Mortgage free – if those words sound like music to your ears, keep reading! It is possible!
Some people do consider their house payment to be as basic as a monthly utilities bill, but with some discipline and smart thinking, those words that sound like music now can become a reality.
Let’s think about this together. If a person borrowed $300,000 at 3% for 30 years, the principal and interest payment would be $1,264.81 and at the end of 12 years, the unpaid balance on the mortgage would be $210,900.
Now, had that same person financed the home on a 15-year term at 2.5%, the payments would have been $2,000 but the unpaid balance at the end of 12 years would be $69,310. Yes, the equity would be larger, but they would also have to make higher payments.
15-year mortgages usually have a lower interest rate than the 30-year loans and at the time this article was written, the difference in a 30-year loan was about 0.5%. A 15-year loan gives the lender their money back in half the time. If rates go up during the interim, they will be able to loan it at the higher rate sooner. For that reason, they are usually willing to offer a slightly lower rate on the shorter term.
Check out these stats below. Simply put – a lower rate means that you pay less interest, and lower interest rate loans amortize faster than higher rate loans.
| 30-year | 15-year | |
| $300,000 mortgage for 30 years | 3% | 2.5% |
| Monthly payment | $1,264.81 | $2,000 |
| Unpaid balance at end of 12 years | $210,900 | $69,310 |
| Increased equity | $141,590 | |
| Additional monthly payment | $735.56 | |
| Additional total payments for 12 years | $105,920 | |
| Savings | $35,670 |
This is a great wealth-building technique – and it works! You’ll make higher payments, save interest and the mortgage will be retired sooner. A shorter term mortgage requires a commitment each month to make a higher payment, instead of giving the borrower flexibility to spend or invest the difference each month for as long as the loan is in place.
To make you own calculations, go to the 30yr vs. 15yr Comparison.
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