Why that Lower Monthly Payment Really Costs You Big
Let’s take into consideration a $150,000 home, financed with a 30 year conventional loan at 4.7% interest. Let’s say you put down 10%– or $15,000—on your home, so you’ll be financing $135,000. If you take out a conventional 30-year mortgage at a 4.7% interest rate, that means your monthly payment will be $700. Over the course of your 30-year mortgage, you will pay $117,058 in interest.
Now let’s see what would happen if we financed that $135,000 with a 20 year loan, which should have a lower interest rate than its 30-year cousin. We’ll say the 20 year rate is 4.3% and that your down payment is still 10%. This would bump up your monthly mortgage payment to $840 per month. However, you will pay only $66,497 in interest over the life of the loan. This means that, over the course of 20 years, you’d be saving $50,561 on interest by simply paying just $140 more per month on you monthly mortgage payment. If you have a PMI on your loan, that monthly payment will decrease significantly once that falls off as well.
But it gets better. Let’s consider a 15 year loan. Again, the shorter the mortgage term, the lower the interest rate usually is. We’ll say this 15 year mortgage has an interest rate of 3.7%, and again, you’re putting 10% down. This would leave you with a monthly mortgage payment of $978, and the total amount of interest paid on the life of the 15 year loan would be $41,113. This means that by paying a higher monthly payment for a shorter period of time—half the time of a traditional 30 year mortgage, actually—not only will you own your home faster, but you’ll be saving an impressive $75,945 in interest over the life of your loan.
Affording a Shorter Term
Some borrowers simply are not comfortable going in on mortgage with less than a 30 year term, but there are great incentives for doing so. In many cases, it will increase your monthly payment by only $100 to $300, but it’ll save you massive amounts of money that you would have otherwise never seen again.
In the long run, a shorter term on your mortgage will save you big. You will be pleasantly surprised at how reducing your mortgage term by just five years will affect your ability to save money in the future. It’s worth re-evaluating your finances to afford. After all, shortening the duration of your mortgage loan could potentially save you enough money to do something big in the future, like send your kids to college without the worry of student loan debt, or pay for their wedding when they get a little older. If your kids are already out of the house—or if you don’t have children—that money could be used to save for your retirement fund. Why not take advantage of it?
Even if you aren’t comfortable modifying your mortgage or refinancing, you could always treat your 30-year loan like a shorter term loan, putting any extra income you may find yourself with into it. Things like tax refunds, inheritances, or even prize winnings make excellent additions to your monthly mortgage payment, so remember that by paying more on your monthly mortgage payment than is required, you are really paying yourself and securing your future. Even one extra mortgage payment per month paid over the life of the loan could knock as much as five years off the term of your mortgage.