Best Way to Prepay a Mortgage?

May 6, 2014 by

illustrating flexibility

Flexibility is good!

Ms. Money Counselor and I paid off our 15-year mortgage nine years early in 2002. We didn’t follow a formula or particular strategy in making accelerated payments. We just threw chunks of money at the mortgage whenever we felt doing so was our best option for surplus cash. (Mortgage rates were much higher back in those ancient, pre-meltdown times!) Felt really good to get that debt monkey off of our backs, and not purely for financial reasons. Paying off debt will liberate your spirit!

Should You Pay Off Your Mortgage Early?

With mortgage rates so low, whether to make early payments on mortgage debt has become a much closer call than it used to be. I still encourage people to consider pre-paying their mortgage; what’s best depends in part on individual circumstances. See “Pay Off Debt or Invest?” for my ideas on how to think about accelerated mortgage payments.

What If You’re Buying a House Now?

Let’s say you’re in the market for a house now and considering mortgage options. You’ve probably tossed the idea of a variable rate mortgage, as it appears (I don’t predict the future) rates will begin rising steadily within the next year, and could be considerably higher than today the first time your rate re-sets. So maybe you’re weighing a 30-year versus a 15-year mortgage.

Here’s my idea: Get the 30-year mortgage, but resolve to make payments as if it were a 15-year mortgage.

That’s crazy, you say. The rate on a 15-year mortgage is lower, so why wouldn’t I just get a 15-year loan if I want to make 15-year mortgage payments?

Good question, and maybe you should get a 15-year mortgage. But hear me out for a minute.

The Numbers

Let’s say you’ll be borrowing $100,000. From, here are today’s average 15 and 30-year mortgage rates and payments:


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Let’s say you get the 30-year loan but make a $707 payment (the 15-year payment). Here’s what happens:

Scenario A
30-year mortgage repaid after 15 years + 5 months
Total interest paid: $38,815

And now let’s look at what happens if you repay the 15-year mortgage according to its terms:

Scenario B
15-year mortgage repaid after 15 years
Total interest paid: $27,181

The “cost” of my idea—getting a 30-year mortgage but making payments as if it were a 15-year mortgage—is five additional months of payments and extra interest of about $11,600 (that’s the difference between total interest paid in the two Scenarios).

So again you’re asking: why would I want to pay an extra $11,600 in interest?

Flexibility Has Value

I’m going to hazard a guess that a big majority of households with mortgages need the earnings of both wage earners to meet the household budget, including the mortgage payment.

If that’s your situation and you sign up for the 15-year mortgage, you’re committed to making a $707 payment—$216 more than if you’d signed up for a 30-year mortgage. What happens if one of the wage earners is laid off or suffers an extended illness or permanent disability? Suddenly the household’s income has shrunk by a lot, and now maybe that $707 mortgage payment is a burden. In the worst case, if the loss of income persists for a long time, the family could be in real trouble financially, or be unable to put much money away for retirement.

But what if you’d signed up for the 30-year mortgage? Though you’ve been making $707 payments, you’re committed to making only a $491 payment. In a crisis, you’ve got the option to cut back your mortgage payment to $491, and that could really make a difference, particularly in a short-term financial challenge like a layoff.

My strategy has other benefits. Let’s say you or your spouse would like to quit their job and put their energy into starting that small business they’ve always dreamed about or perhaps freelancing or something silly like starting a personal finance blog. Or maybe Mom or Dad feels pulled to stay at home when Junior comes along. If your family’s finances will be squeezed if either wage earner’s income goes away, even temporarily, you’re going to feel terribly challenged to make the decision to quit your job and pursue your dream or home school Junior. Instead, you’d be living by that bumper sticker motto “I owe, I owe, so off to work I go.”

“Flexibility Insurance” Premium

I see the extra $11,600 in interest over 15 years of my strategy as a sort of “flexibility insurance” premium. That extra interest expense gives you the option to spend less on your mortgage, if you needed or wanted to.

Not For Everyone

I don’t suggest this, or any other, strategy for everyone. Our circumstances are all unique! If you’re in the fortunate position of being able to meet your household’s expenses—including a 15-year mortgage payment—on either wage earner’s income, then probably signing up for the 15-year mortgage is the way to go. Also, if you’ve got loads of savings you could fall back on in the event of a short-term financial setback, maybe the 15-year makes sense for you too.

What Do You Think?

Would you pay $11,600 in extra interest over 15 years for mortgage “flexibility insurance?”

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  1. When I see “pay mortgage early” articles, I feel compelled to make an observation – Paying off early is great so long as (a) you have deposited to the match in your 401(k). Don’t forgo a 100% (or even 50%) match for the sake of paying off even a 6% mortgage. (b) You have no other, higher interest, debt. Pay off the damned 18% card, and 8% car loans first. (c) you have a well funded emergency account. You make the extra payment to the mortgage, it’s not easy to get that money back. When I was sitting on too much cash, I decided to pay my mortgage down, and get a HELOC as a back up. I paid the mortgage down by $100K, refinanced to a non-jumbo, saving 2% on the rate (dropped from 7.5 to 5.5%) but was light on cash for a good year. We rebuilt the reserve, with HELOC as safety net.

    • Your (a) through (c) are all excellent points, thanks for contributing. And I agree–it’s inconvenient and costly to get cash out of a house, so best to feel confident that won’t be necessary before prepaying.

  2. Travis Pizel

    We just refinanced our home with a 30 year mortgage, and I figured out if we pay an extra $300 a month it’ll cut down to a 20 year mortgage. We did this mainly because we couldn’t get approved for anything but a 30 year due to our recent history of just finishing a debt relief program. Funny how our actual current financial state is good enough to get a shorter term, but we couldn’t qualify.

    • No doubt many are approved for 15-year mortgages who have nowhere near your financial savvy Travis. Your story is an example of what happens when software alone makes decisions.

  3. Great article! I love seeing the different scenarios of how much you can save for a shorter mortgage and how much you actually pay for a longer one. As you know, I have been hitting this topic hard lately. Once you pay off your mortgage, so many opportunities are opened up!

  4. I think this plan is actually a good idea for a household with more than 1 wage earners, totally makes sense, especially for unexpected circumstances like getting laid off… I myself would prefer to go for the 15-year mortgage and buy less inexpensive house.

  5. MoneySmartGuides

    Great post. This is why everyone’s situation is different. What might work for you doesn’t work for someone else and that is perfectly fine. It just shows why basic personal finance needs to be taught in school. While the calculation and factors to come to a conclusion as to what to do seem simple enough, I wager that most wouldn’t be able to do it.

    • I agree. Most would just take the advice of the realtor or banker, who of course do not have the buyer’s best interests foremost in mind, nor are they knowledgeable of the buyer’s financial goals and long-term plans.

  6. It really depends on what you can afford. If you can afford a 15-year, and have extra money to apply to the principal each month, then you are in the best of both worlds. If swinging a 15-year would be financially difficult, then by all means, get a 30-year and try to pay extra when the money is available.

    • A key is defining “afford” I think. Those who make money from house sales & purchases implicitly define ‘afford’ as the largest mortgage that any lender will approve. But a monthly payment consistent with a financially prudent family’s saving and other long-term goals typically is much less than the payment that would go along with that maxi-mortgage the realtor wants you to take out.

  7. I do like the idea of having flexibility. I would say I’d rather have the 15 year mortgage if given those two choices. I think personal finance is more psychology than $$$ and I would prefer not having to risk my psychology get in my way.

  8. Our mortgage has the option to pay down 10% each year without penalty. We mortgaged our house for 25 years (which is the max you can do here in Canada) but plan to pay it back within 15 years or less. So far just by changing our payment frequency to accelerated bi-weekly, we cut back on 3.5 years!

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