Is It Better to Do a 30 Year Mortgage and Pay Extra 1?

When buying a home, one of the biggest financial decisions is choosing between a 30-year or 15-year mortgage. The longer 30-year term comes with lower monthly payments, but you’ll pay more interest over the full loan. Paying a little extra each month can help slash your interest costs and repayment timeline. Here’s a look at the pros and cons of paying extra on a 30-year mortgage.

The Benefits of a 30-Year Mortgage

A 30-year fixed-rate mortgage is the most popular home loan option for several reasons:

• Lower monthly payments: 30-year mortgages spread payments out over decades rather than 15 years. This makes the monthly payment much more affordable.

• Fixed, predictable payments With a fixed rate your principal and interest payment stays the same over the full term. This helps you easily budget each month.

• Lower down payment requirements: Lenders often require just 3-5% down for a 30-year loan. This gives first-time buyers easier access to homeownership.

• Investment flexibility: The lower monthly payments free up extra cash you can invest for retirement or other goals. Often the returns outpace mortgage rates.

• Interest deductions You can deduct mortgage interest on your taxes, which saves money each year.

The Downside of 30-Year Mortgages

While 30-year mortgages offer affordability, you pay a price over the long run:

• Higher interest costs: By stretching payments over 30 years rather than 15, you’ll pay significantly more interest over the loan term.

• Slower equity building: More of your payment goes toward interest early on, so it takes longer to build equity in the home.

• Higher total costs: In total, you’ll pay much more in interest costs with a 30-year mortgage compared to 15-year option.

This is where paying a little extra can help reduce the downsides.

How Paying Extra Helps

Giving your mortgage more money can cut down on interest costs and the time it takes to pay off. It doesn’t matter if you give an extra $100 a month or one extra payment a year. Here are some of the benefits:

• Pay off your loan faster: Extra payments let you shave years off a 30-year mortgage. This builds equity faster.

• Less interest: Paying more on the principal lowers your balance faster, so less interest is paid on it.

• Increase savings: Paying less interest means saving more over the loan’s lifetime.

• Build wealth: Faster equity growth helps you leverage home wealth sooner for other financial goals.

• Get rid of PMI: When you reach 20% equity, extra payments let you ask for your private mortgage insurance to be taken away.

How Much Does an Extra Payment Help?

The savings from extra payments depend on factors like your loan amount, rate, and years left. But in general, even a small extra amount creates big savings.

Let’s say you get a $300,000 loan with 30 years of payments at 6%. 5% interest. Here’s how extra payments help:

• Extra $100/month: Saves $62,762 in interest and repays loan 3.5 years faster

• Extra $500/month: Saves $99,689 in interest and repays loan 8.2 years faster

• 1 extra payment/year: Saves $96,710 in interest and repays loan 5.7 years faster

As you can see, just $100 more per month saves over $60,000 in interest! Now imagine if you can afford even more extra each month.

Ways to Add Extra Payments

If an extra monthly payment doesn’t fit your budget, there are a few easy options:

• Split extra payment: Add a little each month rather than one lump sum. For example, add 1/12th extra per month.

• Make biweekly payments: This adds an extra month’s worth of payments per year.

• Twice-a-year payments: Add an extra payment two times per year rather than monthly.

• Annual windfalls: Use your tax refund or a work bonus toward extra principal.

• Rate discounts: See if your lender offers a rate discount for enrolling in an automatic extra payment program.

Things to Consider

Before diving into extra mortgage payments, keep a few things in mind:

• Have an emergency fund first: Don’t stretch your budget too thin. Save up a 3-6 month emergency fund before extra payments.

• Review your interest rate: If your rate is above ~4%, consider refinancing first to lower payments.

• Weigh investing: Compare potential investment returns to your mortgage rate to see if extra funds are better off invested.

• Talk to your lender: Confirm the extra goes to principal and if they offer any repayment incentives.

The Bottom Line

Overall, paying extra on a 30-year mortgage can be a smart move if you want to pay off your home faster and reduce interest costs. Even small amounts create substantial savings over time. Just be sure you budget carefully and have a financial cushion first before committing to extra principal payments.