How A 30 Year Fixed Rate Mortgage Can Cost You Long Term

A debt free house is every homeowner's dream. But how do you pay off a mortgage fast?

"There are few things in this life that equal the sensation of being paid up." - Kin Hubbard, Abe Martin's Back Country Sayings, 1917

I'll never forget my disbelief when we bought our first house. Noticing the year our loan would eventually pay off, I asked my husband, "Honey, do you realize how old we'll be when we make our final mortgage payment?" "Don't worry," the loan officer interjected, "it's an amortized loan." I guess he was trying to make me feel better.

Years later, I entered the mortgage lending industry, eventually owning my own mortgage company. My clients were amused as I'd recount my own initial impression of mortgage and amortization. I described it as my favorite oxymoron because the act of eliminating a mortgage through gradual amortization means most homeowners rarely become mortgage free.

Both mortgage and amortization come from the Latin root "mort", meaning death. Summing it up for my clients I'd explain, "Until death do we part." Or more to the point, "Until death do we owe."

A simple definition of mortgage is to borrow money in order to own real estate. In contrast, amortization is the reduction of debt by means of scheduled installments, starting with more interest paid than principal in the earlier years. Once a homeowner realizes how long it takes to fully repay the principal, owning a home free and clear through mortgage and amortization becomes a contradiction in terms at its best, an oxymoron.

For those of us who prefer the dream of being mortgage free before we die, what steps can we take to speed up the mortgage pay off? Consider this. After the first 15 years of making payments on a $200,000 home loan, using a 30 year fixed rate mortgage at 6%, a borrower will still owe $142,097 of principal. In fact after a full 30 years, a homeowner would pay a grand total of $431,671 in mortgage payments, including principal and interest.

There has to be a better way to be mortgage free! Don't give up! I have a solution! Have you considered a 15 year fixed rate mortgage? It's a great way to make mortgage amortization actually work in your favor. You'll usually find the 15 year interest rate a little lower than its counterpart, the more common 30 year mortgage. The lower interest rate will save you thousands of dollars in interest over the mortgage term. And after 180 payments, you'll own your home with no remaining mortgage!

Here's a good example. Assume you borrow $200,000 using a 15 year fixed rate mortgage. Speed up the clock another 15 years. You've paid off your mortgage. Had you chosen a 30 year mortgage, you'd still owe $142,097 of principal and an additional $74,000 in interest over the next 15 years. A 30 year fixed rate would have cost you approximately $232,000 in interest alone. You'll save nearly $138,000 in interest with a 15 year amortization and be mortgage free a lot sooner. Sure, your mortgage payment is higher with a 15 year fixed rate mortgage but you'll pay it off in half the time compared to a 30 year term.

Now that's no oxymoron!

The calculations in this article are estimated. Consult a lender for exact numbers and outcome. Interest rates vary and could determine a different result.