Comparing 30 Year vs 20 Year vs 15 Year

The vast majority of mortgages originated each year have amortization schedules of 30 years.  However, many borrowers do not realize that you can choose other periods and depending on your situation, a shorter amortization period may make more sense. 

The main reason that the 30 year mortgage is so popular is that it provides the lowest monthly payment.  However, this also means you are paying more interest over the life of the loan so in most cases, the 30 year mortgage also winds up being the most expensive in spite of the lower monthly payment.

Mortgage amortization periods are typically 30, 20, 15, and 10 years.  However, you can sometimes choose oddball periods in between like 23 years.

The advantage of a shorter amortization loan is that you typically receive a more favorable interest rate and you build equity in the property much faster.  The down side is that you have to commit to a much larger monthly payment.  However, that larger monthly payment usually consists of larger principal payments versus interest payments.

Let's Illustrate:

Take a typical $300,000 mortgage:

30 Year Monthly Payment:  $1432

20 Year Monthly Payment:  $1798

15 Year Monthly Payment:   $2108

As shown, the 15 year mortgage payment is $500 per month more expensive than the 30 year.  However, the savings is generated from a larger percentage of the payment going to pay down principal instead of interest.  The $2108 per month payment for the 15 Year has $1296 going towards principal while $813 goes towards interest.  On the other hand, the 30 year payment of $1432 consists of about $400 going towards principal and $1000 towards interest!  In fact, it would be almost 15 years before the principal portion of the payment exceeds the interest portion whereas with the 15 year you start off with the bulk of the payment going towards principal.