Alternative to a 15-Year Mortgage: Prepay on a 30

The average rate on a 15-year mortgage offers a pretty significant savings over the 30-year loan. But payments are much larger on 15-year deals because the debt must be paid off twice as fast. Many borrowers just don’t want to commit to that, or can’t afford to.

Fortunately, you can have it both ways — by making extra principal payments on a 30-year mortgage. That way you can pay the loan off early, saving a fortune in interest. Because the interest rate is higher on the 30-year loan, the savings aren’t quite as good as you’d get on a 15-year deal. But that’s offset by flexibility. You could make extra principal payments only when you wanted to, while you’d be stuck with big payments if you got a 15-year loan.

The trick is to make an apples-to-apples comparison that accurately looks at the costs of the two loans.

At the current average rate of 4.709%, according to the Tracker, a $300,000 loan for 15 years would cost $2,327 a month, and interest would total $118,888 over the loan’s life.

At the average of 5.269%, a 30-year loan for the same amount would cost $1,660 a month, with interest totaling $297,653 over three decades. (Use the Mortgage Loan Calculator to try your own numbers and see the effect of prepayments.)

The savings on the 15-year deal are awfully appealing, but paying $667 more a month is not.

The alternative? Take out the 30-year loan and plan to make extra principal payments as often as possible. If you paid an extra $667 every month, ending up with the same payment you’d have with the 15-year deal, interest would come to $143,415 over the life of the loan, and it would take about 16 years to pay off the debt.

That’s a significant savings — $154,239 less interest than if you’d made minimum payments on the 30-year loan.

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