Monthly Payment Total Payment
30 year fixed $1,847 $664,920
20 year fixed $2,170 $520,800
15 year fixed $2,511 $451,980
The picture above says it all! The only way to get ahead is to reduce the amount of interest by reducing the amount of payments over time. Forget the tax advantages and the time use of money as that pertains to few borrowers. The majority of borrowers need to be better financial planners in order to have the retirement they wish.
Looking at a popular loan, the interest only loan , which is actually just a loan option, you will see the thoroughness of the mortgage instruments and how they work. You can have an interest only option on arms or fixed loans that allow you to pay interest only for 5 to 10 years, depending on the terms of the loan.
The interest only term I will use for this example will be 10 years . The loan will be amortized over 30 years. The interest only payment for the first 10 years will be the interest portion of the 30 year fixed above, keeping the interest rate the same for this example.. The payment would be $1562 a month.
What happens at the end of the 10 years is a new loan that has a 20 year amortization. The interest only loan with have a payment of $2192 for the next 20 years. That is slightly higher than the 20 year payment shown above because the interest rate is 1/8 higher.
My objective is to show you how most loans work in regards principal and interest. The one that is right for you depends on many factors which include your age, income, financial situation , goals, etc. The more you understand about the inner workings of loans the better your choice s become, giving you the maximum benefit and chance of reaching your goals.