January 28, 2015

Let's get right to the question above. A mortgage loan is made up on principal payments and interest payments. From the first payment you make the interest payment goes down and the principal payment goes up. How much goes to each is a function of the length of the loan. In the case of the 30 year loan the interest payment is higher from the start and it takes 14 years, 3 months at current interest rates for the interest to go far enough down and the principal payment rise high enough for the two to be even.

After that point the principal payment grows more every payment until the loan is over.

In a 15 year loan the first payment has the principal greater than the interest portion of the payment and continues to grow until the loan is paid off. The first payment for the 15 year is 59.2% toward the principal pay down and 41.8% toward interest. The 30 year fixed is almost the opposite on the first payment. 73% of the first payment goes to interest and only 27% goes to principal. There is the reason why it takes 30 years, under a simple interest scenario, to pay off the loan.

Does a 15 year loan seem better than a 30 year at this point?

Lets explore it further.

30 year view:

$300,000 4.375% mo. payment $1498 |
||

5 years |
$62,823 Interest Paid |
$272,952 Balance |

10 years |
$125,900 Interest Paid |
$234,236 Balance |

14 years 3 months |
$160,454 Interest Paid |
$204,320 Balance |

19 years 8 months |
$202,701 Interest Paid |
$149,207 Balance |

30 years |
$239,228 Interest Paid |
$0 Balance |

15 year view:

$300,000 3.5% mo. payment $2145 |
||

5 years |
$45,560 Interest Paid |
$216,831 Balance |

8 years 6 months |
$68,178 Interest Paid |
$149,423 Balance |

10 years |
$75,593 Interest Paid |
$116,080 Balance |

15 years |
$86,037 Interest Paid |
$0 Balance |

Obviously the numbers can speak for themselves, but what about the time: your life's clock. If your 25 and just beginning do you want to be middle aged before you pay off your house?

If you are 50 can you see paying off the house you just purchased long after your friends and relatives have retired?

Let's look at the bright side. If you are 25 you can take a 15 year and be done at 40. If you are 50 you can be done at 65. All the extra time you won't be paying a mortgage you will have the money to do something you would really like: travel, develop a hobby, retire, run for Congress or become a senior statesman!

This isn't a long column because it doesn't take much time to read it and understand what you have been doing to yourself and what you could do for yourself instead. Live your life without additional stress and with more change!