If you have a fixed-rate loan with a term of 15 or 30 years and would like to pay it off sooner, you may be able to do so by making extra mortgage payments, which will allow you to pay back the loan faster and for less interest than if you were to make the original payments as stipulated by the loan.
Selecting the best mortgage can be difficult, particularly if you have to choose between two options that seem appealing: a 15-year mortgage with larger payments but quicker payback, or a 30-year mortgage with lower monthly payments.
Is it better to get a 30-year mortgage and pay extra to reach a 15-year payoff, or should you opt for the 15-year loan from the get-go?
Let’s delve into the pros and cons of each option to help you make an informed decision,
30-Year Mortgage with Extra Payments: Flexibility and Interest Savings
Pros:
- Lower monthly payments: This is the biggest advantage of a 30-year mortgage. The lower monthly payments free up more cash flow for other financial goals or emergencies.
- Flexibility: If your financial situation changes, you can always choose to make smaller payments during tight times.
- Interest savings: By making extra payments towards the principal, you can significantly reduce the total interest paid over the life of the loan.
Cons:
- Longer payoff time: It takes 30 years to pay off the loan, which means you’ll pay more interest overall.
- Temptation to spend extra money: The lower monthly payments might tempt you to spend the extra money instead of putting it towards your mortgage.
15-Year Mortgage: Faster Payoff and Lower Interest
Pros:
- Faster payoff: You can pay off your mortgage in 15 years, saving you a significant amount of interest in the long run.
- Lower interest rates: 15-year mortgages typically come with lower interest rates than 30-year mortgages.
- Forced savings: The higher monthly payments act as a forced savings plan, helping you build equity in your home faster.
Cons:
- Higher monthly payments: The higher monthly payments can be a burden for some borrowers, especially those with tight budgets.
- Less flexibility: If you encounter financial hardship, you may not be able to afford the higher payments.
So, which option is right for you?
The answer depends on your individual financial situation and goals.
Consider these factors when making your decision:
- Your budget: Can you afford the higher monthly payments of a 15-year mortgage?
- Your financial goals: Do you have other financial goals, such as saving for retirement or a down payment on another property?
- Your risk tolerance: Are you comfortable with the higher risk of not being able to make the payments if your financial situation changes?
- Your interest rate: How much lower is the interest rate on a 15-year mortgage compared to a 30-year mortgage?
Here are some additional tips to help you decide:
- Run the numbers: Use a mortgage calculator to compare the total interest paid and the monthly payments for both options.
- Talk to a financial advisor: A financial advisor can help you assess your financial situation and make an informed decision.
- Consider a hybrid approach: You can start with a 30-year mortgage and make extra payments to reach a 15-year payoff. This gives you the flexibility of lower payments while still achieving a faster payoff.
The mortgage that best suits your needs and financial objectives will ultimately be the best choice for you.
Additional Resources:
- MyMoneyBlog: Paying Down a 30-Year Mortgage Faster vs. 15-Year Mortgage
- Quora: Is it better to get a 30-year mortgage loan and pay it off in 15 years, or a 15-year loan?
Remember, there is no one-size-fits-all answer to this question. The best way to decide is to carefully consider your individual circumstances and choose the option that best suits your needs.
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Do you have a 15- or 30-year fixed-rate loan that you’d like to pay down faster? You might find that making extra payments on your mortgage can help you repay your loan more quickly, and with less interest than making payments according to loans original payment terms.
What is mortgage amortization?
The process of reducing debt through consistent principal and interest payments over time is known as mortgage amortization. For instance, when you make a monthly mortgage payment, part of it goes toward principal reduction and part goes toward interest.
Usually, interest is paid on top of the principal balance at the start of the loan term, with the majority of each payment going toward interest. Assuming regular payments, more of each following payment pays down your principal. This reduction of debt over time is amortization.
Paying extra on your loan: The RIGHT way to do it! (Monthly vs Annually)
FAQ
What happens if you make 1 extra mortgage payment a year on a 30-year mortgage?
Is it better to get a 30-year mortgage and make extra payments?
What difference does 1% make on a 30-year mortgage?
Should you get a 30-year mortgage?
Going with a 30-year mortgage provides you with the choice of how much extra you can pay in a given month, depending on your budget. You will still be able to save on interest by tackling it this way and paying your loan off in less than 30 years.
Can I make extra mortgage payments in a year?
There are a few different ways you can make extra mortgage payments in a year. No matter which method you choose, it’s important to tell your loan provider that you want the extra payment applied to your principal balance. Otherwise, extra payments might go toward the interest — which doesn’t help you pay off your mortgage faster.
How much money can you save on a 30-year mortgage?
As an example, if you took out a mortgage for $200,000 on a 30-year term at 4.5%, your principal and interest payment would be about $1,000 per month. Paying one extra payment of $1,000 per year would shave 4½ years off your 30-year term. That saves you over $28,500 in interest if you see the loan through to the end.
How long does it take to pay off a 30-year mortgage?
That tells us the 30-year-plus-extra mortgage would be paid off in 15 years and 11 months, requiring 11 additional payments of roughly $2,000 and thus an extra $22,000 of interest in the end. However, the 30-year does allow me the flexibility to reduce my payment by about $700 a month if things get tight.