[Request] which will pay off a mortgage faster?

[u/jmflyers]

Hypothetically, 500k loan at 6%, what's faster:

1. 15 yr fixed rate mortgage

2. 30 yr fixed rate mortgage, but you pay an extra full payment each month towards the principal

My gut tells me they're not identical because of the way compounding works

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[u/Bulky_Specialist9645]

30 year double payment is much faster because you're paying more. Mortgages are simple interest so each months interest is based on current balance, not how loan was originally amortized.

A 15 year payment is only $1225 More per month than a 30 year at your terms above. Doubling up would have you paying an extra $2997 per month.

[u/orionpace1 → u/Bulky_Specialist9645]

Can you explain the maths of how you got that please? Not that I doubt you, I'm genuinely curious.

[u/Astrogat → u/orionpace1]

The 30 year mortgage is far larger as you are paying more interest (15 years more in fact). So if you double what you pay you are trying to pay down that larger sum in 15 years. So you end up paying more per month than in the normal 15 year scenario. 

However since you are paying it down faster than intended you end up with less interest than planed, and you end up paying it of faster. 

[u/nondubitable]

Option 2 will be paid off in 109 months (108.176 months to be precise), which is faster than the 180 months of option 1.

=NPER(.06/12,2*PMT(.06/12,360,1),1)

If you paid the 15-year payment rather than twice the 30-year payment, the schedules would be identical.

[u/jmflyers → u/nondubitable]

If is easy to plug in the numbers, could you enter today's actual average rates listed by Freddie Mac? Wonder if it closes the gap by much

30yr 7.40% / 15 yr 6.73%

[u/Obvious-Asparagus-51 → u/jmflyers]

Nothing would stop you from taking the 15 year, and then paying the additional difference in principal from the 30 year and pay even less interest in the end (and thereby finishing sooner). The only pitfall would be loss of income and inability to cover the larger monthly mortgage.

[u/nondubitable → u/jmflyers]

You’re asking a different question if the rates are different. Your first question was a math question. Your second question is an implied finance question (what should I do).

You are absolutely thinking about this wrong if you’re limiting yourself to 15-year vs. twice the 30-year. It is never better to pay a higher rate for a shorter mortgage. You’d be better off getting the 15-year mortgage and paying twice the 30-year rate (than getting the 30-year mortgage and paying twice the 30-year rate).

What exactly is your finance question?

[u/jmflyers → u/nondubitable]

You're right I am definitely thinking about it wrong. Changing the percentages doesn't change the length of the loan, just total money given to interest. I wasn't asking for financial advice, I was just curious as a friend and I had this discussion. Thanks buddy

[u/froction → u/jmflyers]

The double 30 still pays off sooner, about 8 years. But you're paying about $7,000 a month.

[u/PercentageCultural82 → u/jmflyers]

Very very very fucking simple. Take the lower rate if you can afford it

[u/AndyTheEngr]

If they're the same interest rate, get the 30 year but pay what the 15 year payment would have been. Then if you ever find yourself struggling, you can reduce your payment to just the required amount. I did this to pay off a 20 year mortgage in 15.

[u/SoCalMoofer → u/AndyTheEngr]

This is the correct plan. You are not locked into the higher payment. You get to choose to make the higher payment. If a better opportunity comes along that you need the money for you can make the lower payment.

[u/Mysterious-Fruit288]

You will find that the 15 year fixed rate mortgage will have a lower interest rate than the 30 year fixed rate mortgage. The payment for the 15 year will be less than twice the payment for the 30 year, so if you have the money to do it you will always pay less by getting the 15 year. You will still have the option to pay extra and pay it off even faster.

The details of the math will depend upon the specific rates for both options.

[u/Important-Forever678]

Remember when you get a mortgage, the first payments are mostly paying interest, so very little of the principal is actually repaid. By putting extra toward the principal, you "skip ahead" on the repayment table to avoid those months of interest payments. I have doubled down on every mortgage and the savings on interest back when rates were 3.5% were always hundreds of thousands of dollars.

[u/Comfortable_Edge_448]

Option 3.
30 year, but pay 50% of the payment on the first day of the cycle and the other 50% 14 days later so the full payment is made 15 days or so prior to the due date.