0.12 Summary Comparison of 15- and 30-Year Mortgages
The following table presents a comparison of the $100,000 annual pay mortgage (above) at 6% interest for 15- and 30-years.
| Borrow $100,000 @ 6% | 15 Years | 30 Years |
| Annuity Payments (Principal & Interest) | $10, 296.33 | $7,264.91 |
| Total Payments over life | $154,444.95 | $217,947.30 |
| Interest Payments over life | $54,444.95 | $117,947.30 |
| Total Interest ÷ Principal | 54.44% | 117.95% |
Notes and Questions:
The shorter-term mortgage presents a higher periodic payment requirement but entails less overall interest payments over time.
The longer-term mortgage presents a much higher total interest payment requirement but requires a lower periodic outlay.
Question: Under what conditions does it pay to take out the shorter-term mortgage?
Answer: It pays if the mortgagee has sufficient cash flow, and wishes to minimize total payments, especially interest, over time.
Question: Under what conditions does it pay to take out the longer-term mortgage?
Answer: It pays if one does not have sufficient cash flow, is unwilling to settle for a less-costly home, and is relatively unconcerned about the long-term, larger amount to be paid; perhaps he does not intend to stay for the full thirty years.
In most circumstances, a 15-year mortgage will bear a lower rate than a 30-year mortgage – unlike this illustration. Here we focused on a single variable – time – which greatly impacts the scenario depicted relative to the minimal impact that a small premium interest rate would have for the increased term to maturity.
Taxation will also have an effect. Recall that interest payments on mortgages are, under current law, tax-deductible.
The mortgage formula is important to master as it will be used again in three additional contexts: 1. Leasing; 2. Bond Accounting; and 3. Capital Budgeting: The Annual Annuity Approach.
