My husband and I have committed to purchasing a handful of homes over the years, always with the aid of a 30-year mortgage. While we contemplated a 15-year mortgage a time or two, we instead always listened to the advice of friends and family and went with a 30-year term.
The overwhelming majority claimed it was better to secure a 30-year loan because the monthly payment would be smaller and more comfortable on our budget than a 15-year mortgage payment. It seemed to make sense at the time: Obtain a loan with a lower required payment and just pay extra each month, if and when we wanted. So, we followed this advice for years.
Click to read more about 30 cities where you can buy a house for under $100K.
Occasionally, we did make extra principal payments. Sometimes it would be a sizeable one-time lump sum principal payment, other times we would add $100 extra to the required monthly payment amount.
When we purchased our current home together, we did it just like our prior real estate purchases: a 30-year fixed rate mortgage. Because we were fortunate to be able to pay additional money towards the principal with each monthly payment, we did so, all the while feeling great because we were saving some interest.
Then, one day, I started playing with online calculators.
Crunching the Numbers
I quickly realized that while we were saving some interest, we could be saving so much more. Rough calculations showed minimum possible savings of $90,000 in interest payments over the life of the loan by switching to a 15-year mortgage at our same interest rate of 4.125 percent. If we were able to secure a lower interest rate, the savings would be substantially more.
I quickly found us a new loan, and we refinanced our 30-year mortgage, which we had held for two years, into a new 15-year mortgage. We landed a desirable 2.75 percent interest rate and immediately shaved off almost $300 in interest per month from our monthly payment.
Two and a half years in and we’ve already saved over $8,300 in interest. In two and a half more years, the savings will have grown to over $34,527.64, and we’ll have only 10 years of payments remaining, instead of more than 20. At the end of our 15-year mortgage, our total savings in interest payments will be over $120,000, as compared to what we would have paid had we kept the 30-year mortgage.
More on Owning a Home Faster: 7 Things to Consider Before Paying Off Your Mortgage Early
If you’re contemplating a home purchase, I highly suggest doing your own mortgage calculations. While it would be best if you could avoid interest payments altogether and make a cash purchase, the next best thing would be to limit your interest obligations with a 15-year mortgage instead of the typical 30. You’ll keep more of your hard-earned money–which you can invest and earn interest on, instead of paying interest to someone else.
Click through to read more about how prepayment penalties can make paying off your mortgage early more expensive.
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