) to refi to a 15-yr 4.8%, my new payment would be about $840/mo. assuming refi costs of 5k are added to the loan and I plan to stay at least 3 more years in my house. I/m assuming taxes and insurance stay the same, don’t they?

  6. Luv2teachag says:

    I just recently bought my first home. I locked into a 15yr- 4.5%!!!! Whoooo, Hoooooo!!! tHE difference in payments between a 15 yr vs a 30 yr (5.5%) were only about 300.00!!! I HAVE TO pay the higher payment this way! Which is great for me because if I had the 30yr loan I definitely would not make higher payments all the time. Its a built in disipline program for me :) GO FOR THE 15 YR!!!!

  7. marc says:

    way to go, luvtoteachag. keeping it simple and real will serve you well. Nothing hypothetical about your numbers. And the realization that making optional payments is probably not going to happen often enough shows that you factor in more that numbers and hopeful thinking. It’s always about the real world.

  8. de says:

    btw. has any one read anything by dave ramsey.
    can’t deny his real world logic, facts, and numbers.

    go luvtoteach. you won’t be sorry!

    also, if you lose your job, or is an emergancy or whatever. you wont have the money to pay either payment! so i’d rather have a little more principle under my belt.haha
    just a thought.

  9. ranch111 says:

    Not anymore, Einstein. A 15 yr beats a 30 yr currently. 3.75% vs 4.25%. Plus, any extra you put down on a 15 accelerates the payoff even faster.


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