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Paying Off a 30-Year Fixed-Rate Mortgage in 15 Years

This article was written by in Debt Reduction. 28 comments.


This is a guest article by Laura, a twenty-something woman working to improve her finances and reduce debt. She writes about personal finance for college students and grads at Green Panda Treehouse.

We’re buying a town house and it has a been a huge learning process. We have been running the numbers and making sure everything works budget wise. While looking through some books and blogs, I noticed some people mention getting a 15 year fixed rate mortgage instead of a 30 year fixed rate mortgage.

Talking with friends and family, many of them advocate getting a 30 year mortgage and paying it off in 15 years. Their reasoning is this gives you some flexibility. I wanted to run the numbers and see if this is a viable solution.

How much money you can save with a 15-year mortgage

Many people may not realize the financial upside of having a fixed 15-year mortgage. Besides paying less total interest, they typically have lower interest rates than 30-year fixed mortgages. Most of your money in the beginning of your mortgage payments goes to interest. As you move further and further along, more and more of your money goes towards principal.

Comparing a $200,000 fixed-rate mortgage for 30 years at 5.25% and a mortgage for 15 years at 5%, you get the following results:

30-Year 15-Year
Monthly Payments: $1,104.41 $1,581.59
Interest Paid: $197,587.59 $84,686.20
Total Paid: $397,587.59 $284,686.19

You save a total of $112,901.39 in interest going with the 15-year fixed mortgage. Could you use that $112,901.39 for something else?

The downside of a 15-year mortgage

The downside for a 15-year mortgage is the same as any other mortgage: affordability. If you can afford a 15-year mortgage comfortably, congratulations. This is a great option for paying less interest over the life of the loan.

If money will be very tight with a 15-year mortgage and you are a bit hesitant with the monthly budget, you have two options:

  • Wait until you have enough buffer room in your monthly budget for a 15 year. Save up while you’re waiting and put down a larger down payment.
  • Decide to get a 30 year loan and come up with a plan to accelerate your loan.

You also have to weigh the opportunity costs of the money difference. That extra money could be redirected to investing more into the stock market for retirement or some other financial decision.

Will you pay a 30-year fixed mortgage in 15-years?

Dave Ramsey mentions the statistic that more than 97% of people who planned to pay their 30-year mortgage in 15-years do not. He has seen from his personal experience running his program that people lack the will power to keep up regularly with mortgage payments.

Ramit also observes that many people believe that they are the exception to the rule. This can lead some to not prepare properly. You may plan on paying your mortgage in 15 years, but if you rely on pure will power, you can set yourself up for failure.

Why pay off a mortgage sooner?

There are a few reasons why someone wants to pay off their mortgage sooner than 30 years. One popular reason is that they want the “peace of mind” in owning their home outright. If they lost their job, or if they experienced a pay cut, people would feel better knowing they did not have a mortgage hanging over their head.

How to accelerate your mortgage payments yourself

You can accelerate your payments even if you have a 30-year fixed rate mortgage. Automating payments can help you pay off your mortgage sooner and avoid some mental barriers to staying focused on your goal. By not managing the payments personally on a on a monthly basis, you can increase your chances of paying off the mortgage a lot sooner.

  1. Start by examining your budget line by line. Know exactly what your actual income and expenses are. This will save you time from adjusting payments often as you realize you overestimated what you can put in.
  2. Have a buffer. If you don’t have a fully funded emergency fund, consider getting that taken care of before accelerating mortgage payments.
  3. Set up an automated payment plan. You can go through your mortgage company or you can go through your online bill pay. Note: Some mortgage companies offer programs to send extra payments but they cost you some money.
  4. Start off with an extra payment that leaves you some wiggle room. As you get a raise in your income, increase your accelerated payments little by little. By adjusting it every year or so with your raise, you are accelerating your payments without missing the money.
  5. Automation is key. You can build your payments up through the years while still having money to invest for retirement, save for other goals, and pay your bills.

This automated system can give you some flexibility in case your income decreases, like a pay cut or lay off. You simply pause or lower your extra payments and put them into your savings account as needed.

Even if you don’t hit the 15 year mark, you will still save tens of thousands of dollars by avoiding more interest payments. Think about it, you’re saving couple of years of salary for less than an hour of work spent on a phone call and online bill payment! I think that’s a great trade off.

Mortgage contact information

If you’re going through your mortgage company, check with them to see if there is a prepayment penalty or any fees associated with the accelerated payments.

  • Bank of America: (866) 642-0987
  • Chase: (866) 461-5953
  • Citi: (800) 283-7918
  • MetLife: (888) 638-6964
  • Wells Fargo: (866) 234-8271

What about you?

What kind of mortgage do you have? Are you prepaying it? Why or why not? What suggestions do you have? Please also share your experience working with the mortgage company on prepaying your loan.

Updated September 3, 2012 and originally published September 11, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Laura is a twenty-something woman working to improve her finances and reduce debt. She writes about personal finance for college students and grads at Green Panda Treehouse. You can subscribe to her blog's RSS feed. View all articles by .

{ 28 comments… read them below or add one }

avatar Randy

I’m currently 6 years into a 15 year fixed rate loan. In the past, I’ve had 30 year fixed, 30 year adjustable and 20 year fixed.

One piece missing from your analysis is the rate difference. As of this post, bankrate.com shows a 30year fixed rate as 5.26% vs 15 year at 4.67%. Going with a 15 year loan saves you just over 1/2%.

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avatar cukamunger

The important thing is to evaluate your circumstances and then do something about it. Don’t come to the conclusion that you could afford an extra couple hundred dollars a month payment on your house and then not do it. Make setting up the automation part of the activity. That’s like doing all the hard gorcery shopping and then letting the milk sour because you didn’t feel like taking that last step to move it from the counter to the fridge.

I agree with the statistics, but I also wonder at their implications. Even paying off a mortgage in 18 years is a mighty big accomplishment. How many people do it that way?

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avatar Susan

We bought our house with a 30 year fixed mortgage at 6%. We refinanced to a 10 year mortgage a couple of years ago for 4% fixed. So our total will be an 18 year mortgage (which is better than 30). :)

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avatar Ellen

Something else to consider about the 30-year fixed rate mortgage, is that it has lower monthly payments, meaning that you can invest the money you aren’t spending for the higher 15-year option in other avenues, and potentially make more money to pay it off. Say, if the stock market takes a drastic turn for the better: If you have lower monthly payments from your 30-year and can invest more in stocks, you have the ability to earn more from all of your stocks that increased in value. With the money you make selling them, you can pay off your mortgage, maybe even sooner than you had planned.

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avatar Steve

I’m surprised the table doesn’t include the numbers for paying off a 30 year mortgage in 15 years. So here they are:
Monthly Payments: $1,607.76
Interest Paid: $89,395.98
Total Paid: $289,395.98

Also, the flip side to “Could you use that $112,901.39 for something else?” is “Could you use that $477.18 per month for something else?” But I guess us humans aren’t wired to think of things over the long term – the average caveman probably didn’t even live for 30 years, never mind have a mortgage for that long.

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avatar MichaelM

We are pretty confident that on average over 15 years we would have enough for monthly payments on a 15 year mortgage. We decided though that we would get the 30 year instead.

We currently have a car payment (1.5 years left) and student loans (1 year left) which would make it very tight for the next couple of years while we get those paid off. We also wanted to keep some budget money un-allocated for now for doing home repairs and improvements. We needed a new furnace and to refinish the basement (a need because of mold problems), and who knows what else will come up!

When these one-time and time-limited costs are behind us, we will accelerate our payments but for now we are happy to make the smaller 30 year mortgage payments.

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avatar Tim

We got a 30 year mortgage through WF and signed up for their bi-weekly payment plan. I know it has been discussed before, but WF has seemed to improve this as it does not cost anything. Since I get paid bi-weekly it is nice to have my mortgage payment get paid the same day my direct deposit slips in. This equates to paying an extra payment per year, cutting our 30 year mortgage to nearly a 24 year one.

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avatar fern

thanks, Steve. That was a key piece of missing information. Also overlooked was the added flexibility that sticking with a 30-year loan but making prepayments gives the borrower; if you lose your job or h ave sudden, unexpected expenses, like a medical crisis, you can pull back on the prepayments until you find work again (or recover from illness). You’re not forced to make those payments no matter what.

I got a 30-year mortgage 14 years ago that i’ve been prepaying since day 1, and will have paid off in 6 more years, or 20 years instead of 30. I could have possibly paid it off in 15 years, but “life” got in the way. During my 14 years with the house, i was laid off 3 times and so had bouts of unemployment, plus i had lower than normal income for about 3 years when i couldn’t afford to prepay by as much as I am now ($425/monthly).

checking off each paid mortgage month on my amortization sheet is a big incentive for me, plus i track my mortgage balance on my blog for all to see; i’ve never had a problem sticking to my plan becus becoming debt-free, and later, career-free, is a huge incentive for me.

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avatar Laura

Thanks for sharing your thoughts and perspectives! It gives us food for thought as we navigate this new chapter of our lives. The interest rates I used were the actual rates shown to us last week.

We’re taking a 30 year loan and working on paying it off sooner. Our first few months will be rebuilding savings. We’ll move from a 3 months emergency fund to a 6-8 month emergency fund. Paying the mortgage for us is more a peace of mind issue. Retirement contributions will still be automated, so it’s not an either/ or choice.

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avatar Jim

For my Citibank mortgage I can add extra principal to my payment easily via their website. Theres no extra fees or anything. I assume that would hold true for other mortgages held by Citi but can’t guarantee they’re all the same.

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avatar Jason @ MyMoneyMinute

I think the reason people don’t go to 15-year mortgages is because they see how much more house they can “afford” by extending to a 30-year term. How many people are able to resist a $225k home on a 30yr note, and instead buy a $150k home on a 15yr with the same monthly payment?

Not that a 30yr mortgage is the end of the world, but there’s a deep-rooted mindset that now entangles the modern U.S. consumer. We no longer ask “how much?” — rather, we ask “how much per month?” This is the same mindset that enabled us to go from car loans that averaged less than 3 year notes, to about 6 years to pay off. As long as there’s a longer-term payoff plan available, humans are more inclined to take it, and buy a more expensive item.

We re-financed to a 15-year last year, and we love it. If/when we sell this house and move, we’ll do everything we can to fight off the temptation to buy a more expensive house on a 30yr loan, merely because we can “afford” it. I’d rather set my affordability standard at a 15yr term, which will give us a little less house, but tons of flexibility both now and down the road should a crisis occur.

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avatar Evolution of Wealth

Ellen hints on a point that I would be interested in hearing the discussion. Why give this extra money to the bank? Ellen mentions stock market which scares me a bit because of the risk especially as you get closer to paying off your mortgage. You don’t want to go reach for the side fund and have a year like 2008. Then all is lost. Maybe there’s a better way though? Maybe there’s a way for you to take control and build up a side fund that at any time you can take it and pay off the mortgage if you choose. Then if life gets in the way as some had mentioned it might not be detrimental to your house.

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avatar Greg McFarlane

Is it splitting the difference to suggest paying off a mortgage in about 22.5 years? You can orchestrate just a couple of extra payments a year, which will strike a balance between
-enriching your lender, and
-impoverishing yourself for 15 years so you can finally eat something beyond ramen noodles in the 16th.

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avatar Free Your Mind

I personally do not believe in paying your house off early. Numbers suggest that by paying the minimum on your house and investing the rest, you can come out ahead. And that is even with a low rate of return. Yes, 2008 was bad… but what about the last 30 years… or the next 30 years?

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avatar Financial Samurai

I strongly recommend paying off your mortgage early ONLY if you have the extra money b/c your payments just stay the same until the very end.

It’s just accounting b/c you earn interest on your savings if you don’t pay it off.

I will pay my rental property off within15 years, going from -$3,000 to + $2,600 cash flow once it’s over. that’s a big difference come retirement!

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avatar Mike L

What about the tax benefits of paying mortgage interest longer? I will be getting a mortgage in the next coming months and was just wondering if the tax write off has influenced anyone’s thoughts.

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avatar Jason @ MyMoneyMinute

Mike,

I hate taxes, but I would never get a loan based on tax benefits!

If you can afford a shorter term, do it. I would rather pay off my mortgage in 15 years and have an extra 15 years of NO payments, rather than make payments for 30 years to get a perceived tax advantage. Your tax advantage will never be more than 25-35% of the monthly interest on your mortgage payment. The rate at which you pay off your house FAR outweighs the opportunity to reduce your taxes.

That’s the myth of “writing off” expenses. While you give the bank X amount of dollars, you only receive back 25% of it in tax breaks. If you’d like, you can give me $1,000 and I’ll gladly give you $250 back as a ‘tax write off’ :O) Your taxes may be lower, but you still have less money to spend.

Whatever you decide, good luck with your mortgage!

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avatar Mike L

Thank you, that makes sense!

So then the only reason to pay interest on a mortgage is to take the leftover money to pay off interest on balances that can not be written off on taxes (cc’s, car loans, etc). I will start making a list of priorities to pay off in order now – thanks again!

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avatar Financial Samurai

Hi Laura – Just wanted to say this is a great post. Donno if you’ll see this comment, as it’s 2 months after you posted, but thanks for sharing!

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avatar Bo Tanical

How about a chart showing the difference between paying off a 15 year mortgage in 30 years and the length of time before the trade deficits, peak oil, and national debt destroy the value of the U.S. dollar.

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avatar Bill

It makes no sense to me to have a 15 year mortgage. The monthly payment on a 30 year is lower. All you have to do is add a small amount extra to principal to pay off in 15 years. If you get into financial problems you can always drop the extra principal payment.

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avatar dawn

I am currently in the process of switching to a lower interest 15 year fixed mortgage over my current 30 year fixed mortgage. Aside from the long term advantages of money saved by doing this, there is another advantage I want to make sure is mentioned. Equity.
More money toward principle balance means equity in your home is building up at an accelerated rate as well. Why do you want your equity to build faster? Well lets say five years down the line you want a pool, or an add on or whatever, the built up equity in your home could help you get a cash-out refinance for such things, not to mention emergency situations. Typically, whatever makes the stock market take a turn for the better will also make the housing market take a turn for the better.
Yes you will have a couple hundred extra a month with a 30 year fixed, but chances are you are not going to invest in stock markets. Why invest in a stock market when you can simply invest in what you already have, your home? Well that is my two cents, that I paid off early, ha..

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avatar miklos

if you have a 30 yr fixed mortgage and pay just the requred monthly payments for 5 years. Than, suppose you win the lottery. You decide to pay for whatever you owe at once with cash. Do you still have to pay all the interest or not? Your answer is appreciated. Thanks.

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avatar Curtis

Miklos,

No. The payoff will be the remaining amount you owe on the loan less the anticipated interest.

We are going to payoff our 30 year loan on our personal residence we purchased in February 2010 by October if 2011. The loan will have been paid off after only 21 months. That’s the way uh huh uh huh we like it uh huh uh huh…..

I agree with Dave Ramsey that the vast majority of people while well-intentioned will not retire the 30 year mortgage in 15 years by consistently paying double payments. So few have that kind of discipline over the long haul.

We have always gotten 30 year terms. However, we recently refinanced two other properties to 15 yr terms. The other investment properties will get paid of quickly as we snowball the extra 3k monthly from our personal residence to our investment properties. The goal is to own all 7 properties (2 currently paid off) in 5 more years by snowballing.

We bought far less than we could afford. We have NO other debts. We live on 36% of our income. We believe in delayed gratification, but also know how to enjoy life. We have a Hawaiian Island cruise scheduled for the month we pay off the personal residence.

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avatar Michael

I’m trying to pay my mortgage off in less than 5 years– before the age of 30! I’m throwing everything at the mortgage– because I already have an emergency fund and invest in the stock market. It’s kind of like the Dave Ramsey method, but super-charged. You can follow my progress on my blog, if you are interested. I can’t wait until my mortgage is paid off. It will allow me so much more flexibility with my professional and personal life! To everyone else out there trying, keep it up!

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avatar Jon

Nobody adjusted for inflation over 30 years. Let’s see the comparison with inflation discount.

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avatar Paul

In order for this to work, you have to be careful about how much you finance! A major attraction towards a 30 year loan is that they will allow you to buy a more expensive house, since the payments are lower. For example, if your household pulls in $6000 a month, and you have at least 10% down, you can either buy a house for:

$200,000 @ 15 years or
$266,000 @ 30 years

If you opt for the $266,000 house at 30 years, you would be hard pressed to pay it off in 15 years, since that would mean 40% of your $6,000 a month income. You would have to make $8,500 a month before those payments would make financial sense. Maybe you will earn that and more! But I don’t trust in our economy that much.

So make sure you pick a home for $200,000 @ 30 years, instead of being tempted by what you could afford if only you have 30 years to pay it off.

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avatar nosense

bank takes 80% of interest in first 7 years of the loan. so is there a material difference in a 15 yr note vs a 30 yr note paid off in 15….any guesses? 320k loan

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