The 30 fixed mortgage is the gold standard for financing the purchase or refinance of your home. There are a number of options to pay-off your mortgage early and save thousands of dollars in the process.
To start, I’ll explain how the standard 30 year fixed mortgage works. A $300,000 mortgage with a 4% interest rate is used in this example. The payment is $1432.25 a month, principal and interest. Every time a payment is made, the lender first applies the amount received to interest and the leftover portion is applied to principal.
The balance on the loan decreases at an increasingly faster pace as the loan is paid off
64% of what you borrowed or $192,800 in 15 years
47% or $140,500 in 20 years
26% or $76,600 in 25 years
most of the loan balance is paid in the last 15 years of the loan. If you keep the loan for 30 years and always make the required payment, you will pay $215,610 in interest over the life of this loan.
One option to save interest is to take a loan with a shorter amortization period such as a 10, 15, or 20 year fixed mortgage.
The downside to this option is the payment is larger:
10 year fixed payment is $3037
15 year payment is $2219
20 year payment is $1818
In the past, lenders offered substantially lower interest rates for shorter term mortgages, which rewarded buyers who were willing to commit to a higher payment. Recently, the difference in rate is very small, so the benefit is negligible.
Therefore, I recommend that borrowers take a 30 year mortgage and voluntarily pay more than is required, unless the borrower feels they will be tempted to spend the additional principal money on something else. As an example, if you paid $2219 every month instead of the $1432.25 minimum payment, your mortgage will have a zero balance in 15 years. Some buyers cannot afford a 15 year payment in the early years of the loan; they can pay off their mortgage early and save thousands on interest by slowly increasing the additional amount they pay every month to principal as their income increases.
Another option is to set up your mortgage payments on a bi-weekly schedule. By paying ½ your mortgage payment every two weeks, you will make 13 full payments a year, which will get your 30 year loan balance to zero in about 22 years. Be aware of third party firms that will charge you to set up a bi-weekly program; you can do it yourself or directly with your lender for free.
If you know of someone who is planning on buying or refinancing, please refer them to me. I will provide them with the best options, taking their unique situation into consideration. Additionally, I will get them the lowest rate and most advantageous terms by shopping their loan with the over 30 lenders I have a relationship with.