What are the true economic savings associated with shortening a 25 year mortgage to 15 years?

Answer 1

You are paying a lot less interest. First, going from a 25 year mortgage will usually have a 1/2 point more interest than a 15 year mortgage. Second, with a 15 year mortgage, you start off by paying close to half of your payment to the principal, while with the 25 year, only 20% of your payment goes to the principal. If you go to bankrate.com and put in a 100K with a rate of 6.5% for both, you get the following:

25 year: 675.21 per month
15 year: 871.11 per month

25 year: 675.21 * 12 * 25 -> 202,653 total
15 year: 871.11 * 12 * 15 -> 156,800 total

So it would be about 50K savings for every 100K....So it is a big difference.

Answer 2

It is possible to shorten your mortgage by paying extra each month on principle. There are calculators online that will tell you how you can shorten. I have figured out that if you pay 100.00 per month directly on principle you can shorten a 30 year mortgage by approximately 10 years, but you must pay this extra every month. However, you will still have the lower payment compared to refinancing from 25 years to 15 years. That way if you cannot come up with larger payment you will still have the lower payment. One never knows what can happen in the future. I feel this is a better idea than having to go through a refinance with all the closing cost. Only way I would refinance is if the interest rate is at least a point lower. But to get back to main question the money you save on interest by shortening mortgage by 10 years would be quite a bit of money.