So even though I thought the 15-year mortgage at 4.25 percent we closed on last November was going to be the last home loan for this property, we just refinanced to another 15-year mortgage at 3.75 percent.
We’re saving another $59 per month over what we had been paying (and the bragging rights are pretty good), and will shave another $7,000 in interest off the total amount we’ll pay on this loan compared to the other.
Still, it’s worth exploring whether prepaying a 15-year mortgage at 3.75 percent makes sense.
It’s a question that keeps coming up, as families across the country refinance into extremely low-interest 15-year and 30-year mortgages. Many folks seem to be using the savings not to buy more stuff, but to pay down their debt: credit card, student loan, car loans and, yes, mortgages.
It makes sense to prepay a 30-year mortgage because even making one extra payment a year will shave years off of the loan term and save you thousands of dollars in interest.
To see exactly how much you’ll save, you should use one of the many free mortgage calculators available on the web, like the one I have at my website, ThinkGlink.com. But I also happen to like the amortization calculator at eloan.com. (Please note, I’m not necessarily recommending that you use eloan to get your mortgage, but the calculator is easy to use.)
Let’s run the numbers: If you have a 30-year, $100,000 loan at 4 percent, your monthly payments will be $477.42 (none of the examples include extra for real estate property taxes and insurance), and you’ll pay $71,868 in interest over the life of the loan.
If you make one extra payment a year, you’ll pay off the loan four years earlier and save $10,000 in interest. But if you make a double payment each month, you’ll pay off the loan in 11 years, and only pay $23,195 in interest.
Why don’t you get a bigger bang for your buck? Prepaying works better the higher your interest rate. If the same 30-year loan was priced at 7 percent, your monthly payment would be $665.30 and you’d pay $139,511 in interest over the life of the loan.
If you make one extra payment per year, you’ll pay off the loan six years earlier and save roughly $36,000 in interest. If you make a double payment, you’ll pay off the loan in just 9 years, and only pay $31,000 in interest – a savings of $106,000 in interest over the life of the loan.
When it comes to a 15-year mortgage, prepaying makes less sense. You’re already saving 15 years of interest payments, and when the interest rate is so low (again, our new loan is priced at 3.75 percent), it’s already virtually free money.
Still, let’s take a look at how much we’d save by prepaying: On a $100,000 loan at 3.75 percent, our monthly payment would be $727 and we’d pay $30,900 in interest over the life of the loan.
One extra monthly payment per year means we’d pay off the loan in 14 years instead of 15 years and save just $3,000 in interest over the life of the loan. If we make double payments each month, we’d pay off the loan in 7 years, and save just $18,000 in interest over the life of the loan.
It’s not that $18,000 isn’t a significant amount of money. It is. But it’s not quite the same bang for the buck.
Still, there’s something to the idea that if we make double payments each year, we’d pay off our entire mortgage in 7 years. That’s just a hop, skip and a jump from now.