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Comparing Payback Periods On 15-Year, 20-Year and 30-Year Mortgages

Posted By Paula Henry on Tuesday, September 16, 2008 5:28:00 PM | 4 Comments

On all principal + interest home loans, the first few years of payments include a lot more money going to interest than to principal. This is because mortgage repayment schedules are front-loaded with interest, meaning large-volume principal reduction won't occur until late in the mortgage's lifecycle. Comparing products at a 6% mortgage rate, did you know that after 15 years:

A 15-year mortgage will be paid in full
A 20-year mortgage will have 41.21% of its loan balance remaining
A 30-year mortgage will have 73.19% of its loan balance remaining

Of course, this doesn't mean that 15-year mortgages are better than their 20-year or 30-year brethren. It just means that 15-year mortgages pay off faster. Yet, there are reasons for homeowners to avoid 15-year mortgages. For example, versus 20-year or 30-year products, 15-year mortgages require the highest monthly payment because the payback period is compressed to a shorter time.

In addition, mortgage interest tax deductions to which most homeowners are entitled are reduced. So, just because the 15-year pays off quickly doesn't mean that it's best for everyone.

Discussion

#1 Posted by Thesa Chambers, Broker at 9/17/2008 4:23 PM

Paula - with the rates going down it would be nice to see some folks get a 15 year mortgage - great info for your buyers - nice to see you

#2 Posted by Curtis Reddehase at 9/22/2008 5:04 AM

Yes, a 15 year mortgage is not for everyone. If someone loses their job they may wish they had the 30 year, with lower payments. If disciplined, pay more each month on principal.

#3 Posted by Paula at 9/20/2008 6:32 PM

Thesa - For those who can afford the increased payment, it makes sense. Good to see you also!

Ki - If a homeowner is diligent about paying extra each month on a 30 year morgage, they can save a ton, while having flexibility. You're right, it rarely pays on an investment - then again, it depends on the objective. If the objective is to hold long term, the investment could make sense at 15 years.

#4 Posted by Ki in Austin at 9/20/2008 3:07 PM

I struggle with this on properies. Its nice on 15 years that you pay off the mortgage quick and you get a lower interest rate and a total lower cost.

On investment properties its hard to take that in general on a 15 year your rent doesnt cover your mortgage except in a few cases. So its hard to buy too many properties because you are losing money on them.

Sometimes I tell people to get a 30 year and then overpay. That way they can lower pay it off quick but change their mind if they need to. They lose the lower interest rate that way though.