Shorter Mortgage Term Vs Extra Mortgage Payments

October 23, 2001, Reviewed October 25, 2007

A 6% 10-year loan with payment of $1110, and a 6% 15-year loan on which you pay $844 plus $266 extra, are identical except that on the 15 you are only required to pay $844. Which is better depends on whether you value flexibility more than discipline.

"I am currently trying to choose between a 6% 15-year loan and a 6% 10-year loan. I want to pay off in 10 years and I’m wondering whether or not I will do better taking the 15-year and making an extra payment every month that will result in payoff in 10 years?”

It’s a wash.

For example, the monthly payment on a $100,000 loan at 6% for 15 years is $843.86. On a 10-year loan, it is $1110.21. If you take the 15-year loan and make an extra payment every month equal to $266.35, you will pay off in 10 years.

This is hardly surprising, since the sum of $843.86 and $266.35 is $1110.21, which is the payment on the 10-year loan. The extra payment in effect converts the 15-year loan into a 10-year loan.

There is one difference, however, between the 10-year loan and the 15-year loan with the extra payment. With the 10-year loan, you are obliged to pay $1110.21 every month. With the 15-year loan, you are obliged to pay only $843.86; the extra payment of $266.35 is optional. Which is better for you depends on whether you attach greater value to discipline or to flexibility.

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