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