During your first year on a 30 year fixed mortgage, nearly 70% of your mortgage payment will go to interest alone. Therefore, even in a period of historically low interest rates, we are still paying interest for several years of a 30 year fixed mortgage.
Even more eye-opening, since so little of your initial mortgage payments go towards the principal, it would take you nearly seven years to pay down the first $10,000 on a $100,000 mortgage at 4 percent! If you have a higher mortgage of say $500,000, these ratios pretty much stay the same.
While it feels like interest is reverse compounding when nearly 70 percent of your payments are going toward interest in year one, a mortgage is simple interest usually calculated monthly.
Over the past several years, mortgage tenure has increased from about six years to 10 years. Locked into historically low interest rates, homeowners are less likely to refinance a new mortgage. They may also not be able to upgrade to a new home with a higher interest rate.
Due to the lower interest rate and higher initial principal payments on a 15 year fixed mortgage, you won’t pay nearly as much in interest over the life of the loan. The extra money you pay every month on a 15 year fixed mortgage goes towards the principal, reducing the amount of interest you pay the following month.
I’m not going to argue with this approach from a mathematical standpoint. However, my argument is if you plan to pay the minimum on your mortgage, then do whatever you can to take out a 15 year fixed mortgage.
With a 30-year mortgage, you pay an insane (to me) amount of interest during the first several years making minimum payments. You will build up very little equity during the first ten years of a 30 year fixed mortgage.