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Benefits of Shortening Your Loan Term; 15yr. vs. 30yr. Loan

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If you read my previous article that compared the historical mortgage rates to what they are currently, you may have noticed that I used a 30 year mortgage term in order to make the comparison. To be quite honest though, through much of my research regarding home loans, I always advise home-buyers to choose the 15 year mortgage.

Choosing a shorter term on your mortgage does have its disadvantages:

· You may not be able to qualify for your “dream” house
· The monthly payments are higher

Those are honestly the only disadvantages I can think of. Here are some advantages of the shorter term loan:

· You will pay off the loan 15 years earlier
· The rate is typically much less
· You will save a lot of money
· You may be able to retire sooner because you will be debt free

I have performed some quick calculations in order to show you the benefit of the shorter term loan. Take a look at the graph below.

  • 30 year loan rate = 4.40%, payment of 1001.52, total payment of 360,547.86
  • 15 year loan rate = 3.68%, payment of 1447.51, total payment of 260,551.65

As you can see, with the 15 year loan the total amount paid is approximately $260,000. With the 30 year loan the total amount paid climbs to about $360,000. Clearly, it is much more beneficial to pay off the house in 15 years.

Now let’s dig a little deeper so that I can prove my point. If you take a look at the 15 year mark, the lowest term is obviously all paid off, and the house is yours free and clear. But, if you focus on where the 30 year mark is, can you see how much you still have to pay off? At this point, you still have $180,000 to go on your house that is valued at $200,000. Isn’t that awful?

Hopefully this quick explanation has been enough for you to choose that 15 year loan on your next house. If you heed this advice, I promise you won’t be sorry.

Housing Mortgage Payoff

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

15 Comments

  1. Couldn’t agree more except that you missed one potential benefit. If you can make the 15 year payment but choose a 30 year payment, and put the difference in investments that grow 8% or more. Don’t forget the power of compounding for the long term. 🙂
    With that being said, each of us has our own choices that we make regarding this and due to my age, I chose to go with a 15 year mortgage as I mentioned here.

    • Good point Chris, but that’s assuming your investments will make money. There is definitely no guarantee of that.

  2. I am looking at investment properties and am basing my buying decisions off of whether or not I can come out ahead each month while taking out a 15 yr mortgage. When you run the numbers, it’s amazing how much interest you save over those 15 years. But it makes sense since the first years of a mortgage payment are typically 90%+ interest.

    • Now that’s actually a tough decision there. Ideally, you’d like to pay off your investment properties as fast as you can, but you want to be sure that you can make the payments with ease as well. I think the best solution is to buy a cheaper investment property that you can handle the 15 year terms, pay it off as quickly as you can, and then move onto buying the next investment property (I’m basically trying to convince myself of this by the way – thanks for posing the scenario!).

  3. Shorter loans are really better than longer loans, though there are some cons with it, it outweighs the pros more often than not.

  4. We refinanced a couple times before finally paying off the mortgage. Both refinances were for 15-year loans. We kept paying extra each time we refinanced, so we actually paid off the mortgage in 9 years.

    • That’s pretty good Bryce! I admire your commitment to paying it off!

  5. The earlier one can be rid of debt the better. The shorter time horizon also gives you something to anticipate. Psychologically I think its easier to work harder for something you might enjoy the benefits sooner than something you might have to wait a long to do, you might actually get lazy at it thinking, well, I still have another 20 years, where is the hurry 🙂
    Then again as someone pointed out, it really does depend on ones financial situation.

    • I agree with you Simon. I think if anyone were given the option to be completely debt free with just a little bit more work, they would take it in a heartbeat. Just think about the cash flow you would have each month!

  6. Great post. I agree that sometimes getting a longer term loan can be beneficial however it really depends on the person’s situation and how the person can actually make use of his/her time to do something with the money they loaned maybe put into good use like a low-risk high-return investment.

    • I think that many time the longer loan is the worst option, that is, unless you’re completely strapped for cash, but then maybe you shouldn’t be purchasing a house in the first place. If somebody gets the 30 year loan and says they’re going to pay it down as if it were a 15 year loan, it’s most likely not going to happen.

  7. I’m definitely in the 15 year camp for my primary residence. I refinanced 2 years ago from a 30 to a 15 and love it. I’m already past the tipping point where I’m paying more principal than interest with every payment.

    That said, when I get into investment properties for rental cash flow, I’m likely going with the 30 year fixed. It makes it that much easier to predict the payments, and stay cash flow positive. I’d much rather pay extra principal every month and perhaps even pay it off in `5 or 20 years, just to have the extra margin of error to cover for the unexpected.

  8. Over the last 10 year we went from a 30 year to a 15 year to a 10 year to a 5 year. Rates kept dropping and we kept refinancing. When comparing the 30 year to the 5 year payments, the principal and interest amounts we pay each month have flip flopped. Payments originally were almost all interest, and a tiny sliver of principal. Now payments on the 5 year are 90% principal and 10% interest!

    • That’s awesome Justin! Nicely done!


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