30 year fixed vs 15 year.

SuperKirby · ‎11-09-2014

If I pay off a 30 year mortgage early in 15 years, is it the same as asking for a 15 year loan (minus all the fees and nicknacks to begin with)?

Not sure how all of this works. Thanks.

StartingOver10 · ‎11-10-2014

There is usually a slightly better (lower) interest rate with a 15 year mortgage. However a 30 year mortgage gives you more flexibility in the payment if you are running tight financially during the mortgage term.

You can always pay extra on your principal balance to reduce the term of the loan almost always without a pre-payment penalty (except with private mortgages).

You can ask for any term of loan: 25 year, 30 year, 20 year, etc.

SuperKirby · ‎11-12-2014

@StartingOver10 wrote:
There is usually a slightly better (lower) interest rate with a 15 year mortgage. However a 30 year mortgage gives you more flexibility in the payment if you are running tight financially during the mortgage term.

You can always pay extra on your principal balance to reduce the term of the loan almost always without a pre-payment penalty (except with private mortgages).

You can ask for any term of loan: 25 year, 30 year, 20 year, etc.

Can you elaborate on "reduce the term of the loan?"

So if I pay extra principal every month, my 30 year can shrink down to say, 25 years (depending on how much I pay)? In which significantly reduces my interest payment?

Thanks for the info.

StartingOver10 · ‎11-12-2014

Sure, any extra payments apply to your principal balance and instead of a 30 year loan you end up paying for a shorter term. Your mortgage payment remains the same but with larger principal payments your repayment period is reduced. You can experiment with the mortgage calculator at Bankrate.com for specifics

An example: $200k loan, 30 year amortization and 4% interest rate has a PI payment of $954.83 (Escrows not included)

If you make your payment on time each month during the course of the loan you will be paid off in 360 payments (30 years) and have paid $143,739.01 in interest.

If you make an additional principal payment of $100 per month, for example, you save five years and the amount of interest you paid is $116,884.08. That is a savings of $26,854.93 and a shorter term (25 years instead of 30 years). You can input figures on the bankrate mortgage calculator and determine for yourself how you want to make principal payments. Some people prefer to make one extra payment toward principal a year, some prefer to make monthly or quarterly payments. Tip: make your extra principal payment at the same time you are making a regular payment so that none of the extra principal payment goes toward your interest. Most lenders have a place for you to make extra principal payments right on the website.

You do not have to make 'double payments' to pay off your loan in 15 years. Using that same example if you pay an extra $475 per month toward your principal you will be paid off in 189 months (slightly more than 15 years) and the total interest you will have paid is $69,759.90 which is a huge savings over the $143,739.01 for the same loan.