- The structure of a 30-year mortgage results in the payments in the early years consist primarily of interest with little money towards the loan balance. A 15-year mortgage has payments with more balance between interest and principal. A 15-year loan at 5 percent will have payments in the first year that are almost half of the total loan payment amount. The slow principal pay-down on a 30-year loan means the loan balance for the longer mortgage term is still almost 70 percent of the original loan amount when the 15-year loan is paid off.
- Lenders will offer lower interest rates on a 15-year loan compared with the 30-year mortgage. For example, in December 2010 Wells Fargo bank was quoting a rate of 4.875 percent for a 30-year fixed rate mortgage and 4.25 percent for a 15-year fixed rate mortgage. The lower rate results in less interest paid and narrows the gap between the payment amounts for the shorter and longer mortgage terms.
- The total amount of interest that can be saved by selecting a 15-year loan instead of a 30-year mortgage can be significant. Using a $200,000 initial loan amount and the Wells Fargo bank rates quoted above, the total interest paid on a 30-year mortgage would be $181,000. The 15-year loan would incur total interest charges of just $70,800. The 15-year loan saves over $110,000 in interest when compared with a 30-year mortgage.
- The monthly payments are not twice as large for a 15-year loan even though the loan will be paid off in half the time. The large amount of interest savings means the payments for a 15-year mortgage may be more affordable than home buyers may think. The monthly payments for the $200,000 example are $1,058 for the 30-year loan and $1,504 for the 15-year mortgage, a difference of approximately $450. For some home buyers the extra amount would be affordable and the other benefits of a 15-year mortgage mean significant savings over the longer term.
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